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OPEC’s Compliance towards Production Cuts

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Crude oil futures

February US crude oil futures (USO) (DBO) contracts rose 0.7% to $62.17 per barrel at 1:21 AM EST on January 9, 2018. It’s near the highest level since December 2014. Higher oil (DWT) prices favor funds like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Guggenheim S&P Equal Weight Energy (RYE). These ETFs have exposure to US oil and gas companies.

The E-mini S&P 500 (SPY) futures contracts for March delivery fell 0.06% to 2,745 at 1:21 AM EST on January 9, 2018.

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OPEC’s crude oil production 

According to Reuters, OPEC’s crude oil production rose by 20,000 bpd (barrels per day) to 32.41 MMbpd (million barrels per day) in December 2017—compared to the previous month. Compliance with the ongoing production cuts was at 128% in December 2017 and 125% in November 2017, respectively.

Higher compliance with ongoing output cuts is bullish for oil (BNO) (UCO) prices. Higher oil (SCO) prices favor energy companies (IXC) (IYE) like Laredo Petroleum (LPI), SM Energy (SM), and ConocoPhillips (COP).

Impact 

Oil producers decided to cut production by 1,800,000 bpd from January 2017 as part of the ongoing production cut deal. The production cuts will last until December 2018. Brent (BNO) oil prices rose ~17% in 2017, partly due to the production cuts.

Compliance towards the production cuts could increase in January 2018 due to an unplanned supply outage or geopolitical tensions. Higher compliance with pledged cuts would shrink global and US crude oil inventories and support oil (DWT) prices. Any fall in production from Libya, Iran, Iraq, and Venezuela could also support oil prices. 

Next, we’ll discuss Cushing inventories.

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