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OPEC’s Cut: How Long Oil’s U-Turn Might Continue

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OPEC’s cut

On December 7, a Reuters report said that Iran agreed to a 0.8 MMbpd (million barrels per day) production cut. The plan is only expected to be implemented by OPEC members in 2019. Iran might be exempt from the production cut. At 7:13 AM EST on December 7, US crude oil prices rebounded 5.7% from their intraday low.

OPEC and non-OPEC oil producers plan for a production cut up to 1.2 MMbpd in 2019. On November 14, the International Energy Agency explained that it expects the global oil demand growth to rise by 1.3 MMbpd and 1.4 MMbpd in 2018 and 2019, respectively. A production cut of that magnitude might boost oil prices.

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How long oil’s u-turn might continue

Investors can’t ignore the risk from the US oil industry. Oil production was still at the record level of 11.7 MMbpd in the week ending November 30. The oil rig count has also been higher in recent weeks. The contraction in the yield spread might indicate an economic slowdown—a concern for a growth-driven asset like oil.

Oil was on slippery ground

On December 6, US crude oil January futures fell 2.6% and settled at $51.49 per barrel. OPEC is waiting for Russia’s nod. In the trailing week, US crude oil prices rose 0.1%. The Energy Select Sector SPDR ETF (XLE) fell 1.8% on December 6. The S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) fell 0.2% and 0.3%, respectively. In Part 3 of this series, we’ll analyze US crude oil’s relationship with these equity indexes. Integrated energy stocks like ExxonMobil (XOM) and Chevron (CVX) are also sensitive to oil prices.

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