Russia’s Production Cut Decision Could Make or Break Oil Prices

Suspense over Russia’s decision

OPEC members have provisionally decided to implement production cuts but are waiting for Russia to agree to a cut, according to a Reuters report. As of December 6 at 8:55 AM CST, US crude oil prices have declined ~2.7%. If Russia won’t agree to a production cut, OPEC alone cannot implement a cut because it could hurt its oil revenue.

Russia’s Production Cut Decision Could Make or Break Oil Prices

Moreover, Donald Trump has already expressed his displeasure about any production cut that might propel oil prices higher. However, at the same time, a rise in oil prices is likely to benefit US upstream companies.

Brent-WTI spread

In the trailing week, the Brent-WTI spread has contracted $0.1. In fact, based on the CME’s OPEC Meeting Outcome Probability tool, for the meeting on December 6, there’s less than a 1% chance that OPEC will reduce oil output significantly, which might explain the contraction in the Brent-WTI spread.

A widening Brent-WTI spread is good for US refiners and US oil exporters, while a narrowing spread might have the opposite impact. On October 19, the Brent-WTI spread expanded to $10.66, the widest level since June 8. Between October 19 and December 5, the Brent-WTI spread contracted by ~$2, while the VanEck Vectors Oil Refiners ETF (CRAK) fell 8.4%.

Phillips 66 (PSX) and Valero Energy (VLO), which account for ~16.5% of CRAK, have fallen 11.1% and 14.3%, respectively, since October 19. If the Brent-WTI spread moves lower, it might drag down these US refining stocks.

Oil prices and US equity indexes

US equity indexes such as the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the S&P Mid-Cap 400 (IVOO) can be influenced by changes in oil prices. The Energy Select Sector SPDR ETF (XLE), which includes energy stocks that are sensitive to oil, can also react to changes in oil prices.