This morning, we woke up to learn that OPEC agreed to extend production cuts through March of 2018. In order to wage the continued war against a stubborn market, it was clear cut that OPEC needed to continue its fight to level-out supply & demand. Since the beginning of the year, many analysts have identified factors which could hinder OPEC from beating the supply glut.
Just to name a few factors:
- Factor 1: Increased production in the United States, Libya and Nigeria
- Factor 2: Production uncertainty from non-OPEC nations such as Russia
- Factor 3: Limited space to store excess crude (crude vessels waiting to unload for weeks)
The question at hand today is, now that OPEC decided to extend production cuts why is the market starting to trade down so heavily? Especially if the extension of cuts was expected to create bullish sentiment?
It seems clear that a majority of investors already placed their bets weeks ago for OPEC to continue its cuts past June. However, a lot of folks were hoping that OPEC would decide to cut even more volume than before and since that didn’t happen it looks like the market has turned over to the bears. In addition, Libya and Nigeria have been granted amnesty in regards to this production agreement. Libya and Nigeria have been ramping up production this year, so this could potentially give another reason for the bears to stomp all over the market.
If you are an adamant follower of the markets, you are probably not surprised to see refined products trading down 3.0-4.0 cents and WTI crude trading below the pertinent $50 level.
The one major unknown that still remains is what will non-OPEC members do in regards to their production levels? OPEC may be the big bad Oil Cartel, however it is important to remember that there are a lot of other countries such as Russia that have their own agenda to keep in mind.