Crude Oil has plunged around 5% today following an OPEC meeting where OPEC members and its allies agreed to extend their oil production cut deal for another 9 months. This move was widely expected by traders before the meeting but they were disappointed that deeper cuts were not announced. The current deal has production cuts of 1.8 million barrels a day but investors feel that sticking to this will not be enough to reduce the huge surplus that had built up over three years before the deal was put in place. In addition to this, there has been an increase in outputs by members who are not included in this deal and OPEC announced that no new members would be joining.
OPEC President and Saudi Arabia’s Energy Minister said that these cuts would be enough to reach the 5 year average before the end of 2017. He also added that the deal could be extended again during the next meeting in November.
Another concern for investors is that no exit strategy has been talked about as of yet. When the targets are met and surpluses have been lowered, how will members exit the deal? How will they make sure that after the deal is completed, a surplus will not start to build again? These are the questions that investors have but no indication or mention of these points was made during the meeting.
It also did not help that the Algerian oil minister, Noureddine Boutarfa, was replaced mid way through the meeting as a cabinet reshuffle took place following elections in Algeria. Boutarfa was key in forming the original deal and so this will be a loss for OPEC but traders will not dwell on this for very long.
Crude Oil is currently looking to break a trendline on the 4 hour timeframe. If the break is successful, we should see oil move down towards the $47 and $43.50 levels. Oil prices have been trading around the $43 to $55 range for the past few months and if the deal stays in place and is adhered to by all members, we can expect this to continue until September. Many banks and analysts have said that they expect crude oil to reach $70 dollars a barrel by the end of the year but we will reassess the situation and the fundamentals around August to see if this target is still valid.
OPEC President and Saudi Arabia’s Energy Minister said that these cuts would be enough to reach the 5 year average before the end of 2017. He also added that the deal could be extended again during the next meeting in November.
Another concern for investors is that no exit strategy has been talked about as of yet. When the targets are met and surpluses have been lowered, how will members exit the deal? How will they make sure that after the deal is completed, a surplus will not start to build again? These are the questions that investors have but no indication or mention of these points was made during the meeting.
It also did not help that the Algerian oil minister, Noureddine Boutarfa, was replaced mid way through the meeting as a cabinet reshuffle took place following elections in Algeria. Boutarfa was key in forming the original deal and so this will be a loss for OPEC but traders will not dwell on this for very long.
Crude Oil is currently looking to break a trendline on the 4 hour timeframe. If the break is successful, we should see oil move down towards the $47 and $43.50 levels. Oil prices have been trading around the $43 to $55 range for the past few months and if the deal stays in place and is adhered to by all members, we can expect this to continue until September. Many banks and analysts have said that they expect crude oil to reach $70 dollars a barrel by the end of the year but we will reassess the situation and the fundamentals around August to see if this target is still valid.