OPEC Defies Trump

The Organization of the Petroleum Exporting Countries (OPEC) met on Dec. 6 - 7 in Vienna to discuss the member countries’ output strategy for 2019. Given that November was the worst month for oil prices since October 2008— falling almost 30 percent from its peak— the OPEC meeting was one of the biggest events of the week.

OPEC consists of 15 member countries, though Qatar announced its exit from OPEC in January 2019. While the departure signals weakness for the organization, Qatar’s exit did little to rock the energy market as the country accounts for less than two percent of OPEC’s total production.

Source: Financial Sense Wealth Management. Data Source: Bloomberg

At the G-20 summit, Russia and Saudi Arabia agreed to prolong their deal to manage the oil market and spread output cuts into 2019. After the meeting, the West Texas Intermediate (WTI) and Brent—which are both major benchmarks in oil pricing—were up.

Prior to the meeting, investors were anticipating Saudi Arabia’s pitch of a 1.3 million barrel a day cut. President Trump made it clear he wanted no production cuts and called for lower prices. Trump tweeted, “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”

On the first day of the OPEC summit, the ministers considered the one million barrel per day cut. Ultimately, OPEC and its allies agreed to cut production by 1.2 million barrels a day to prop up prices and stabilize the market. OPEC’s largest producer, Saudi Arabia, will make the largest cut at around 500,000 barrels a day, and Russia, a non-OPEC member, will account for a cut of 230,000 barrels a day. OPEC members will make cuts accounting for 800,000 barrels a day from the October baseline, and non-OPEC members including Russia will account for the remaining 400,000 barrels a day cuts. This agreement completely defied Trump's wishes.

Saudi Arabia, Russia and the U.S. are the world’s three largest oil producers. The U.S. is now the world’s leading oil producer which has caused problems for OPEC and Russia. Saudi Arabia and Russia increased their production over the summer and fall due to pressure from Trump to ease market concerns on supplies for oil after Washington imposed sanctions on Iran.

The news from the summit caused oil prices to rise sharply. On Friday, stocks reacted negatively to the global market uncertainty resulting in a 2.2 percent decrease in the S&P. The S&P 500 is close to corrective territory at minus 9.5 percent from its recent high. Brent crude and WTI both ended Friday up about 2.0 percent.

Oil analyst John Kilduff of Again Capital stated, “They struck an accord that will bring some balance back to the market. The prices at the pump are going to stop going down as a result of this meeting.”

Let me just tell you, with my 24 gallon tank in my gas guzzler, my savings plan is not in favor of this. The production cut will take effect in January, so I highly suggest getting your road trips in now!

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crystal [dot] colbert [at] financialsense [dot] com ()