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OPEC’s Deal Sends Oil Up – For Now

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OPEC members met at a meeting last November in Algeria to discuss a needed production cut to lift oil prices as the U.S. continues to produce oil at a more efficient rate. Plans from that meeting were finalized Wednesday, and OPEC is cutting oil production by 1.2 million barrels per day. Oil prices surged as a result,  but can they get back to where they were just two years ago? What can investors expect from oil stocks in the near future?

OPEC Cuts Oil Production, But Oil Prices Surged. What Gives?

The markets responded as the Organization of Petroleum Exporting Countries (OPEC) finalized an agreement to cut oil production from 33.5 to 32.3 million barrels of oil per day. This is the first cut in oil production since 2008. As such, the deal sent London’s Brent benchmark for crude up 8 percent to more than $50 per barrel. The U.S. benchmark also rose 9 percent to $49.22 per barrel. How high can the oil gains continue?

Investors should be cautious.

The OPEC agreement is a loose one. And while Kuwait, Venezuela and Algeria all agreed to monitor compliance of the OPEC agreement, the deal is only set to last six months starting in January 2017. It’s also contingent upon non-OPEC countries’ cooperation. Russia, for example, agreed to participate by reducing its production by 600,000 barrels per day. And since the cuts don’t begin for another month, the biggest oil producing members of OPEC, rivals Saudi Arabia and Iran, are stocking up on oil til then to ship to Asia. The rest of the OPEC countries are following suit as everyone takes advantage of the delay in beginning cuts.

Any gains in oil price help U.S. fracking companies, which can drill and pump new wells almost as efficiently as Saudi Arabia. Shale oil would see an immediate increase to offset the loss of oil production by OPEC. With oil prices currently at just around $50 per barrel, no one should expect the $100 a barrel level oil was trading at just two years ago. Analysts are predicting oil prices may rise as high as $55-60 per barrel and even that price increase would be only temporary.If OPEC fails to hit those levels in the six month plan, more production cuts could be in the works.

The reality is that a 1 million barrel per day cut won’t be felt in the middle of an oil glut. Non-OPEC countries will increase production, and OPEC countries, while not producing more than the allotted amount, will still sell off oil stores, which are currently being filled as quickly as possible.

For now, trading oil is a smart play. Exxon Mobil Corp. (XOM) rose 1.63% on the news. Chevron Corp. (CVX) rose 2.03%. Energy companies and oil shares will continue to rise through June of 2017, albeit not as high as many investors would like. Once OPEC’s six month agreement ends, oil prices will drop right back down.

 

Watch this video – Game of oil: Behind the OPEC deal – Counting the Cost

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