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Big Oil Deal Gets Extended


Image source: Fedor Selivanov / Shutterstock.com

What's going on?

A huge group of oil-producing countries agreed to extend their agreement to limit their oil production – and, yet, the oil price fell almost 5% on Thursday. What gives?!

What does this mean?

It was, essentially, a case of high expectations. Comments in recent weeks from two of the world’s biggest oil producers, Saudi Arabia and Russia, primed investors for the likelihood that an extension would be agreed between OPEC, a group of mainly Arab oil-producing countries, and various other oil producers (remember, by limiting production it keeps a lid on supply, which helps support the oil price).

Prior to the Russian and Saudi comments, the oil price had fallen significantly, but it rebounded sharply as expectations of an extension increased. Investors thought there was some chance that even stricter limitations on output would be announced on Thursday, but when no new restrictions were announced, the oil price fell.

Why should I care?

The bigger picture: Saudi Arabia really wants a high oil price right now.

Saudi Arabia is planning to sell a 5% stake in its national oil company, Saudi Aramco, to investors sometime next year (right now it is fully owned by the state). They are hoping the deal will raise as much as $100 billion, which Saudi Arabia plans to spend on diversifying its economy away from oil. The higher the oil price is when they sell that stake in Aramco, the more Saudi Arabia will have to invest in other initiatives – which is likely a big reason why it is so eager for these production limits to continue.

For markets: American oil producers are loving it.

Oil companies in America are privately owned and are not part of this deal. They are free to pump as much oil as they can. Even after Thursday’s fall, the oil price is likely higher than it would be without this deal – and US oil producers are big beneficiaries.

Originally posted as part of the Finimize daily email.

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