Cautious Optimism

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What's going on?

The price of oil had one of its best two-day climbs on record late last week, as Russia and Saudi Arabia shuffled closer to elbow-shaking on an end to their price war.

What does this mean?

Both Russia and Saudi Arabia have been producing more oil than anyone needed, and with supply massively outweighing demand, its price fell. Couple that with falling global economic growth – which played its own part pushing demand even lower – and the commodity’s price hit lows not seen for almost 20 years.

But on Thursday, the US president tweeted that there’d soon be an agreement between Russia and Saudi Arabia to cut between 10% and 15% of global oil production. A day later, the world’s major oil-producing countries scheduled a (virtual) meeting to discuss the possibility of lowering global oil output in the coming days. That better balance between supply and demand should push oil’s price up, but even the prospect of it had the same effect: oil’s price rose by more than 20% on Thursday, and another 10% on Friday.

Why should I care?

The bigger picture: Flakey friends.

Skeptical investors have raised questions over how soon those fabled production cuts will actually come into force after an agreement’s reached, as well as how big they’ll be. Historically, the group of oil-producing countries known as OPEC and its allies haven’t cut as much as they’ve promised. With that in mind, there’s an even higher risk that non-OPEC countries invited to the meeting will renege on a deal – and that last week’s oil price boost will prove short-lived.

For markets: It’s a refine line. 

Most oil companies benefit from higher oil prices: oil producers, for instance, make more money from selling the oil they find and extract. Even refiners – which generally prefer to buy oil at a lower price – see the value of their end-products fall when oil’s too cheap, and therefore might struggle to make a profit.

Originally posted as part of the Finimize daily email.

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