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Dealing With An Oil Deal


Image source: shinobi / Shutterstock.com

What's going on?

Adding to gains made last week, the price of oil jumped 3% on Monday as various officials of oil-producing countries – including Russia’s Vladimir Putin – suggested an agreement to freeze oil production was likely.

What does this mean?

There’s been speculation of a production freeze by OPEC (a group of mainly Arab oil-producing countries) since February. In September, they unexpectedly made a preliminary deal but said that the details would be worked out at a meeting on November 30th. Only a few weeks ago, it seemed like the deal might be on the rocks (and oil sold off to its lowest level since before the preliminary deal was announced), but it now appears that a deal is actually going to be completed (probably largely due to efforts by Saudi Arabia to make it happen).

Why should I care?

For the markets: There are plenty of reasons to remain pessimistic about the deal – and the price of oil.

OPEC countries (and Russia) have significantly increased their oil production this year, so an agreement to “freeze” or moderately cut production now would simply be returning it to a level seen in the very recent past (which would still be higher than previous years). Also, OPEC countries have historically cheated on their production limits by pumping more than they said they will – which would, of course, counteract the effects of a deal. Finally, US production is increasing after years of declining (and the US is a big oil producer). Therefore, even if some sort of deal is made, it’s still unclear whether it will actually result in less global supply.

The bigger picture: The dollar also has a big influence on the oil price – and it hasn’t been helping.

As we reported last week, the US dollar hit its highest level in more than a decade versus a collection of other major currencies. Since oil is priced in dollars but traded globally, it naturally goes down when the value of the dollar goes up (because oil becomes more expensive for everyone except Americans; click here for a more in-depth explanation).

Originally posted as part of the Finimize daily email.

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