What's going on?
The price of oil jumped more than 3% on Monday to its highest level in two weeks, after Saudi Arabia and Russia said that they would both agree to continue to limit their oil production.
What does this mean?
The oil price is currently being whipsawed around by competing factors: increasing US supply is putting downward pressure on the price, while the possibility of OPEC, a group of oil-producing countries, extending the limits that it put on its members’ oil production is working to push up the oil price. Remember, limiting production means less supply, which is typically good for prices (click here for more background on the OPEC deal agreed late last year).
Russia is not a member of OPEC, but it is a large oil producer and its continued participation in the deal to limit production is seen as important to other OPEC members agreeing to extend the deal beyond the end of May. So it’s very important that Russia says it is on board with an extension. Also, the proposed length of the extension, out to March 2018, is longer than investors were expecting.
Why should I care?
For markets: Markets are now pretty confident that the OPEC cuts will be extended.
This news makes it materially more likely that a deal to extend the supply cuts will be agreed at OPEC’s meeting on May 25th. If that doesn’t happen, the oil price would be very vulnerable to a sharp selloff.
The bigger picture: Oil producers still have a problem.
While the deal’s extension will help support the oil price in the near term, rising US oil production continues to pose a threat to the oil price (and, by extension, oil-producing countries like Saudi Arabia, regions like Alberta and companies like BP). At the same time, renewable energy is becoming cheaper to produce and a more viable alternative to oil-based energy. The good news for oil producers is that, if the global economy continues to improve, overall demand for oil could rise quickly enough that it could push the oil price higher. But that’s a risky bet to be making.