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Oil Prices Are A Sticky Mess


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What's going on?

So much for that big agreement last week that was supposed to boost the oil price… Oil had another weak day on Wednesday, falling more than 3%!

What does this mean?

In 2016, the members of OPEC, a group of oil-producing countries, agreed to put a cap on their collective oil production (along with Russia and a few other non-members). The objective was to push up the (then) very low price of oil, since decreasing the supply of something typically increases its price.

Even though that agreement was extended last Thursday out to the end of 2017, it appears that investors had expected even bigger limits on production (which, by further restricting the global supply of oil, might have increased its price). Since then, the oil price has fallen more than 5%, partly because investors are fretting over increased supply from producers outside the agreement (particularly from the US).

Why should I care?

For markets: The oil price is still much higher than before the deal was first discussed.

Even though some investors are doubting the strength of the renewed OPEC deal, it’s made a substantial impact in raising the price from 2016’s deep low. The oil price was languishing below $30 per barrel in February of 2016, right before the first murmurs of a deal between OPEC and Russia began making headlines. At $48 per barrel, the oil price is more than 50% higher today.

The bigger picture: The rise of renewable energy is threatening the long-term price of oil.

Renewable energy (think: solar and wind) is getting cheaper and cheaper to produce. Meanwhile, automotive companies are investing heavily in electric cars (and, as battery technology improves, that’s only likely to become more popular). Both of these factors will likely create a significant drag on global demand for oil (the other side of the supply/demand equation).

Originally posted as part of the Finimize daily email.

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