Saudi Arabias Oil Minister Set The Record Straight

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What's going on?

Saudi Arabias oil minister dispelled any notion that there would be a coordinated effort to cut oil production and the price of oil dropped about 5%.

What does this mean?

A deal of sorts was recently made between Saudi Arabia and Russia to freeze the amount of oil they produce, e.g. they agreed not to increase current production. Some thought this might be a precursor to a coordinated cut in global supply, but the Saudi minister made clear on Tuesday: That is not going to happen.

The market was ascribing some likelihood that the supply of oil would be reduced, but with that likelihood significantly diminished, the price of oil fell considerably.

Why should I care?

The bigger picture:Oil and stock prices were closely correlated in January until speculation of a deal between Russia and Saudi Arabia emerged. That means that the oil price and overall stock prices moved very closely together: both up and down. Investors thought, perhaps, that a low oil price was indicative of a weakening global economy which would hurt stocks (amongst various other possible reasons). Russian and Saudi cooperation perhaps caused oil and stocks to be less closely related because, for some, the deal suggested a production cut might be coming. But now that this prospect appears off the table, the correlation might resume. The lower oil price certainly helped to push stocks lower on Tuesday.

For the price of oil: Expect volatility to continue. That means the price of oil will swing around a lot. The price is now around $31 per barrel which is roughly in the middle of its recent range of $26-$35. In percentage terms, thats a very wide range (e.g. $35 is 34.6% higher than $26 so its no longer unusual for oil to move 3-5% in a single day).

Originally posted as part of the Finimize daily email.

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