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Sorry, No Deal!

Oil

Image source: vladimir salman / Shutterstock.com

What's going on?

On Wednesday last week, we reported on a meeting taking place this weekend between Saudi Arabia, Russia and other major oil-producing countries to potentially agree to a deal to freeze oil production. Well, after a long day of talks, there was no deal – and that decision will likely lead to a fall in the price of oil and energy stocks.

What does this mean?

This deal was first discussed back in February and, over the following two months, led to the oil price increasing by more than 50%. But the devil was in the details and it looks like Saudi Arabia’s insistence that Iran take part in the freeze ultimately made a deal impossible (Iran had many of its international sanctions removed earlier this year and so doesn’t want to agree to “freeze” production until it can ramp it up). The oil price fell more than 5% as markets opened up for the week in Asia (Sunday night, New York time) – Monday will be a very interesting day indeed.

Why should I care?

The bigger picture: Talk of this “deal” and declining US oil production have both helped boost the oil price lately. While this deal has been under discussion for two months now, the amount of oil that is drilled in the US has been declining (as its unprofitable for many American producers to drill with oil anywhere near its current price level). The collapse of this deal will almost certainly be negative for the oil price in the coming days, but, once the dust settles, declining US production might push up the oil price anyway.

For markets: Certain sectors benefit from a higher oil price – and others feel the pain. Of course, energy companies win when the oil price goes up. And there are tons of companies that profit from more oil production by, for example, selling heavy machinery or doing seismic surveys. But, typically, companies that sell things to people – especially things that we don’t really need – are moderately hurt by a higher oil price because, as people spend more on filling up their cars, they have less for discretionary spending.

Originally posted as part of the Finimize daily email.

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