Representatives from the Organization of the Petroleum Exporting Countries (OPEC) announced a deal to cut production by 1.2 million barrels per day following their meeting in Vienna on Wednesday. This brings expected production levels down to 32.5 million barrels per day, which is near 2014-2015 production levels.
A 3.8% cut may not sound like much, but, in theory, it could have a large short-term effect on the market.
Oil spiked on the news, as investors expected a short-term increase in prices following the supply cut. However, it’s likely that short traders made more of an impact on prices by unwinding positions in the futures market. As you can see in the chart below, WTI crude oil prices spiked 8.5% on the news, but the long-term channel is still intact.
WTI Oil Futures — Chart Source: Trading View
It is possible that the supply cut will be enough to drive shorts further out of the market, which could lead to a break of resistance, but we think that outcome is unlikely for a few reasons:
- The OPEC deal is important, but “compliance” with quotas is unreliable.
- Rising oil prices open the door to higher-cost producers in North America and Northern Europe, and increased supply from the U.S. and U.K. may do a lot to reduce the impact of the cut.
- China’s production may continue to ramp as coal production increases.
- Economic slowing in Europe will likely reduce demand in the near term.
- The production numbers released by OPEC don’t have a very close relationship to what is happening in the oil market. The quota numbers are based on weeks-old data and have caveats for several large producers like Russia. In other words, the data look good, but the real cut is unknown and will most likely be MUCH less than what was announced today.
These factors introduce enough uncertainty to keep prices low through the end of the year. This may present some opportunities for option traders if resistance at $52-$50 per barrel holds.
More Inflation News Adds to OPEC Movement
Adding more fuel to Wednesday’s split market were some statements by President-elect Donald Trump’s likely treasury secretary nominee, Steven Mnuchin, about future bond issues with longer maturities.
His rationale is partially based on the assumption that “eventually we are going to have higher interest rates.” It doesn’t take much of an imagination to assume that Mnuchin is correct, and investors responded by spiking interest rates.
Higher inflation and interest-rate news tend to have a negative impact on retail stocks and a positive one on banks. When combined with predictable selling among dividend payers, the major indices are likely to experience strong back and forth volatility in the short term.
This kind of market presents some interesting opportunities for option traders to profit from bullish and bearish trades at the same time.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
