Oil Prices Jump as OPEC Works With Other Producers

The world is getting ready to pay more for oil. The price hike is the result of unprecedented agreement between the major crude producing countries. For the last two years, OPEC has tried strangling the competition, by increasing production and purposefully tanking the economies of oil dependent countries like Venezuela. Now the cartel has abandoned their strategy of flooding the market to encourage low prices. On Saturday, the OPEC powers signed a historic agreement with nations such as Russia, Sudan, and Mexico. These cuts will mean 558,000 less barrels of oil per day. This is the first time in over 15 years that OPEC has cooperated with non-member states to manage supply and demand. In response, the price of crude jumped 5% after the announcement.

OPEC negotiates to limit oil reserves.

Saudi Arabia Promises Production Cuts

Additionally, Saudi Arabia has agreed to further cut their oil production below 10 million barrels per day. This comes on top of the cuts the country has made since November, when production went from 10.7 million barrels in July, to only 10.06 million barrels. If Saudi Arabia and Russia both stick to their production caps, global prices could spike as high as $60 a barrel. This would be a major reversal from January of 2016, when crude prices fell to $27.

Is There a Limit to Increased Oil Prices?

Some analysts believe that even with this level of cooperation, there will still be enough supply to set a price of ceiling of $50 per barrel. The United States and Canada own huge inventories of shale oil reserves. Until now, the energy corporations delayed exploiting these resources, instead focusing on more cost-effective fields. However, once prices rise, demand for locally sourced oil will increase. Given that Donald Trump has placed an emphasis on domestic industry, it is unlikely that the agreement will lead to complete price domination, even though the countries involved account for more than 60% of today’s oil production.

Will Higher Prices Help the United States and Canada?

Ironically, the higher prices may end up helping the dollar and the loonie, as oil producers who are not bound by cuts will see immediate gains and stronger economies, as long as they can meet internal demand. In the States, President-Elect Trump has already called for a faster approval process for energy infrastructure projects, and his leading candidate for Energy Secretary is former Texas Governor Rick Perry, who is a board member for Energy Transfer Partners LP, the company behind the North Dakota pipeline project that is being picketed by environmentalists and Native Americans. Given these signals, it is likely that American oil production will be scaled up quickly if access to imported barrels are cut.

Is Iran the Ultimate Winner of the Oil Price Ceasefire?

Iran also factors in to the production equation. Iran is back in production mode after the recent removal of sanctions. The country is scrambling to revive its economy through crude sales. While other OPEC nations decreased production in November, Iran received a license to increase its volume to 3.8 million barrels per day. Iranian president Hassan Rouhani followed this up with a statement that “The Islamic Republic of Iran is now able to sell as much crude oil and to any country it deems appropriate.” It remains to be seen whether the rest of OPEC is willing to take a cut in profits, while watching Iran enjoy the benefits of increased prices.

Can We Expect Compliance With the Agreement?

Compliance will continue to be an issue. Several OPEC countries announced production cuts in the past, and then released more crude onto the market. Russia also reneged on production promises several times in the last five years. Outside enforcement by signatories is difficult. The key is to encourage voluntary participation, by stressing the long term benefits over short term losses. This may seem like an easy sacrifice for the wealthy nations of the Middle East. Russia, on the other hand, is facing an economic crisis after years of domestic and international conflicts. The Russian oil industry already faces a threat of increased taxation. Coupled with lower profits, the government risks long term declines in growth.

Trading the Oil Agreement

Traders looking to benefit from the oil agreement should keep an eye on oil. However, those trading the dollar and the loonie can find hidden opportunities. Investors trading indices should review the Tadawul.  Increased oil prices are driving up stock prices on the Saudi Exchange.