Tuesday, May 30, 2017

Why Crude Oil Dipped After OPEC’s Cut Extension

West Texas crude prices dipped following OPEC's decision to extend production cuts on May 25, falling from the day's high of $52 to below $48 in after-hours trading.

Oil continues its slide -- United States Oil (USO) has fallen 0.68% while the iPath S&P GSCI Crude Oil (OIL) has declined 1.13%. Meanwhile the Energy Select Sector SPDR (XLE) has corrected 0.83%.

This is a classic "buy the rumor, sell the news" move, says Societe Generale's Michael Wittner. When the Saudis and the Russians indicated that they would extend the cuts for nine months rather than for six, oil prices got a more than $2 lift. Prices have since corrected to May 15 levels, but the fundamentals haven't changed. Wittner in a note published last week said:
Today’s meeting didn’t have any impact on our fundamental supply outlook, because we had already built it in to our forecasts. First, the level of the targets has not changed. Second, even without a nine month extension, we previously believed that OPEC would meet again late this year and agree on targets for the first half of 2018.
The key for us is that we continue to believe, as we have since the end of last November, that the Saudis and OPEC are back in the game of active supply management. What this means is that when we look past today’s meeting to the next meeting, and the meeting after that, etc., there will be an OPEC production target. In the abstract, the target may move higher or lower, depending on market conditions and on progress toward the rebalancing goal – but there will be a target.
Wittner maintains his bullish outlook on oil and thinks that while the rebalancing process has taken longer than expected earlier this year, the OPEC cuts will eventually work.

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