OPEC Is Waiting For Russia Before It Cuts Oil Supply

Oil has been going through some volatility in the recent period which can be explained by political uncertainty. In particular, Donald Trump has roiled the waters a few times with his tweets celebrating falling prices while the OPEC members are trying to cut the supply in order to push up the oil prices. The crude prices were at one-year lows last week but this week there was a reversal as the investors are expecting the largest oil producing countries including Russia (which is not a member of OPEC) to cut the output next year. The decline in oil price is a double-edged sword. While it is beneficial for many companies and individuals as they will have access to cheaper fuel, it is also a big blow to the energy companies which constitute a large part of many countries’ national output.

OPEC has previously used the method of cutting the supply after the price of oil dropped to under $30 a barrel in 2016. While the cut was effective and indeed helped the depressed prices, the number of suppliers increased again and currently the market faces a similar problem. In addition to this factor, there is also the trade war between the US and China to consider, which is affecting investor confidence not only among oil producers but other companies as well who issue stock, bonds as well as Forex brokers and others. “What started the sell-off on oil was a supply issue. In the last couple of weeks, what we are getting is fears of slowing demand. And fears of slowing demand are directly related to fears of the global growth slowdown,” – commented Alicia Levine, chief market strategist at BNY Mellon Investment Management.

OPEC is waiting for Russia

Correlation between the cyclical market and oil prices

A research conducted by Ed Clissold, a chief US strategist at Ned Davis Research has found that since 1982 crude oil has fallen by 30% more than 13 times. During 12 out of these 13 occasions, the drop in prices coincided with a cyclical bear market i.e. a 30% drop in Dow Jones Industrial Average after 50 days or a 13% drop after 145 days. The stock market has indeed been going through some tough times in the latest period. The finding doesn’t necessarily imply that a 30% decline in oil price entails an economic recession as this was the case in only three of the 13 cases.

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