OPEC Blinks

On November 27, 2014, OPEC triggered an acceleration in the decline in the price of oil by issuing a statement explaining that the cartel could not agree to production cuts requested by poorer members in response to softening prices. From that announcement through January 15, 2015, the price of oil (as measured by WTI Crude) fell nearly 55%. Today, the price of oil trades at or near the high $40s, almost 45% lower than July 2014 highs. 

OPEC (largely controlled by Saudi Arabia) kept output constant as the price of oil fell, continuing to pump oil into a supply glut in order to take market share from higher cost producers. On September 20, however, OPEC’s posture appeared to slightly shift when it announced a preliminary agreement (to be ratified in late 2016) to cut production from ~33.2 million barrels per day to ~32.5 million. The price of oil rose by over 5% after the announcement, but gains were reversed the next day when pundits largely panned the announcement as an “agreement to agree.”

The announcement, however, marks the first time since the energy market downturn began that Saudi Arabia appears to be at least considering a shift in strategy from keeping production constant and gaining market share to cutting production to support and potentially increase price. OPEC explained, “It is not advisable to ignore that the potential risk that the present overhang may continue to weigh negatively well into the future.” Further, OPEC president Mohammed bin Saleh al-Sada stated, “There is a common understanding that we need to look at market stabilization measures aimed at reducing the length of the downturn.”2

Since the first quarter of 2015, we have held a neutral weight on the commodity sector, of which oil is the largest component. While we are not yet ready to raise our outlook, the recent OPEC announcement combined with the price of oil seeming to settle in the $40-$50/bbl. range during most of 2016 (as illustrated below by red dashed lines) may have created support for a short term price floor. We will be watching OPEC’s next meeting closely for signs of continued agreement to curb production and will reconsider raising our outlook depending on the outcome.

2 Source:  OPEC Agrees to Cut Production, Sending Oil Prices Soaring, THE NEW YORK TIMES, September 28, 2016, page B2.