OPEC surprised the market - Rabobank

Bas van Geffen, Quantitative Analyst at Rabobank, notes that the crude oil posted its sharpest rise since April, after the OPEC surprised the market with an agreement to reduce the bloc’s combined output to 32.5mn barrels per day, a reduction of about 750,000 barrels per day.

Key Quotes

“This is the third time in a row that a meeting in Algeria catches the market off guard with a production cut. While the details –i.e. the individual countries’ production targets– still need to be hammered out in the November OPEC meeting, this agreement marks a break from the current policy in which each member produces at will.

The Organisation of Petroleum Exporting Countries thereby succeeded to agree on a common strategy against low prices where global central banks and governments so far fail to coordinate a common response against the low growth, low inflation, and hence low interest rates environment. And so, while the FX wars rage on, the oil shake-out may have come to an end.

Sources also said that in addition, OPEC would try to involve non-OPEC oil producers in this newly agreed cooperation. Of course, it remains to be seen whether non-OPEC members would be willing to cooperate. In fact, with individual production targets not fully agreed on, there is still a small risk that some OPEC members may not agree. However, given the impact of the current low prices on the countries’ budgets, the OPEC members likely see this agreement as favourable for everyone.

The news of this OPEC agreement reverberated across other asset classes as well, with currencies of oil producing countries, such as Canada, strengthening. And, unsurprisingly, the energy sector posted the biggest gains in the equities universe, with the S&P energy index up 4.3%.”