Oil has been on a strong run upward recently, and for good reason. The world is paying close attention to supply cuts from OPEC and non-OPEC member nations. However, many experts have pointed out that the oil-supply cuts would not be an end-all, be-all for oil. In fact, they have been warning that the cuts may not be enough to cause long-term change in the sector. Now, it looks like investors are starting to listen.
Oil Supply Cuts In Focus
For some time now, oil supply cuts from OPEC and non-OPEC member nations have been on center stage, and for good reason. It all started months ago when OPEC announced that it had reached a preliminary agreement to implement an oil production cut by no later than November 30. While this announcement was met with skepticism, the deal did come to fruition by that date. On November 30, OPEC announced that it had reached a deal to cut 1.2 million barrels per day of oil from production.
Shortly following the OPEC production cuts, the oil industry received more good news. Now that OPEC has shown that it’s serious about creating balance in the oil industry, non-OPEC nations are getting in on the solution to the supply glut. In fact, Russia, Mexico and several other countries have agreed to cut production as well. The total production cut under this added agreement comes to 550,000 barrels per day.
As the law of supply and demand suggests, this sent the price of oil up. After all, when supplies shrink, prices must climb. With many of the world’s largest oil producers now working to cut production, supplies are likely to fall… or are they?
Oil Falls 3%
While oil has been on a strong run upward, that’s not what we saw from the commodity on Monday. In fact, the oil price was down by about 3%. As many experts have been warning, investors are starting to realize that the OPEC and non-OPEC production cuts may not be enough to actually lead to change. After all, while some are cutting production, others are increasing it. In fact, much of the declines that saw on the commodity throughout the day are the result of worries that while cuts are happening, US oil production is climbing. In a statement, Hans Van Cleff, senior energy economist at ABN Amro, said:
We see the optimism surrounding OPEC and non-OPEC production cuts being counterbalanced by fears of higher U.S. crude production as the higher rig count as of last Friday still weighs…
What Investors Should Be Watching
While this may prove to be a blip on the screen on an otherwise uninterrupted run on oil, Monday's declines could also be the beginning of a larger slide in value. With that said, in order to properly gauge where oil is headed moving forward, pay close attention to supply and demand. Forget about supply cuts and supply increases on a singular level. Instead, watch for reports that look at the oil industry as a whole and balance the cuts with the gains. This will give you a clear picture of what to expect ahead.
Where do you think oil is headed moving forward?