Oil prices blasted off Nov. 30 after OPEC announced a deal among its members to cut production by 1.2 million barrels per day, with another 300,000 pledged by Russia and another 300,000 being sought from other non-OPEC producers.
Oil spiked upward in double-digit percentages, even though the deal does not kick in until Jnaury. Well, of course, because oil buying is a futures market - buyers bid on contracts now for delivery later. Three months is a typical period. That's how the commodities markets work.
Yesterday oil began to slide in price. This was inevitable since like any commodities market, that of oil is traded heavily by speculators who do not want to buy physical oil at all, they just want to leverage money. So speculators started taking profits and that drove prices down. (There is a deadline date that closes contracts, and if you still hold an active contract the day after, you are going to buy 1,000 barrels of oil no matter what, or 42,000 gallons. Hope you have somewhere to put it!)
But did prices decline for other reasons, too? Here is the chart since Nov 29 for an ETF called USO, used as a proxy for oil contracts since USO's share price matches oil contract's price moves on a 1:1 ratio:
As the market has not opened as I type this, the pre-market price shows a further decline.
Was the decline due to things other than profit taking?
But on Monday, a Reuters survey found that OPEC's output hit a record high in November, indicating that member countries could have a hard time sticking to their plan.
"We remain skeptical of Iraqi and Iranian compliance," said Michael Cohen, head of energy commodities research at Barclays, in a note Monday.
"OPEC export levels may remain elevated in 1H 17 if countries step on the gas in December and fill their storage. Lower demand and lower refining runs should also help the Saudis keep exports high."Note that the OPEC deal was only for production, it does not affect exports into the world market. And OPEC nations were cheating in advance by raising production and cheating after implementation. Any economist knows why. See also, "Saudi Arabia And The Great OPEC Production Cut Hoax."
Disclosure: I am not invested in oil or the oil industry in any way. Don't take anything I write as investment advice!
Update: There are a number of analysts making the case for oil to go much higher and generally remain there:
The Oil Deal: Pay Attention Because The Game Just Started
Oil Prices Doubled The Last Time OPEC Cut Production
And finally, nine bearish factors that will drive prices down
Update: Iran Brags It Can Now Sell As Much Oil As It Wants
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