Oil Price Drops After OPEC-Russia Agreement Will Not Reduce Production

Saudi Arabia Says It Does Not Trust Producers to Cut Production

The collapse in the price of oil appeared to be over after the Organization of the Petroleum Exporting Countries (OPEC) and Russia reached an agreement to freeze output levels. The price of West Texas climbed above $30 and ended a losing streak that started at the beginning of February. The details of the agreement showed no sign of reducing the production levels that have the world awash in the black stuff, but it was enough to stabilize the price of crude.

The agreement has been on and off and since February 11 when comments from Russia showed a willingness to reach an agreement to boost the price of oil. A production freeze was announced with the backing of Saudi Arabia, Russia, Venezuela and Qatar. Now it appears that Saudi Arabia’s comments about the agreement is to only freeze output levels, but will not include a reduction in crude output. The price of oil dropped 4.6 percent following the news. The uncertainty in the price of energy has kept commodity currencies: AUD, NZD and CAD rising and falling in high correlation to the price of oil. A stable price for a barrel of crude is needed to end the compound effect those economies are suffering with their own growth slowdowns.

Supply is expected to remain high in the short term with no uptick of global demand in sight. The U.S. Energy Information Administration will release the weekly inventory numbers on Wednesday, February 24 at 10:00 am EST. Inventories are forecasted to rise by 3.2 million barrels. Lower demand for crude and refined products as inventories grow will continue to put downward pressure on oil prices and commodity currencies.



The problem is that the agreed ceiling for combined production is at January 2016 levels of production, which for most of OPEC nations and Russia are record high levels. Iran was not part of the agreement and after a diplomatic disagreement with Saudi Arabia at the beginning of the year it was unlikely they would participate. Iran has been forced to decrease output due to sanctions and is pumping at close to half the 2011 levels. Possessing the world fourth largest reserves it needs to double their current production to match pre sanction levels which would still leave it behind other OPEC members who have picked up the slack left by Iran’s absence.



The uncertainty in the price of energy has kept commodity currencies: AUD, NZD and CAD rising and falling in high correlation to the price of oil. A stable price for a barrel of crude is needed to end the compound effect those economies are suffering with their own growth slowdowns. The supply glut of crude and the difficulty of reaching an agreement that ends in a production cut is unlikely. Market share is a concern as most producers know that if they cut to boost prices, their competitors will make a move. Saudi Arabia is in a position where it doesn’t trust in full the rest of the OPEC membership to stick to an agreement and can afford, at least for the time being, current prices. Russia and Venezuela are not in such a comfortable position but there is little they can do if there are no production cuts.

Cheap oil has benefited consumers and inflation expectations in energy importing nations. India has been one of the main beneficiaries. On the other hand low inflation expectations have hit the plans of the central banks of Japan and Europe as they hope to guide their economies into a faster pace of growth. Energy companies around the globe are facing rising risks of bankruptcy if commodity prices remain low which could end up hitting the financial institutions who offered them credit.

FX events to watch this week:
Wednesday, February 24
10:30am USD Crude Oil Inventories
7:30pm AUD Private Capital Expenditure q/q
Thursday, February 25
4:30am GBP Second Estimate GDP q/q
8:30am USD Core Durable Goods Orders m/m
USD Unemployment Claims
Friday, February 26
8:30am USD Prelim GDP q/q

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza