On Thursday, OPEC and other non-members extended the November production cut agreement by 9 months. If the deal cut announcement was in keeping with the market consensus, why did oil drop ~5% after the news?
The drop could be a temporary blip
Oil prices had been going north before the meeting on deal extension hopes and the news was mostly priced in. So when the announcement came in as expected, prices dropped as traders booked profits. Also, the markets were hoping for deeper cuts to tackle the excess supply. The disappointment of the traders due to the extension of the deal as it is also contributed to the drop.
Near term outlook positive
However, the IEA report this month hinted optimism in its outlook for the oil markets rebalancing should the deal extension happen. Further, seasonal pickup of demand for oil during summers could also be a catalyst in keeping oil prices buoyant in the near term.
Supply concerns remain in the long term
The rise of US shale has considerably changed the oil dynamics in the recent years and to an extent reduced OPEC’s influence in driving global oil prices. While the cuts could help in rebalancing the market in the near term, it is not clear what happens to prices once the deal ends in March next year and supply is increased.
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