Why did oil fall despite the OPEC cut?

Why did oil fall despite the OPEC cut?

27 May 2017, 08:48
Jiming Huang

OPEC and other major producers, including Russia, agreed to extend to March 2018 a previous agreement to cut production by 1.8 million barrels per day. Investors, however, had been either hoping for a larger cut or longer cuts, and sold off on the black gold. Brent, the international benchmark, slipped over 5 percent to just above $51 per barrel, while WTI, the U.S. marker, fell to about $48 per barrel.

The initial price reaction is unfounded, explained Giovanni Staunovo, an analyst at UBS Chief Investment Office (CIO). Prices had rallied about 10 percent before the OPEC meeting in Vienna, as many oil producing nations had already expressed their support for the deal.

"We believe the deal should keep the oil market in deficit, and help accelerate the decline of still-elevated inventories in the second half of this year," said Staunovo. "With stronger seasonal demand, we see the stage as set for higher prices."

CIO continues to be long crude, and sees prices rising to $60 per barrel over the coming months. Over the last five years, oil demand has grown seasonally by nearly 1.7 million barrels per day between the first and third quarters of each year. OPEC and its partners have also taken concrete steps to tighten the market.

"We believe the next big move for prices is up, as oil inventories fall at an even faster pace," the analyst said. 

(By UBS)

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