The early reaction in oil futures following this morning’s announcement by OPEC and its partners in the production cuts that they will cut by another 500 thousand barrels per day is probably mystifying to some people. To those who understand the way markets work, however, it should come as no surprise.
What is remarkable is not the initial surge, but the pullback that quickly followed. That move has nothing to do with the size of the cuts, it is a function of what came before.
Crude futures had already risen this week as the view that cuts were coming gained traction. What we are seeing this morning is not quite a “buy the rumor, sell the fact” pattern, but it is based on the same thing. If everybody is already positioned for expected news, the reaction will inevitably be muted and profit-taking will cause the opposite to the logical reaction.
The question is though, does that mean that the market will stall out here?
Logic dictates not, but that isn’t the end of the story.
Half a million barrels a day would be a significant supply adjustment at any time, but coming as it does at a time when there is no real glut of oil in the world, it is hard to see how it cannot continue to give oil a boost. At the very least, it will put a floor on prices, making short trading an unattractive proposition.
What the decision to cut has done is to take some of the uncertainty out of the equation on the supply side,…