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Was This Another False Oil Price Rally?

Friday, February 19, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. OPEC and Russia production freeze means little

 

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- The big news this week was the historic OPEC/non-OPEC deal, which called for a production “freeze.” But unless the agreement is a stepping stone to something more significant, the practical implications could be limited.
- The deal merely freezes production at historically high levels. Saudi Arabia has added more than 0.5 million barrels per day (mb/d) since 2014. Russia has added a few hundred thousand barrels per day, hitting post-Soviet highs in recent months. Iraq added over 1 mb/d.
- With further gains from these highs unlikely, the deal to “freeze” output hardly involves a sacrifice from OPEC or Russia. The one country that does matter is Iran, which plans on ramping up production after freeing itself of sanctions. Iran, crucially, avoided committing to the freeze this week.
- Oil still rallied strongly following the announcement of the deal on Tuesday and also following Iran’s semi-supportive comments on Wednesday.
- The rally could be short-lived once everyone realizes it may not impact oil prices much.

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