Oil Surges Back Toward $50

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Members of the Organization of Petroleum Exporting Countries (OPEC) and Russia may have made a deal to extend production cuts in hopes of reducing the world’s oil stockpiles. In theory, this should raise the price. Oil traders appear to believe the plan will work. They have pushed oil prices to just shy of $50 a barrel. The price was just above $45 earlier this month.

OPEC and Russia face a number of challenges as they try to cut global supply. Some members of OPEC may pump more than they have promised. Shale production in the United States has rocketed due to improved financial situations brought on by the oil price recovery. Venezuela and Iran may not honor plans to cut prices at all. For the time being, the market believes most of these things will not happen.

The International Energy Agency (IEA) reported yesterday that the rebalancing of global oil supplies could take several months, which means oil prices may not rise much higher. On the other hand, geopolitical problems could slow oil production from a number of unstable countries, with Venezuela as the most likely. Oil price fluctuations based on global events are usually unexpected and their effects significant.

MarketWatch reported:

Crude oil futures were up Tuesday, with prices headed closer to session highs reached in the prior U.S. session, as expectations that the Organization of the Petroleum Exporting Countries will extend production cuts until early next year continued to boost trading sentiment.

The news, announced during a joint press conference by Saudi Arabia and Russia on Monday, lifted prices by as much as 4% in the U.S., though trading settled with a 2.1% gain, a three-week high. A formal decision that must be agreed by all the deal participants is expected to be announced next Friday.

The conventional wisdom will keep oil prices high, absent some unexpected development.