How Effective Is The OPEC Deal For An Oil ETF Rally?

On November 30, OPEC leaders satisfied market watchers by signing the oil output cut deal for the first time in eight years and succeeding in the third attempt this year. The deal sent oil prices and global energy stocks soaring. At the time of writing, oil prices hit a 16-month high.

The apparent hurdles to the deal – Iran and Iraq – also came in tune with others and decided to slash production by about 1.2 million barrels a day by January to about 32.5 million barrels for six months. Notably, OPEC’s estimated output in October was 33.6 million barrels a day.

The key bottleneck in the deal so far – Iran – was permitted to increase production to about 3.8 million barrels a day, against Saudi Arabia’s previous pitch for 3.707 million barrels. More importantly, a non-OPEC country Russia, which was producing at a post-Soviet record, will also slash its output by 300,000 barrels a day though it is “conditional on its technical abilities.”

WTI crude ETF United States Oil (USO – Free Report) , Brent crude ETF United States Brent Oil (BNO – Free Report) and the largest energy ETF Energy Select Sector SPDR ETF (XLE – Free Report) added about 3.8%, 5.1% and 1.4%, respectively (as of December 5, 2016) following the signing of the deal.

Are These Just Short-Term Gains?

Investors should note that anything concrete in the oil patch will happen only when the participants stick to their commitments. If all promises are kept, the supply-demand scenario may balance out in 2017 and push oil to the $50?$six monthsrange. This means the cut won’t take oil to about $100 a barrel level – that mark we saw in early 2014 – under the best possible circumstances.

And in reality, there are many downsides to the oil patch. First of all, as per some analysts, “significant risk remains that OPEC members will produce crude above quotas, as has happened in the past.” Secondly, the OPEC deal is less commanding this time than it was in 2008 amounting to 4.2 million bpd. Next, already OPEC’s oil output hit a new record highto 34.19 million bpd in November before the scheduled production cut.