After a tight debate in Vienna on November 30th regarding the production of oil, the OPEC cartel has finally agreed to an output cut. The effects on the oil price were felt immediately after the news went public. This was the first cut since 2008, a move that goes against the strategy of producing as much oil as desired.
But how much have they agreed to reduce the output by? OPEC will collectively produce a maximum of 32.5 million barrels per day, which means they have decreased output by 1.2 million bpd.
Why The Output Cut?
The oil production cut is mostly intended to end the oversupply of this raw material, which has made oil prices fall for over two years, mainly affecting oil-exporting nations.
When the news about the agreement went public, the major benchmarks reacted immediately as seen in the West Texas Intermediate crude oil (US Benchmark), which was up 8.5%, and Brent Crude (International Benchmark) was up 8.8%. by 12 pm ET on Wednesday.
Regarding volume and volatility, both the Nymex WTI and ICE Brent hit record levels on Wednesday; these are the two most actively traded crude contracts. On the other hand, oil market volatility measured by the Chicago Board Options Exchange Crude Oil Volatility Index dropped by 20% after the agreement took place.
Here is the oil’s rally over the day after the agreement:
And The Winners Are…
Oil-linked currencies were indeed the biggest winners as crude price surged. More specifically, the Colombian peso and Russian ruble became the best emerging-market performers after the OPEC agreement. But this was just a happy ending to the increasing volatility that currencies of oil-exporting nations were facing in recent weeks amid concern that OPEC’s three biggest producers (Saudi Arabia, Iraq and Iran) would fail to agree on a production cut.
It is also important to consider the fact that Trump’s ascent to the US presidency and a better than expected economic data from the world’s largest economy boosted the dollar. In this sense, even though the currencies of oil-exporting nations are up as one would expect them to be, given the oil price increase, they have not gone up as much as they could because the strength of the dollar has put more pressure on them.
Here’s How It Looks:
OPEC’s agreement will not only make oil prices go up (for now), but it will also create tension in global politics and stronger volatility should any OPEC member fail to comply with the production cut. Overall, it has been a wild year in markets given the increasing uncertainty after the world was hit by unexpected news involving the future of the global economy.
In this sense, it is important to consider other facts that may be adding up to the volatility in FX markets besides OPEC’s agreement. These include the movement of the dollar amid the economic transformation of the US under Trump’s command, the resignation of Italy’s prime minister and the evolution of the Brexit process in 2017.