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Oil Gains, US Equities Fall As OPEC And Allies Agree To Lower-Than-Expected Production Cuts

Oil Gains, US Equities Fall As OPEC And Allies Agree To Lower-Than-Expected Production Cuts

Oil prices posted gains early Monday after the Organization of the Petroleum Exporting Countries and allies agreed to long-awaited production cuts in a Sunday meeting.

What Happened

The United States futures options dipped as the 9.7 million barrels per day cut (mb/d), the OPEC+ countries agreed to, fell below the market expectations.

Oil, too, initially dropped following the agreement, before rising late Sunday.

The meeting effectively ended a price war between oil powerhouses Saudi Arabia and Russia started in March.

The novel coronavirus (COVID-19) pandemic has significantly reduced the demand for oil, and OPEC led by Saudi Arabia proposed production cuts last month but faced disagreement from Russia.

In the aftermath, oil saw the worst single-day drop since the gulf war in 1991.

OPEC+ proposed a 10 mb/d in its last meeting on Thursday, but Mexico disagreed with the 400,000 mb/d it was asked to cut. Under the latest deal, the country is only required to cut 100,000 mb/d, according to CNBC.

What The Analysts Are Saying

"This is at least a temporary relief for the energy industry and for the global economy," Head of Analysis at Rystad Energy, Per Magnus Nysveen, told CNBC. "Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided."

Goldman Sachs said that the oil prices are likely to continue the downward trend in the coming weeks. The production cuts are "historic yet insufficient" as they can't offset the sharp reduction in demand, the investment bank said, according to Reuters.

What's Next

The production cuts will start on May 1, for an initial period of two months, OPEC said. The 23 member countries will meet again in June to review the situation and see if their current agreement needs to be updated.

In its latest meeting, OPEC+ countries have agreed to reduce the production cuts to 7.7 mb/d for six months between July and December, and 5.8 mb/d for 16 months between January 2021 and April 2022.

Price Action

West Texas Intermediate crude futures gained 5.2% at $23.94 at press time on Monday, Brent crude futures added 4.4% at $32.85.

Dow Jones futures traded 1.3% lower at $23,312.00, Nasdaq 100 futures were down 1.4% at $8,110.00, and S&P 500 futures traded 1.4% lower at $2,741.00.


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