ETF Trends
ETF Trends

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, rallied in late 2016 on news the Organization of Petroleum Exporting Countries (OPEC) was moving to reduce production.

OPEC has already agreed to reduce output by 1.2 million barrels per day. After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply. The reductions took effect January 1, and the oil producers will reconvene after six months to evaluate the results of the deal.

In a reversal of previous sentiments, Saudi Arabia accepted Iran’s higher output target as a special case. Previous OPEC talks broke down after Iran, which suffered from curtailed exports under strict global sanctions, argued for increasing its output to pre-sanction levels. However, there are some potential problem children within the cartel that could undermine the output reduction effort.

For example, Libya and Nigeria, the latter of which is Africa’s top oil producer, were exempted from the reductions.

“But the success of the deal could be undermined by a few members within OPEC that are not part of the deal. Libya and Nigeria were given exemptions, due to the sizable portion of oil production capacity sidelined because of war, sabotage and political strife in both countries,” reports OilPrice.com.

Libya is targeting production of 900,000 barrels per day by the end of this year while Nigeria is hoping just to keep pace with last year’s output after a spate of rebel attacks ravaged oil facilities there.

“Nigeria has had much less success in recent months. S&P Global Platts puts Nigeria’s January production at just 1.65 mb/d, roughly flat compared to 2016 levels and down sharply from 2015. In fact, 2016 was a horrific year for Nigeria. While the country has long suffered from theft, sabotage, and a growing internal security threat from a variety of militant groups in both the north and in the Niger Delta, 2016 proved to be a low point,” according to OilPrice.com.

OPEC and Russia have in all cut at least 1.1 million barrels per day in production so far. However, Societe Generale oil analyst Michael Wittner said U.S. shale output was rebounding faster than expected as more rigs drilled better and more efficient wells more quickly.

For more information on the crude oil market, visit our oil category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.