What’s Going On Here?

The price of oil had one of its best two-day climbs on record, as Russia and Saudi Arabia shuffled closer to elbow-shaking on an end to their price war.

What Does This Mean?

• Both Russia and Saudi Arabia have been producing more oil than anyone needed, and with supply massively outweighing demand, its price fell.
• Couple that with falling global economic growth, the commodity’s price hit lows not seen for almost 20 years.
• But on Thursday, the US president tweeted that there’d soon be an agreement between Russia and Saudi Arabia to cut between 10% and 15% of global oil production. A day later, the world’s major oil-producing countries scheduled a meeting to discuss the possibility of lowering global oil output in the coming days.
• That better balance between supply and demand should push oil’s price up, but even the prospect of it had the same effect: oil’s price rose by more than 20% on Thursday, and another 10% on Friday.

Why Should I Care?

The bigger picture: Flakey friends.

• Skeptical investors have raised questions over how soon those fabled production cuts will actually come into force after an agreement’s reached, as well as how big they’ll be.
• Historically, OPEC and its allies haven’t cut as much as they’ve promised. With that in mind, there’s an even higher risk that non-OPEC countries invited to the meeting will renege on a deal – and that last week’s oil price boost will prove short-lived.

For markets: It’s a refine line.

Most oil companies benefit from higher oil prices. Even refiners – which generally prefer to buy oil at a lower price – see the value of their end-products fall when oil’s too cheap, and therefore might struggle to make a profit.

Content source: Finimize (2020) Cautious Optimism. Available from: https://www.finimize.com/wp/news/cautious-optimism/ [Accessed 6 April, 2020]