In a surprise move, OPEC oil producers struck the first deal to curb production since 2008 in an informal meeting in Algeria. However, as indicated earlier, the agreement will be finalized at its formal policy meeting in November end in Vienna.
The news left global oil investors open-mouthed, though in a positive way, as the day before dark clouds were forming over the possibility of such an agreement. Iran did not agree to freeze its oil output at the level it is producing now – something over 3.6 million barrels per day (bpd) (read: Oil ETFs: Short-Term Threat, Long-Term Opportunity?).
Iran has been boosting production since the international sanctions on it were lifted in January. The country intends to reach its pre-sanction levels of over 4 million, or about 12.7% of the OPEC output, which it is likely in two–three months. But other OPEC Gulf members wanted Iran’s output to remain below 4 million bpd. Notably, Saudi Arabia – the OPEC biggie – ramped up its production to 10.7 million bpd from 10.2 million in recent months.
In fact, Iran’s apparent no to output freeze deal dragged down oil and energy stocks and ETFs on September 27. But finally, OPEC countries reached agreement on a preliminary accord on Septembers 28 to restrain oil output, which in turn should put an end to the long-standing oversupply issue and shore up long-ailing oil prices. This happened despite the difference of opinion between Saudi Arabia and Iran.
Needless to say, oil prices – which slid over 50% since mid-2014 – shot up following this news. WTI crude ETF United States Oil Fund (USO - ETF report) and Brent crude ETF (BNO - ETF report) tacked on over 4.9% and 5.3% gains respectively after the news. Wall Street’s index of energy shares rose over 4%, representing its best single-day gain since January (see all energy ETFs here).
Falling U.S. Crude Built
Apart from the news of output curb, decline in U.S. crude inventories for four successive weeks also helped in driving oil prices higher on September 28. Crude inventories dropped 1.9 million barrels in the week ended September 23 against analysts' expectations of a rise of 3.0 million barrels.
Inside the Expected Deal
As of now, the agreement says that OPEC will set output levels for each member country at its November meeting. OPEC’s present output is estimated at 33.24 million bpd while it seeks to lower it at a range of 32.5–33 million bpd. OPEC indicated that once the target is reached, non OPEC countries will also be called for in the mission to recover oil prices.
Investors should also note that“pre-accord” says that “Iran would not have the same proportional reductions as other countries”, but would not cross the output limit of 3.7 million barrels a day, as per an adviser to Algeria’s energy minister.
While a group of analysts cheered this historic deal and expects oil to inch higher to $60 a barrel, there are analysts who expect “some back-pedalling between now and November.” Notably, U.S. crude oil presently stands at over $47 a barrel. Whatever the case, oil prices are likely to be steady in the medium term thanks to the likely output curb deal.
While oil ETFs will be the most natural gainers, along with several energy ETFs, key oil producing and exporting countries with revenues earned from oil accounting for a major share of their GDP should also see a bounce. Below we highlight three country ETFs that jumped on hopes of oil output curb:
Winning Country ETFs
Guggenheim Canadian Energy Income ETF (ENY - ETF report)
Canada is also among the world’s top 10 oil producers. The oil, gas and mining sector make up about over a quarter of Canada’s economy. Crude oil has been Canada’s second-biggest export this year and thus the recent run up in oil prices should do good to this economy. ENY was up about 4.6% on the news.
Asthe Canadian dollar soared the most in about four weeks against the greenback on news of output curb, investors can take a look at Currency Shares Canadian Dollar ETF (FXC - ETF report) . FXC was up about 0.8% on September 28, while it is up 5.3% so far this year.
VanEck Vectors Russia ETF (RSX - ETF report)
Russia is the world’s one of the largest producers of oil (14% of world output) and natural gas (18%) and thus will benefit big time if any such deal is cracked in November. RSX added over 2.4% on September 28, 2016 (read: Oil Again in Bull Market: 4 Country ETF Winners).
Global X MSCI Norway 30 ETF (NORW - ETF report)
Norway is among the top 10 nations famous for oil exports. The Norway is the largest oil producer and exporter in Western Europe. Withits comparatively low population, oil forms the key part of the country’s GDP. NORW was up over 2% on September 28, 2016.
Other Country ETFs That Deserve a Look
iShares MSCI Brazil Capped (EWZ - ETF report)
Brazil is ninth-largest liquid fuels producer in the world and even became the second-largest producer of petroleum in South America in 2014, as per EIA. The fund added about 1.8%on September 28.
iShares MSCI Mexico Capped (EWW - ETF report)
This country is yet another major petroleum producer. EWW advanced about 1.1% on September 28, 2016 (read: Behind the Post Presidential Debate Surge in Mexico ETF).
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