Oil Rally Boosts Stocks on Supply Cut News

Oil Rally Boosts Stocks on Supply Cut News

Saudi Arabia and Russia jointly announced an extension of their production-cut deal through early 2018, sending oil prices rallying. The surge in crude led a broader advance in commodities, sparked gains in oil-producer currencies, and pushed US stocks close to new records.

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When OPEC announced an agreement last year to cut production in an effort to curb the worldwide supply glut, Russia joined with those countries in reducing output. Russia is not an OPEC member but found common cause with the cartel in trying to curtail supply and thereby stabilize and eventually increase oil prices. 

The United States, also not an OPEC member, has chosen the opposite approach, pumping as much as it can to capture market share. The increased production from North America has offset the decrease by OPEC and Russia, impeding their efforts to reduce the global supply. As a result, those countries have done some recalculating, based on the expectation that the US will continue to pump as much as it can. Rather than extend their agreement for just another quarter, they have done so for a full nine months. 

Oil markets rallied on the news, but also on the expectation that there will be more bullish news in the months ahead for two reasons. First, US production and supplies are in a gentle but steady downtrend, which means that the production cut has a better chance of working by next year. Second, a lot fo the hedge funds which had bought the crude rally last year when Saudi Arabia and Russia first announced the cut have already pulled out and taken their profits. 

In other words, money managers have cash to spend. They aren't already in the markets, which means that the first sign of a pullback will invite them to buy again and send crude rallying yet again. 

A daily chart of crude oil futures shows that a Fibonacci retracement to 61.8% in the next year would put prices somewhere around $70 a barrel. If crude broke out of its wedge and continued its current upward channel, it could arrive there by next Spring. 

This bullish news was enough to send stocks rallying in several sectors, led by commodities and energy shares. The S&P 500 rallied to within two points of its all-time high on Monday morning, while the Nasdaq made a new all-time high in active trading. The dollar dropped slightly, extending a four-day slide as currencies of oil producers Canada and Mexico gained. 

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