Stock Rally Weakens, Oil Loses on OPEC Doubts

Stock Rally Weakens, Oil Loses on OPEC Doubts

A six-day rally in US stocks which took them to all-time highs, markets pulled back as energy stocks struggled. Crude oil futures failed to top $50 a barrel, with OPEC's nine-month extension of its production curb failing to reassure investors. 

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One consequence of the revelation in the Fed meeting minutes released on Wednesday has been the renewed strengthening of the US dollar. Some new GDP data, which topped economist estimates, furthered strengthened the US currency, undoing the declines earlier in the week. 

That push upward added to the downward pressure on other currencies, most notably the British pound. A new poll showed UK Prime Minister Theresa May slipping to just a five percent lead over Labour Party leader Jeremy Corbyn, ahead of next month's snap election. While May's Conservative Party remains likely to win, a strong Labour showing could create new challenges in the upcoming Brexit negotiations.

The two parties disagree strongly on foreign and domestic policy in ways that would impact directly on that process. The terrorist attack in Manchester brought national security to the forefront in the minds of UK voters, with the Tories seeing a drop in support. 

Energy sector stocks weakened after OPEC announced a nine-month extension of its program to curb production in an effort to limit supply and reduced the global oil supply glut. Without significant reductions in the global oversupply, we're unlikely to see oil prices returning to the $100 level of 2014.

Crude oil is far from a free market, with one big cartel and a few big producers dominating the supply of raw crude and fewer than a dozen multinational corporations controlling production of end products. As a result, the market is frequently assumed to be at least partly guided by price collusion as much as competition. That makes the recent inability of this small group of operators to push prices upward all the more interesting. 

Why this small group of very big players can't get oil prices back up to levels that make it profitable for everyone except average consumers is a complex question in one sense, but a simple answer has to do with a failure to cooperate. Even Russia and OPEC are now on the same page, agreeing to cut their production in coordination with each other and the rest of OPEC. Unfortunately for them, OPEC has one member openly cheating on that production deal: Iraq. The nation was long shut out of the markets by the sanctions against Saddam Hussein's regime and now desperately needs the cash to pay off debts and fund the fight against Islamic State. 

At the same time, the competition to that OPEC-Russia team is pumping into the glut. The US and Canada continue their production, including from shale oil fields, which may not even be profitable. The cost of production of shale oil, which is dirty and tough to extract, is widely believed to be above $50 a barrel. Yet the North American producers are pumping it, possibly at a loss, to maintain their market share. 

With all of that messiness looking unlikely to change, investors are losing faith that OPEC and Russia can do anything to get oil moving steadily upward. At least, it looks unlikely they can do it with a nine-month extension of a production curb which OPEC can't even enforce among its own members. 


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