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OPEC's revival or swan song? First evidence from financial markets

On Wednesday, 30 November 2016, OPEC reached a milestone agreement to cut oil production by 1.2 million barrels a day in a long-awaited attempt to end

Publishing date
02 December 2016

In the two days following the announcement of the deal, Brent crude - the international oil marker - jumped more than 16 per cent, from 46 USD to 54 USD.

The last time OPEC adopted a similar decision was in the midst of the financial crisis, at the end of 2008, when it cut 4.2 million barrels a day in an attempt to prevent prices, already heavily under stress, from plunging further.

It is still too early to understand how the current OPEC deal will impact the global oil market. However, a first look at the financial markets’ response to the announcement outlines two trends.

1. Evolutions of the oil price and its futures: short-term rebound vs. longer-term downturn

Figure 1 shows the Brent forward price curves before and after OPEC’s decision to cut oil production. The curves intersect around 2019. On the one hand, this twist implies that the markets expect higher oil prices in the short term than they did before the announcement, as one may predict. More interestingly, the markets’ expectations about the long-term future oil prices are now lower than before the OPEC deal. This may suggest that markets are already factoring in the assumption that higher oil prices will attract new investments in the short term, thereby leading to higher production and lower long-term future prices than previously expected.

Figure 2 shows the recent evolutions of Brent price and its futures contracts, all indexed at 29 November - the day before OPEC’s announcement. Short-term futures have jumped almost as much as the Brent price, but long-term futures have barely increased. According to these figures, markets do not seem to trust a long-term structural impact of OPEC’s decision on the oil market.

2. European energy equities: a short-lived rebound for oil and gas companies

Figure 3 shows the equity prices of the major European energy companies over the last ten days, again all indexed at 29 November. OPEC’s decision had a different impact on the two key compartments of the energy industry - oil and gas companies and utilities. Utilities have not been reshaped by the OPEC deal, while oil and gas companies surged on average by 6%, thanks to the rapidly rising oil prices. However, two days after the deal, oil and gas equities have already provided the first signs of retreat.

In short, the evolutions of both the oil prices and the energy equities seem to indicate markets’ lack of confidence about the potential structural nature of the OPEC deal on oil markets. Their caution can well be justified by the fact that the effectiveness of the deal depends on the commitment of non-OPEC members (such as Russia) to cut output. This point should be clarified on 9 December, when OPEC plans to hold a meeting with non-OPEC producers to coordinate the production cuts. Until that meeting it will be difficult to understand whether the 30 November deal represents a historical OPEC revival, or just its swan song.




About the authors

  • Simone Tagliapietra

    Simone Tagliapietra is a Senior fellow at Bruegel. He is also a Professor of Energy, Climate and Environmental Policy at the Catholic University of Milan and at The Johns Hopkins University - School of Advanced International Studies (SAIS) Europe.

    His research focuses on the European Union climate and energy policy and on the political economy of global decarbonisation. With a record of numerous policy and scientific publications, also in leading journals such as Nature and Science, he is the author of Global Energy Fundamentals (Cambridge University Press, 2020).

    His columns and policy work are published and cited in leading international media such as the BBC, CNN, Financial Times, The New York Times, The Economist, The Guardian, The Wall Street Journal, Le Monde, Die Zeit, Corriere della Sera, and others.

    Simone also is a Member of the Board of Directors of the Clean Air Task Force (CATF). He holds a PhD in Institutions and Policies from Università Cattolica del Sacro Cuore. Born in the Dolomites in 1988, he speaks Italian, English and French.

  • Enrico Nano

    Enrico, an Italian citizen, works at Bruegel as a Research Assistant in the area of innovation and competition policy, with a focus on energy and climate. Prior to joining Bruegel, Enrico worked at the European Commission as a Blue Book trainee at DG Connect and as a business analyst intern at UniCredit Bank in Moscow.

    He holds a MSc and a BSc in Economics from the University of Turin and a MA in Economics from the Collegio Carlo Alberto, where he completed the Allievi Honors Program. His master thesis in Health Economics focused on the socioeconomic determinants of health outcomes, with an empirical application to cognitive recovery after traumatic brain injuries.

    Enrico’s research interests include empirical microeconomics, innovation and industrial policy, health and development economics.

    He is fluent in Italian and English, and has a basic knowledge of Spanish and French.

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