Weekly Edge: Oil Prices Experience Some Relief On Supply Talks

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by: Invest With An Edge

By Troy Tanzy

Co-authored by Daniel Rangel

Oil prices have eased up a bit in their months-long incline following worries of Saudi Arabia and Russia scaling up oil production due to waning supply levels and heightened demand, according to The Wall Street Journal.

Both Brent, the global oil benchmark, and WTI, the U.S. oil benchmark, have been climbing steadily since a steep drop in oil prices in early February of this year. Since last week, however, oil prices have eased by nearly 4%, providing central bankers and economists some relief from inflation fears.

The Organization for Petroleum Exporting Countries, or OPEC, instituted production cuts in 2016 that forced countries to limit their supply in response to extreme stockpiles and battered oil prices in early 2016 in an effort to effectively normalize oil markets and curb excess supply. Extreme shortages pushed oil prices up to $120 per barrel, strongly incentivizing oil producers to ramp up production early in the 2010s. Supply began piling up, and when demand did not increase at the same pace, oil producers were forced to begin storing the oil. Oil prices began to decline rapidly, forcing OPEC to play its hand and cut production.

Russia, while not an OPEC member, was also grouped into the production cut agreement, given that it is the world's largest oil producer. Unfortunately, Russia lagged in complying with the production limits. Russia did eventually comply, normalizing the global oil supply. The issue for consumers and economies, however, is that the past two years' policy was normalization by way of increasing prices, not vice versa. Oil prices were up as high as 40% since the beginning of 2017 before easing over the past week, when rumors spread that Saudi Arabia, OPEC's largest member, along with Russia, could begin ramping production back up.

When oil prices rise to levels major producers desire, they begin ramping production back up in efforts to squeeze profits and pull market share. OPEC seems to have accomplished its goal of increasing prices and reducing stockpiles, and now it appears ready to begin the cycle all over again. If Russia and Saudi Arabia begin producing more, the rest of OPEC will follow, given that Saudi Arabia is OPEC's de facto leader, and we may see oil prices gradually decline once again.

For now, investors will patiently await an OPEC-led coalition decision to increase production, which, coupled with current geopolitical uncertainty, could shake up oil markets.

Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from 7.91 to 3.73. The results for the sectors were mainly negative for the week. Utilities gained the most, up by 12 points. Energy lost the most, down by 29 points. The leading sectors continue to be Energy and Technology. Defensive sectors were up, and Cyclical sectors were negative. Sensitive sectors decreased by 40 points. Eight out of 11 sectors are still in the green. Telecom is now at the bottom of the rankings. The overall increase in sector scores seems to indicate an adverse appetite for risk.

Factors: Among the Factor Benchmark ETFs, the average factor score decreased from 11.64 to 7.18. Most of the factor scores were negative for the week. Value lost the most, down by 10 points. Growth and Low Volatility saw no change. Value and Yield are at the bottom, while Small Size and Growth are in the lead. Ten of the 11 factors are still in the green.

Global: Global Benchmark ETF momentum scores were down for the week. The average score by country plummeted from 4.36 to -8.55. The top positions continued to contain developed global areas: USA, Canada, and the UK. Latin America decreased the most, down by 25 points. None of the Global areas increased for the week. The bottom of the ranks consists of the Emerging Markets, Eurozone, and Latin America. This week, only five of the 11 global areas are in the green, four less than the previous week.