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OPEC Failed: What That Means For Oil Prices Now

This wasn't supposed to happen.

Oil prices were supposed to run higher on the heels of an OPEC extension.

Traders thought we'd see a return to $60 oil on the hope that an extension would help balance supply and demand.

Algerian Energy Minister, Noureddine Bouttarfa, forecast that oil prices could move above $55 on the expectation that an extension should help clear the glut by year-end. Russia and Saudi Arabia noted that by prolonging the production cuts, the plan would speed up a market rebalancing.

Many oil analysts believed the downside risk had been fully priced in.

Unfortunately, they were wrong.

On the day OPEC decided to extend cuts by nine months, oil slipped from a high of $52 to less than $47.20. The new deal, as it turns out, was a disappointment.

While the extension should continue to slice 1.8 million barrels a day from the market through March 2018, traders wanted to see even deeper cuts. They wanted more than 1.8 million barrels a day removed from the market.

But that didn't happen.

Now, crude oil prices could slip even lower with the global community awash in oil. Stockpiles are at record highs, as U.S. oil production surges against the backdrop of weaker-than-expected oil demand - that decrease in demand has already offset most of the OPEC cuts to date.

Since the middle of 2016, U.S. oil production has jumped about 10% to 9.3 million barrels per day (bpd); and that number will continue to move upward, according to analysts.

In fact, over the next nine months, the U.S. could add another 950,000 bpd, overshadowing OPEC cuts even more.

There's also the worry that we could see rising production from other non-OPEC countries like Nigeria and Libya. In fact, Libyan output could rise above 800,000 bpd for the first time since 2014. Nigeria could also return to 2.2 million bpd this year, and potentially 2.5 million barrels by 2019.

OPEC didn't have much of a choice, though.

Deeper cuts could have put extra stress on OPEC members' compliance with the current deal; and they could have potentially led non-OPEC producers to pump even more, thereby worsening the supply glut.

While oil is on a slippery slope at the moment with no signs of supply-demand balancing, The Cheap Investor is actively working to uncover some undervalued stocks for the next issue.