OPEC Deal, Tax Reform Drive Friday Futures

Seeing that Friday futures for all three major stock indexes were up by at least three-quarters of a point makes one wonder how much the market would have risen if the Senate Republican tax bill had been approved last night. Another vote (or two or three?) is due Friday after the GOP spent the night trying to meet some Senators’ objections to the projected $1 trillion deficit increase the bill promises.

The other bit of good news for investors is that the Organization of the Petroleum Exporting Countries (OPEC) ended its semiannual meeting with an announcement that the current production rate cuts will remain in effect for all of 2018. The agreement is pushing crude prices higher Friday after only a modest gain on Thursday.

The reason for the less than totally enthusiastic response is that the cartel and its non-OPEC partners did not carve the production cuts in stone but left room for a June 2018 review.

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Here’s what the official OPEC press announcement said about the deal:

OPEC maintains its decisions made on 30th November 2017;

1. The Declaration of Cooperation is hereby amended to take effect for the whole year of 2018 from January to December 2018, while pledging full and timely conformity of OPEC and participating non-OPEC countries in accordance with voluntary agreed production adjustments.
2. In view of the uncertainties associated mainly with supply and, to some extent, demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.
3. Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, Republic of South Sudan maintain to continue to adjust their respective oil production, voluntarily or through managed decline. …

There’s more, but these are the salient bits.

Clearly Russia would not agree to any extension beyond March 2018 unless it was given a way out of the deal altogether. In fact, the prior deal was not extended; a new deal was struck that begins in January. The terms of the new deal are less strict on compliance and, while Russia has apparently agreed to maintain its cuts through June, they and nine other non-OPEC participants in the cuts “maintain to continue to adjust” production as they see fit.

Had Russia insisted on ending the current production levels in March, crude prices would have fallen through the floor this morning. Likewise, a firm statement from Russia that it would stick to its reduced production levels through December would have pushed crude prices even higher this morning.

West Texas Intermediate crude for January delivery traded up about 0.8% in electronic trading Friday morning at $57.89. Pit trading on the NYMEX settled at $57.40 last night.

Brent crude for February delivery traded up about 1.1% at $63.31 per barrel on the ICE. Brent’s last settlement price was $62.63 on Wednesday.

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