2016.09.2906:31:00UTC+00Oil in Global Economy Series: Don’t Get too overjoyed by the Freeze Deal

Member countries of Organization of Petroleum Exporting Countries (OPEC) were able to set aside differences and agree to a deal that would reinforce the quota system ceiling. After several meetings since Monday and a four-hour talks on Wednesday, OPEC members committed to reduce output between 32.5 million barrels and 33 million barrels per day. The deal would be finalized at the November OPEC meeting.

The market cheered immediately as the deal came as a surprise. Not many were expecting the OPEC to set aside differences, especially Iran and Saudi Arabia, who are at political loggerheads in Syria and Yemen. In addition to that, the new range means that the production could drop as much as 0.7 million barrels per day from August when OPEC pumped 33.24 million barrels per day. Oil price is down a bit in today’s morning but Brent was trading above $49 per barrel, a more than 6 percent jump since the deal.

We, don’t want to be the spoiler but strongly feel that a warning to not to get overjoyed is necessary. At least not yet; not unless we have the final arrangements in November when the OPEC meets officially. It is not clear at this point, how the ceiling arrangement would work, especially when the big members are looking to increase their market share and especially who would police the quotas. There are other questions that need to be answered as well, like for how long the arrangements would remain active or what could be the ways to enforce the deal. So it’s fundamentally best to welcome the deal but sit tight on it and not take up trades based on the deal.

WTI is currently trading at $46.9 and Brent at $48.4 per barrel.