Market prices often move in the opposite direction of the expected impact of breaking news. This is usually the case when the breaking news is not only expected but fully discounted into current prices. An old saying is to “buy on the rumor. Sell on the news.” and on the other side , to “sell on the rumor. Buy on the news”. The logic is that faster traders have already anticipated how the news would impact the markets and have already taken positions in order to sell to slower traders when the news is finally announced.
Oil traders had been expecting The Organization of Petroleum Exporting Countries (OPEC) to announce production increases which would depress crude oil prices in the futures markets. After a week of tense negotiation in Vienna, Austria, OPEC was expected to make an announcement on Friday regarding production quotas for member countries over the next six months. Over the past eighteen months, the cartel had agreed to cut production in order to support oil prices. And the production cuts were supposed to extend to the end of 2018.
Iran has been a staunch opponent of production increases, since they need to keep the price of oil high enough to offset some of the country’s finances from US imposed sanctions. Iraq and Venezuela also opposed the proposed increases. But Iran’s nemesis, Saudi Arabia, which is OPEC’s biggest producer, has been advocating for an increase of one million barrels per day. So have Russia and the US, who are not OPEC members, but are the world’s largest oil producers, along with Saudi Arabia. On Friday, US President Donald Trump tweeted ahead of the scheduled press conference for OPEC members to help “keep prices down”.
Since May 22nd, crude oil futures had declined from 72.90 to a low of 63.40 a few days before the announcement. But before the announcement was made, news leaked that the oil producing countries had agreed to start pumping more oil, and crude oil futures rallied strongly to settle at 69.28. OPEC’s official statement said that member countries would return to 100% compliance with the 2016 deal to cut production. Compliance had reached 152% by last month, meaning that OPEC members were cutting 600,000 additional barrels per day. Since the original deal to cut production, along with Russia, is still in effect, the announcement just means that OPEC will not be cutting as much so that actual oil pumped will still increase. But the news was enough to satisfy oil traders who had sold on the rumor of production increases and bought back crude as the expected outcome was announced.
One reason for a willingness to buy back may be the fact that US inventory numbers continue to show a drawdown, which adds to bullish sentiment. And there is reason to believe that bullish inventory reports will continue into the future. Ahead of an OPEC quota hike, member countries typically raise production as evidenced by their export figures. Saudi Arabia, Kuwait and UAE are all reporting higher exports this month. In the chart below, Saudi crude exports (blue line) from May to June jumped 500,000 barrels per day compared to the same period in 2016. At the same time, the share of exports going to Asia (red area) has increased to its highest level since the production cut deal in 2016. The increased Asian share has come at the expense of exports to the US
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By: CME Group