January 1 begins the much heralded OPEC supply cut. After “agreeing to agree” to a supply cut on September 28th (which rallied crude oil about 20%, before it fell back) they overcame disagreements between the group’s 3 largest producers — Saudi Arabia, Iran and Iraq — and secured a cut rumored since about 2014. OPEC agreed to cut about 1.2 million barrels per day (BPD) and crude oil futures immediately jumped about 10%. A few days later, non-OPEC producers like Russia and Angola agreed to deny the market about another 500 K BPD and price appreciated another 5%-7% or so, before settling into a a range between $50 and $55 a barrel, where it’s been since early December. This is not where OPEC wants it.

Some research puts the goal-price of this multi-nation cut at $62 per barrel and higher and we may get there before the 2nd quarter is upon us, but OPEC has a supply problem that it does not have the power to fix.

First off, there are 3 noticeable exemptions from the cut; Iran (who agreed to a cap that is above current production)  Nigeria (exempt due to ongoing civil conflict) and Indonesia (who requested and received a freeze on their OPEC membership).

Iraq, who requested an exemption due to their struggle with ISIS, did not get that exemption. These four could combine to “cheat” on their agreement and over-produce, citing sovereign concerns as the reason (especially Iran and Iraq) and OPEC has no punitive power to change this. Saudi Arabia, OPEC’s and the world’s largest producer seems to be keeping its word so far, but even Saudi Energy Minister Khalid al-Falih himself said “This agreement leaves for countries to decide how to implement,” Non-OPEC countries already seem to be stretching the limits of the agreement, with Angola announcing an increase of 85 K BPD from their Sharara oil field and Russia announce plans to increase oil exports. Unless Russia is going into a deeper recession, there is unlikely to be more oil to export without more production.

Then there is North America. Recent figures have production back to May 2015 levels and costs continue to drop. All the talk of “turning the shale oil wells back on” at higher crude prices may be happening anyway and at a lower price than most (not us) expected. It was never that simple, as hiring back laid off workers to work the shale oil fields takes time, but Baker-Hughes rig counts none the less, are up 18 of the last 21 weeks with another announcement due today.

So what can OPEC do? Slowly start to cheat and over-produce when prices peak, which could be sooner than the market expects.

Remember, Nadex offers crude oil derivative binary options and spreads and you should keep all of this in mind when deciding which markets to trade. Crude will be very volatile in the coming months which is what you want when trading a limited risk product like Nadex binary options and spreads.

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