Last week, OPEC roped multiple non-OPEC oil-producing countries into its production cut.
In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain what this will mean for oil production worldwide, and a few things to keep in mind when dealing with cartels. Also, they discuss why the price of oil has taken a bit of a roller-coaster ride on the news.
A full transcript follows the video.
This podcast was recorded on Dec. 15, 2016.
Sean O'Reilly: We have to talk about OPEC roping in non-OPEC producers like Mexico and Russia to cut production. Walk us through it.
Taylor Muckerman: Over the weekend, energy markets got a boost by Russia and, like you said, I think it was up to 11 non-OPEC producers agreeing to cut back on production. But again, we're talking about countries that, like Russia, were producing at all-time or multidecade highs. So they're cutting from a position of strength. When you look at Mexico, they're not really cutting; they're just not going to try producing anymore, they're just going to let the natural decline cut into production.
O'Reilly: Is the tale here with the OPEC cut not actually a cut? It's more like a simmer-down? Like, "Everybody simmer down."
Muckerman: Yeah, basically. But then, you also look at -- I read a funny quote, I talked about it on Monday on MarketFoolery, the former oil minister of Saudi Arabia basically said, "We cheat," talking about OPEC countries, because they self-report all of this. So will they or won't they actually --
O'Reilly: Saudi Arabia is going to walk on over to all these countries and check out how much oil they're producing? Come on.
Muckerman: Exactly. They're not going to have a foreign inspector there at every single oil derrick in these countries. And you look at the statistics, when they have announced cuts in the past, they haven't actually cut as much as they state.
O'Reilly: There was some statistic, like, historically every time OPEC cuts, it actually winds up being in reality like 60% to 80%. I'm totally --
Muckerman: Yeah, I think the average was, like, 60% of the way there.
Muckerman: What'd they say, they bring off almost 1.5 million barrels a day of capacity. Take 60% of that. You're not quite there; even if 1.5 million barrels a day isn't all that meaningful, you're going to take even less off.
O'Reilly: Yeah, oil prices popped on Monday, but they're not doing so hot today.
Muckerman: They did; they popped on Monday, and they're back down below $50 a barrel today.
O'Reilly: On WGI, right?
Muckerman: Yes. You look at it from the aspect of, holy crap, America has ridiculous inventories -- we just found that this week -- holy crap, the dollar is strengthening like crazy thanks to the rate hikes.
O'Reilly: I'm going to Europe, cheaply.
Muckerman: And oil is sold on a dollar-denominated basis, so if the dollar strengthens --
O'Reilly: That's bad.
Muckerman: -- people can't buy as much oil globally, so demand goes down. So you're saying economics come back into play, rather than just, I don't know what you would call it, cartelonomics.