Buy the Rumour, Sell the News
Author: Portfolio Specialist Group
July 7, 2017
Buy the Rumour, Sell the News
13 OPEC member nations and other major exporters, including Russia, agreed to limit oil production for an additional nine months in a continuation of the terms currently in place to reduce total production by 1.8 million barrels per day.
Simple supply and demand economics suggests a deal to reduce supply should equate to higher oil prices. What actually transpired, however, was oil prices plunged nearly 5% immediately following the announcement on May 25th, before retracing a portion of the losses on the following day, May 26th.
So why is it that such a “slam-dunk” positive in theory, actually resulted in a substantial decline in prices?
- An agreement to extend the deal was well-telegraphed and already widely priced into the market. In fact, crude prices rose over 7% in the two-week period leading up to the OPEC meeting.
Source: Bloomberg, as of May 29, 2017
2. In addition, traders speculated that OPEC members would agree to further production cuts and a longer extension period of upwards of 12 months. Market participants reacted negatively to see that neither scenario had played out, in a classic case of “buy the rumour, sell the news” (as seen in the chart above).
3. This agreement doesn’t cover all oil producing nations, including the U.S., which has the advantage of producing an unrestricted amount of oil. This is seen as a major headwind in OPEC’s effort to raise oil prices up to a profitable level by way of reduced supply.
Saudi Arabia’s petroleum minister, Khalid al-Falih, described the initial dip as a “knee jerk reaction” and nearly half of the losses were recouped in trading on Friday. In any event, reaction to the OPEC agreement offers yet another reminder that markets often do not behave as expected.
Commentaries contained herein are provided as a general source of information based on information available as of May 26, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein.
Published Date: June 5, 2017
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