Crude Oil: OPEC Production Policies
Hello Traders! Welcome to the Pro-trading course and the third module Swing Trades: Follow global micro trends.
In this lesson we are going to view at the OPEC production policies which will tell us the direction of oil prices. Well, it is not going to tell us the actual direction of the oil prices but it is going to tell us whether the market is over-supplied or under-supplied and remember if the market is over-supplied, well it is going to have a bearish effect on the commodity and the market if under-supplied, it is going to have a bullish effect on the commodity price. Now the OPEC is the organization of petroleum-exporting countries and it consists of the world’s major oil exporting nations and this is why its production policies are so important.
The OPEC is a cartel that aims to banish the supply of oil in an effort to set the price of oil on the world market in order to avoid massive price fluctuations that could have a devastating impact on both producing and purchasing economies. The climbing oil prices have to do with over-production and over-supply in the market as well as rising oil prices or very high oil prices have to do with under-supply, under-stock and under-production in the market. The OPEC can take two stances in front of this issue. One, it can agree on a production ceiling from the countries that produce oil or it can agree on an oil output policy or a daily quota, or a daily production quota. All right? If the OPEC cuts the oil production and agrees on a production ceiling, this would be bullish for oil prices as supply in the market will decrease and if the OPEC rolls over, its policy or boosts its daily quota, it will be bearish for oil prices as oil production and over supply will still be in play.
Now, I am going to show you an example of last December where the OPEC was set for a policy rollover. You can see that this is the time-stamped Tweet from Reuters Commodities on December 14, 2015. OPEC fails to agree production ceiling after Iran pledges output boost. This means that on its meeting in Vienna on December 4, the OPEC failed on cutting the production of its member countries after Iran said it would not consider any cuts in its own production. What happens here is that their policy rolled over and oil prices started to fall. Now, this is the… as I told you before, the Rueter’s Commodity street time-stamped on December 14 at 1:40 p.m. Here is the trade that I took after the news came out.
I already knew that a policy rollover from OPEC would be bearish for oil so when it came out I went short on this commodity. All right? This is a very short-term trade but I wanted to show you the impact of OPEC policies or production policies in oil prices. Now, here is a longer-term chart of oil.
You can see that right here on December 14 at 1:00 p.m., we had the news on the policy rollover and prices fell from the bottom of the range that oil was trading in, around 4055 to 2750. All right? That is 1305 ticks or 13 dollars and 5 cents in less than two months. So, when we have an over-supplied market, we are going to look for short opportunities because as you can see here, you are going to be more profitable trading the short side and adding on RILYs than trying to trade the long side when the market is over-supplied and trying to catch a falling knife.