5 Energy Mutual Funds To Play OPEC Oil Production Cut

Despite the prevailing differences between arch rivals Saudi Arabia and Iran, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary accord to curb oil production. Such an unprecedented move immediately sent oil prices rallying. A weekly decline in U.S. crude supply also helped oil prices gain ground.

With oil prices going through the roof, energy shares moved north. This makes investing in mutual funds with considerable exposure to the energy sector a judicious move.

OPEC to Cut Oil Output

After a six-hour gathering in the Algerian capital, members of the OPEC agreed to curtail crude output. Such a decision has been taken for the first time since 2008, aimed at addressing supply glut concerns. OPEC officials have decided to form a committee to determine how much of production each country would have to cut. The report on the same will be presented in the group’s next meeting, to be held in November.

Most of the major oil producers in OPEC have been pumping oil close to the maximum capacity in recent times. They have been competing among themselves for buyers. Iran’s commitment to boost production has proved to be a major hindrance, especially, when Saudi Arabia refused to cut production unless Iran does.

Nevertheless, the officials took the unprecedented step, proposing to cut its collective output between 32.5 million barrels per day (bpd) and 33 million bpd, down from August’s 33.2 million bpd. The International Energy Agency had already stated that trimming production by 200,000 bpd to 33 million bpd will bring supply more in line with demand until the second half of next year. Another 700,000 bpd cut in production will help put an end to the glut by the end of this year.

The OPEC-Saudi Arabia Pact

OPEC is responsible for over 40% of the world’s oil production and has always remained committed toward matching global supply and demand. However, the group gave in to the requests of its largest producer Saudi Arabia in Nov 2014. Saudi Arabia sought greater market share, ignoring the need for a balancing act. Rise in shale oil production was cited to be the primary reason behind the motive. Shale oil production had added around 5 million bpd of oil production in the market in just half a decade’s time.

U.S. shale oil producers remained resilient at times of slump in oil prices. Some producers went bankrupt while most chose to curtail expenses and maintain production. This led to a further fall in oil prices, hurting the financials of OPEC members. Venezuela and Nigeria are in deep financial crisis and claim that production needs to be cut to boost oil prices. It seems their wishes have been answered, with OPEC agreeing to limit production levels. This in turn gave oil prices a boost on Sep 28.

Supply Falls, Crude Oil Spikes

Along with OPEC’s decision to cap crude-oil output, drop in domestic crude supply drove oil prices higher. According to the U.S. Energy Information Administration, U.S. crude production edged down by 15,000 bpd to 8.497 million bpd for the week ending Sep 23. Crude inventories also fell by 1.9 million barrels last week.

The WTI and Brent crude gained 5.1% and 5.6% to $47.05 and $48.69 a barrel, respectively. Oil prices posted their biggest gain in more than five months and continue to hover near the $47 a barrel mark for a considerable period of time. And lest we forget, oil prices had tumbled to $26 a barrel on oversupply concerns during the beginning of the year (read more: 5 Energy Stocks to Buy with Incredible Momentum ).

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