Oil prices spike: OPEC plans pro­duc­tion cuts; un­cer­tainty shakes stock mar­kets.

As OPEC an­nounces pro­duc­tion cuts, a weak U.S. jobs re­port leaves in­vestors wor­ried

The Washington Post - - FRONT PAGE - BY THOMAS HEATH [email protected]­post.com

Oil prices spiked and stocks dove Fri­day as un­cer­tainty roiled global mar­kets.

The Dow Jones in­dus­trial av­er­age slid 559 points, or 2.2 per­cent, to 24,388 on a dis­ap­point­ing jobs re­port Fri­day morn­ing that seemed to ce­ment wor­ries that an eco­nomic slow­down is ahead.

The Stan­dard & Poor’s 500stock in­dex was down 2.3 per­cent, and the Nas­daq Com­pos­ite re­treated 3 per­cent Fri­day, adding to a wild week when the ma­jor in­dexes fell 4.5 per­cent or more. Some, like the Nas­daq, have hit cor­rec­tion ter­ri­tory, or a de­cline of 10 per­cent from a 52-week high. The S&P 500 is close to that mark, with a 9.5 per­cent de­cline from its re­cent high.

“Un­cer­tainty re­mains with us, and so does the volatil­ity,” said Michael Farr, a Wash­ing­ton in­vest­ment man­ager. “There is not any sort of a trade res­o­lu­tion with China. We aren’t fur­ther along than we were be­fore the G-20 meet­ing. But we have the added un­cer­tainty of the pres­i­dent’s com­mu­ni­ca­tion style.”

The tech­nol­ogy and fi­nan­cial sec­tors were among those that were hurt the most. Chip stocks were shel­lacked for their worst week since March. Ap­ple dropped an ad­di­tional 3.4 per­cent in af­ter­noon trad­ing. The iPhone-maker was in re­treat for the ninth of the past 10 weeks.

IBM, In­tel and Mi­crosoft were among the big­gest drags on the Dow 30, each down more than 3 per­cent in af­ter­noon trad­ing.

Stock losses ap­peared to deepen about 11 a.m. Fri­day af­ter Trump trade ad­viser Peter Navarro said the ad­min­is­tra­tion would con­sider raising tar­iffs on Chi­nese goods if trade is­sues were not re­solved dur­ing the 90-day ne­go­ti­at­ing pe­riod.

The tech­nol­ogy sec­tor, which has pow­ered the last years of the bull mar­ket, is tak­ing much of the beat­ing, in part be­cause tech com­pa­nies tend to rely heav­ily on over­seas mar­kets, in­clud­ing China, to sell their prod­ucts.

The sec­tor fin­ished down 5.07 per­cent for the week, off 14.14 per­cent from the Sept. 20 high, ac­cord­ing to Howard Sil­verblatt, a se­nior an­a­lyst with S&P Dow Jones In­dices. Tech is still up 2.12 per­cent this year and up 41.3 per­cent since the 2016 elec­tion.

Kristina Hooper, global mar­ket strate­gist for In­vesco, said a con­flu­ence of events pushed stocks lower Fri­day.

She sin­gled out the la­bor re­port that found Novem­ber job gains of 155,000 vs. the 198,000 that were ex­pected. But wage growth con­tin­ued to show year-over-year in­creases of more than 3 per­cent.

“The econ­omy may be slow­ing and in­fla­tion­ary pres­sures may be build­ing, which in turn means the Fed may have less flex­i­bil­ity to take its foot off the ac­cel­er­a­tor,” Hooper said.

If the Fed­eral Re­serve con­tin­ues to raise in­ter­est rates, it could slow the econ­omy, send it into re­ces­sion and tank the mar­ket.

The job­less rate held at 3.7 per­cent last month, a 49-year low.

Oil prices re­versed their week­s­long de­cline Fri­day on an an­nounce­ment by the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries to cut pro­duc­tion by 1.2 mil­lion bar­rels per day.

“They struck an ac­cord that will bring some bal­ance back to the mar­ket,” oil an­a­lyst John Kil­duff of Again Cap­i­tal said. “The prices at the pump are go­ing to stop go­ing down as a re­sult of this meet­ing.”

In­ter­na­tional benchmark Brent crude and West Texas In­ter­me­di­ate crude both rose on the news. Brent was sell­ing around $61 and U.S. crude was sell­ing for about $52 a bar­rel.

Ex­perts con­sider $50 a key thresh­old be­cause many pro­duc­ers can­not turn a profit if prices go much be­low that.

“Our guid­ing prin­ci­ple is balanc­ing sup­ply and de­mand,” Saudi Ara­bian En­ergy Minister Khalid Al-Falih said at a news con­fer­ence in Vienna. “We don’t al­ways get it right. But we al­ways ad­just to try to . . . keep the mar­ket within a rea­son­able cor­ri­dor.”

Al-Falih called 1.2 mil­lion “the head­line num­ber,” with 800,000 bar­rels a day in cuts be­ing borne by OPEC “and 400,000 from our col­leagues in non-OPEC.”

The re­duc­tions are an at­tempt to stem the global over­sup­ply that has driven oil prices down by 30 per­cent in two months. They come in the face of re­peated jaw­bon­ing by Pres­i­dent Trump, who has urged the 15-mem­ber car­tel and Sau­dia Ara­bia — OPEC’s de facto leader — not to cut pro­duc­tion, which would keep prices rel­a­tively low.

The re­duc­tion was an­nounced at a two-day meet­ing at OPEC head­quar­ters in Vienna and is good news for pro­duc­ers. Any­thing short of 1 mil­lion bar­rels per day would have been dis­ap­point­ing for OPEC mem­bers.

“The deal came close to fall­ing apart,” Kil­duff said. “The amount is large enough that it should help ease the cur­rent over­sup­ply. The con­tin­ued growth in U.S. out­put and ex­ports re­mains a prob­lem for OPEC and Rus­sia, how­ever.”

The global oil ter­rain has changed dra­mat­i­cally. The United States, once writ­ten off as an ex­porter, is now the world’s big­gest oil pro­ducer and is a net ex­porter of petroleum.

The next two Big Three oil pro­duc­ers, Rus­sia and Saudi Ara­bia, have sought to keep pro­duc­tion and de­mand in rough prox­im­ity to sta­bi­lize prices in the $70 to $80 price range. The sweet spot in oil prices is $80 a bar­rel, which al­lows pro­ducer profit with­out con­sumers re­volt­ing over be­ing gouged.

Trump took to Twit­ter to weigh in: “Hope­fully OPEC will be keep­ing oil flows as is, not re­stricted. The World does not want to see, or need, higher oil prices!”

Trump has re­peat­edly linked sup­port for the Saudis — in­clud­ing back­ing for the war in Ye­men and his re­fusal to blame Crown Prince Mo­hammed bin Sal­man for the killing of jour­nal­ist Ja­mal Khashoggi — to their co­op­er­a­tion in keep­ing oil prices low.

“Saudi Ara­bia, if we broke with them, I think your oil prices would go through the roof,” the pres­i­dent said last month, in­di­cat­ing he had an agree­ment with Riyadh not to cut pro­duc­tion. “I’ve kept them down. They’ve helped me keep them down.”

“Right now we have oil prices in great shape,” Trump told re­porters. “I’m not go­ing to de­stroy the world econ­omy, and I’m not go­ing to de­stroy the econ­omy for our coun­try by be­ing fool­ish with Saudi Ara­bia.”

World oil sup­ply and de­mand are roughly 100 mil­lion bar­rels per day, with OPEC con­tribut­ing more than a third of that. The re­sult is a very tight sliver be­tween global sup­ply and de­mand. That means any in­crease in de­mand or de­cline in pro­duc­tion in some cor­ner of the world can send prices up­ward.

The sur­plus is largely at­trib­uted to a mis­cal­cu­la­tion be­tween de­mand and out­put by ma­jor pro­duc­ers, in­clud­ing Iran. A strong dol­lar is also weigh­ing on prices be­cause it makes oil more ex­pen­sive for much of the world. Oil prices tend to fall as a re­sult.

Al-Falih said Saudi Ara­bia pumped 10.7 mil­lion bar­rels per day in Oc­to­ber and 11.1 mil­lion in Novem­ber. It is be­lieved that the num­ber will come down to 10.2 mil­lion start­ing in Jan­uary.

The new num­ber “is partly driven by our com­mit­ment to start on the right foot in 2019 and to demon­strate this agree­ment is not go­ing to take a long, pro­tracted pe­riod of grad­u­ally wind­ing down,” Al-Falih said.

Pavel Molchanov, en­ergy an­a­lyst at the in­vest­ment firm Ray­mond James, said that “the key ques­tion is al­ways im­ple­men­ta­tion. How much com­pli­ance there will be? We will be­gin to see ev­i­dence of that early in the new year.”

“Even af­ter to­day’s re­bound, the price is 25 per­cent lower than two months ago,” he said. “There is room for oil prices to con­tinue to bounce into the early months of the new year. How­ever, a full re­cov­ery to where oil prices were two months ago is most likely to be in the sec­ond half of 2019.”

JOE KLA­MAR/AGENCE FRANCE-PRESSE/GETTY IM­AGES

From left, Rus­sia’s en­ergy minister, the OPEC pres­i­dent and the OPEC sec­re­tary gen­eral at the oil car­tel’s con­fer­ence in Vienna.

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