Will an OPEC Production Cut Carve a Bottom in Oil?

Since July, oil prices haven fallen approximately 50 percent. For many people, the drop in oil is a welcome relief but for oil producers, the price of crude has reached levels that could turn budget surpluses into deficits.

According to a report released by the IMF yesterday on the Economic Outlook for the Middle East and Central Asia, the following are the break even levels on spending for oil exporting countries. If oil is less these price levels, the respective country’s income could fall short of its spending.

Iran = $90
Bahrain = $75
Oman = $77
Iraq = $111

Given that the current price of oil is well below most of these levels, a production cut by OPEC is very likely. The Wall Street Journal has a fantastic graphic today that outlines the changes to OPEC’s quota and the rolling 6 month change in the price of oil.

As you can see, whenever there is a large drop in oil prices in excess of 20 percent, OPEC sweeps in to cut production, triggering a bottom in oil prices shortly thereafter.

Oil Graph

For the currency market, a bottom in oil prices could mean relief for the EUR/USD and the Canadian dollar.

Photo: WSJ

About Kathy Lien 235 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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