In late May, OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC oil producers agreed to extend production cuts through April 2018 in the face of oil inventories that remain well above average. While one would have expected a positive market reaction, many investors believed deeper cuts were necessary and the market has sold off sharply since the meeting. The selloff indicates that many investors are no longer relying on OPEC to balance the oil market as concerns about high US inventories and growing US production persist.

Why are investors so dismissive? Why haven’t US inventories budged? I see three reasons:

  1. OPEC oil exports remained steady as OPEC drew on inventory

OPEC nations followed the letter of the law on production cuts, but they drew on existing inventories in the first quarter, leaving oil exports little-changed through much of the period. But with exports down significantly over the past month, the US, Europe and other markets should start to feel the impact of the OPEC cuts on their inventories.

Additionally, investors know that Saudi Arabia decreases exports during the summer as higher cooling demand drives domestic oil consumption. US inventories should fall as a result.