The Organization of the Petroleum Exporting Countries (OPEC) held its semi-annual meeting on Friday in Vienna and shocked the oil market by announcing that it was going to increase oil production, despite the current global supply glut. The cartel, which is responsible for about a third of global oil output, raised its production ceiling from 30 million barrels per day to 31.5, a 5% increase.
This decision caused oil prices to drop Friday to a three-month low, with prices falling as low as $39.60 per barrel.
Typically, when prices are low, OPEC reduces its output to limit supply and raise prices, but Friday's move in the opposite direction signals a new tactic. It appears that OPEC is hoping that it can outlast other major producers like Russia and the United States, forcing them to cut output instead while OPEC produces more oil and hopes for a higher price.
Until there is a significant reduction in production or increase in demand, many analysts expect prices to languish near $40 per barrel or lower.
A Tale of Two Continents
The economic divide between the United States and Europe was underscored again this week.
On Friday, the US Bureau of Labor Statistics released another strong US jobs report, showing a net increase of almost 240,000 jobs in the US and unemployment at 5.0%, the lowest level in almost 8 years. The stronger US economy is emboldening the US Federal Reserve to begin raising interest rates, with most analysts expecting a rate hike at the next Fed meeting in two weeks.
Meanwhile, unemployment in the European Union is nearly double the US rate, with Europe's rate at 9.6%. As a result, the European Central Bank (ECB) is still increasing its stimulus measures by extending bond-buying programs and lowering interest rates. Europe's overnight deposit rate is now at -0.3%, meaning that the ECB is actually charging depositors.
Europe's economic woes pulled the value of the eurocurrency near a twelve-year low this week under $1.05. After the announcement of the newest stimulus measures, which fell short of expectations, the market reacted violently higher, bouncing back to near $1.10 in only a few hours, signaling more excitement to come in the currency markets.