From OPEC To Deutsche Bank: Wider Implications - Taron Ganjalyan

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Events that find their way to the daily headlines have direct and apparent impact on many investors. These events move stocks, indices and markets instantaneously. But there are also second and third-degree impacts that become evident only after a while. Understanding these impacts and potentially converting them into trades can help translate the daily events: anything from OPEC's agreement to cut oil production to the troubles and then the magic rescue of Deutsche Bank (NYSE:DB), into actionable intelligence.

OPEC agreement

While oil traders, analysts and consuming industries are still coming to terms with the unexpected agreement at OPEC to limit production to 32.5 million barrels per day, the oil price is already up by ~8%.

The fact that the decision is not yet implemented and clearly lacks any implementation mechanism (suffices to say that OPEC member countries have not yet agreed an allocation of cuts - that is yet to be decided), scarcely dampened the bullish oil sentiment. Although many are inclined so, it is not wise to chuck it down to the naïve market participants - the wisdom of crowds must have picked up on lack of credibility.

The issue lies not so much with OPEC, but the fundamental bias of the market: exploration and development capital expenditure in the industry has been cut to such an extent that if things are not turned around, we will have a large shortage of oil in the market by 2018 and expanding through 2020.

As it often happens then, OPEC's empty gesture is just a trigger for an otherwise upward biased market. The real "surprise" here is the strong expected demand growth. Despite all our effort to curb oil consumption, the reality is different: the electrification of transport and rapid development of renewable energy sources have not made a dent in oil demand. The largest consumers of oil products (excluding final consumption - gas for passenger vehicles) are airlines, truck transportation, followed by water, rail and public transit.

Read the full report here.