Oil agreement could support stocks, providing a floor

(Reuters) – An agreement by oil producing nations to cut output by a record amount may sustain a recent bounce in stocks, though stay-at-home restrictions and closures tied to the coronavirus pandemic continue to weigh on the global economy.

OPEC, Russia and other oil producing nations agreed on Sunday to cut output by a record 9.7 million barrels per day for May-June, representing around 10% of global supply, to support oil prices amid the pandemic, according to sources.

The agreement, could put a floor on oil prices and provide a psychological boost for equity investors, since talks had hit roadblocks late last week. Some analysts cautioned, though, that details of the accord may already have been priced in to stock prices.

The S&P 500 rose 12% last week, notching its best weekly gain since 1974.

Some believe the scope of any oil-related rally will be limited by the coronavirus-related shutdowns that have slowed economic activity around the world.

If it was a bigger cut “then you would’ve seen oil prices strengthen to $30 very quickly and that would be helpful for equity markets but we didn’t get that,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

“The only new news here is that they did finally reach an agreement but the 10 million was already in the marketplace,” said Cardillo, adding that it should help the market avoid hitting new lows.

Cardillo noted that much would now depend on when governments around the world are able to lift stay-at-home orders aimed at suppressing the coronavirus.

If the global economy stays closed for another few months “this 9.7 million reduction will be meaningless because people aren’t driving,” Cardillo said.

Edward Moya, senior market analyst at Oanda in New York, wrote that he would not be surprised if the agreement became a “buy the rumor, sell the news” event, though he believes it could still give some support to oil prices.

“Despite the skepticism that this production deal will not see a high-level of compliance, it should end calls for oil prices to fall to single digits,” Moya said.

While the deal was not unexpected, Rick Meckler, a partner at Cherry Lane Investments in New Jersey said it should provide some reassurance.

“The broader market will see this as another point of stabilization as the economy, primed by favorable fiscal and monetary policies, seems to be avoiding the worst case market scenarios,” said Meckler.

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