High Oil Prices Good for OPEC, Bad for Consumers

On March 5, members of the Organization of Petroleum Exporting Countries (OPEC) will meet to discuss the global energy climate and the current production quota in place. The price of oil is surging back up towards $100.00 a barrel after recently falling below $90.00 and there’s speculation that OPEC may actually cut production to support prices at the higher ranges in a move of pure greed, but then it is capitalism. OPEC just wants to make money. There’s speculation that OPEC wants to keep oil prices in the $85.00 and $100.00 a barrel range, which has been in effect since November 2007, as oil has been in this sideways trading channel. Oil futures on the New York Mercantile Exchange traded at just over $100.00 on January 2.

OPEC does not care if drivers in the U.S. are paying more at the pumps. But it should also realize that the state of high oil prices could lend itself to reduce demand as consumers cut back and this would pressure oil prices.

As I have been saying for a while, the price of oil remaining high is a real threat. High oil impacts transportation companies where oil is a major part of their expenses. For the economy, the high oil prices translate into higher corporate costs, which could impact earnings. For the consumer, high oil prices translate into high gasoline prices. People will tend to drive less and make fewer trips to the malls, which in turn, impacts retail sales and the economy.

The near-term technical picture for the March light sweet crude is bullish as of February 19, as oil is trending higher towards the top end of the current channel after coming off a bullish minor double bottom. Watch for selling pressure, as oil approaches the four- week high of $97.87 and the 52-week high of $99.77. Failure to break higher could subsequently maintain the current sideways channel and could see the March contract fall back towards support at $85.00 to $90.00.

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The Relative Strength is rising, which supports the price advance. The March oil is trading above its 20-day and 50-day moving averages of $91.28 and $92.30, respectively, as well as the 200-day moving average at $80.64. But watch the upcoming sessions, as oil is in an overbought technical condition, which could drive some profit taking in the near term. Whether oil will break $100.00, the bottom line is that it remains expensive as long as it stays in the current channel and this will impact the economy.