OPEC Should Keep Its Hands Off Oil Prices

The basis December light sweet crude on the NYMEX is trading at below $60.00 a barrel and, based on the current trend, it could see a move towards $50.00 a barrel if it cannot rebound back above the previous base formation at around $60.00. Near- to long-term technical signals are bearish along with declining relative strength.

 So, while the technical picture is bearish and pointing to additional weakness down the line, the fundamentals are also supporting lower prices. With the threat of a global recession, the demand for oil is well down and this has placed pressure on prices. The Organization of Petroleum Exporting Countries (OPEC) has been cutting its daily production quota to try to lift oil prices back to the $70.00 to $90.00 range, an area that the prime minister of Qatar said is “fair.” However, it may be difficult, unless the cuts become more drastic, which could occur at a special OPEC meeting on December 17.

 The reality is that even with more supply cuts, if demand continues to falter, it will be an uphill battle for OPEC. China and the U.S. re seeing significant declines in demand for energy, as their respective economies slow. In our view, if China slows more, we could see $50.00 oil.

 Our view on the matter is that OPEC is greedy especially at a time when there is a concerted global effort to cut interest rates and inject capital into the credit markets. The last thing we want or need is a rise in oil and gasoline prices. OPEC obviously disagrees and appears to be disinterested in the state of the world economies, but that is backward thinking. Should oil rise, it will make it more difficult for an economic recovery worldwide and this would translate into lower demand for oil, which would drive prices lower. OPEC should understand the mechanics and let oil fall if market forces dictate that.

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