The economic headwinds just keep on blowing. Today the gust comes from the some of the largest oil-producing countries aligned in OPEC.
OPEC talks broke down in acrimony on Wednesday without an agreement to raise output after Saudi Arabia failed to convince the cartel to lift production. Analysts covering OPEC for more than 20 years said they could not remember any other time that the normally closed group had admitted to such divisions in its ranks. Oil prices surged on the news. Benchmark crude for July delivery was up $1.25 to $100.34 per barrel in morning trading on the New York Mercantile Exchange after trading lower ahead of the OPEC meeting.
Initially, this news has caused oil prices to spike. I wonder, though, if the inability of OPEC to achieve agreement on raising output quotas is, in fact, bullish for oil prices, especially since Saudi Arabia announced they would increase output by some 500,000 barrels per day. Now that in itself will not make much difference in the 1.6 million barrels of Libyan oil off the market, nor will it affect prices appreciably to the downside.
No, the Saudi decision to go against the cartel just might have a bigger impact. If it actually begins to increase output, other OPEC countries just might follow suit, and the chances of the Saudis following through on their threat are actually quite good, I suspect. The reason is that Al-Naimi, the Saudi oil minister, is angry. He is angry because half the cartel ignored his argument that OPEC was cutting its own throat if it did not raise output.
On the other side, half the cartel believes raising output will lower and stabilize oil prices, which would help the global economy avoid further slowing. In the long term, keeping the recovery alive is in the best interest of everyone. Simply, if oil prices pinch economic growth, oil consumption drops creating a glut, which drives the price down anyway. How far depends on how slow economic growth becomes. Since this outcome is least favorable to half the cartel, I suspect we might see a “revolt” of sorts in the ranks of the OPEC countries. If that happens, the price of oil could stabilize, and, perhaps go lower.
As it stands now, the oil and gas inventory reports that came out today speak to lower gasoline prices. Oil inventories dropped (slightly bullish) and gas inventories rose (bearish). As well, since the median price of a gallon of gas peaked in April ($3.96), it has dropped to $3.78. With the rise in gasoline inventories, expect the average price to drop further.
Like most things in the market today, this “situation” throws more uncertainty into the market, which means more unpredictable market behavior. The market this summer looks to be, well, pick your direction, as right now, picking a direction is a coin flip.
As to the market today, it is all about the technicals, so if you are a fundamentalist, take a breather and wait to see which way the coin flips.
Trade in the day – Invest in your life …
