OPEC Targets Higher Oil Prices: Who Wins and Who Loses

You know, it’s a nice thing to be paying $1.41 a gallon for gas these days. I almost feel like I have stepped back in time. However, OPEC (Organization of Petroleum Exporting Countries) wants to take a “time warp” forward.

You see, those nice prices that you enjoy at the pump are the result of a drastic fall in oil prices. While that may be nice for you and me, it’s a nightmare for oil exporters.

So not everyone is cheering for lower oil prices. While I’d agree that much of the known world is….OPEC is not happy.

OPEC’s New Year’s Resolution

What in the world are they doing about it? Well, yesterday they met and decided to cut out about 9% of their production. Now this is important since they pump about 40% of the world’s oil. They will cut 4.2 million barrels PER DAY starting on January 1st…so there’s their New Year’s resolution (to do their best to make sure oil heads higher).

OPEC is trying to send the world a message. While they can’t control the demand side of the equation, they will do their very best to control the supply part of the equation.

While OPEC as a whole won’t set a price target right now, it’s fair to say that they think it’s way too low. We do, however, get some hints from individual OPEC nations.

For instance, just last month, Saudi Arabia’s king noted that they need $75 a barrel oil in order to meet their budgets and in order to open up new fields. That’s an important comment since they are the largest of the OPEC countries.

Qatar and Kuwait only need $55 a barrel oil. However, even that is still 38% above the current price of $40 a barrel.

While OPEC could call a meeting sooner, their next scheduled meeting is for March. I’m sure they will see how the price responds to the 4.2 million barrel a day cut at first and then decide where they go from there.

Russia is an oil exporter but a non-OPEC member. However, they have cut production as well by 350,000 barrels a day last month and may reduce them by another 320,000 barrels a day next year. There are also other countries out there that are talking of reducing output by 300,000 barrels a day as well.

One thing is for sure. These countries want to meet their budgets and costs for opening up new fields. So they will do their very best to ensure that prices rise over 2009. They don’t completely control the market, but they sure do “highly influence” it.

Who Loses if OPEC Wins and Who Can Win?

So, if they get their wishes in the coming months, who pays and who wins?

The U.S. consumer loses. The U.S. dollar loses. Commodities win, OPEC wins, foreign currencies win (particularly the Euro, Aussie dollar, Canadian dollar and the New Zealand dollar). The oil tracking stock (USO) wins. Gold (GLD) likely wins.

So if they get their wishes, your pocket book will be hurt unless you are invested in the things that win if they get what they want.

That’s why it’s always good to have a few of these things sprinkled in your portfolio because there’s a huge chance for the erosion of your dollar against these other assets. Therefore, protect your hard earned wealth by ensuring that you have some exposure to these foreign currencies and commodities.

You can buy these through your stock brokerage account in the form of ETFs or you can buy the currencies in a “spot FX” (aka currency/forex) account.

Comments

[jepittman:]

OPEC has a very spotty track record sticking to lower production quotas. The temptation to pump a few extra barrels is ever present. Also, the global economy is still several months away from a meaningful recovery.

The American consumer has largely made the shift to higher milage cars and has learned how to eliminate frivolus driving. Any hike in gas prices will be met with the newly learned reponses of reduced driving and a continuing shift to hybrid cars.

While it is entirely possible we could see $75 a barrel oil again as the global economy inevitably recovers, a near term return to $100+ is a longshot at best.

2008 Dec 21 11:42 PM