OPEC and the global economy

OPEC  surprised with a slight cut in production.

Any immediate price reaction may be overdone and unwound at first, but there are long term implications.

The defining point for OPEC, was that the global economy is most definitely slowing. This is not good news for equity markets, and especially, if now, as it seems, OPEC is on guard against oil price declines as a consequence.

This means stock valuations globally will be confronted with both a slow economic environment and stubbornly firm oil prices. While natural gas prices can be expected to remain very strong. Even sharp falls in gas prices here, leave that energy still at around twice the cost it was before the crisis.

This is not just a European crisis.

Gas supplies are being diverted from the US and elsewhere. Prices in those locations have risen accordingly. This is a global process that reaches every corner of every economy.

The only bright spot of late had been the significant declines, certainly not expected by this writer, in the price of oil. While anticipating the global slow-down ahead of most, the degree to which the oil price had fallen back seemed somewhat extreme. Clearly, OPEC feels the same.

What yesterday’s OPEC decision means for global energy prices is that this is about as good as it gets.

We can expect a floor to develop under the oil price around current levels. If not immediately, certainly over coming weeks and months. As the global economy slows, OPEC will reduce supply to maintain prices. This means the supportive nature of a free floating oil price has been removed from the equation. Adding further to the downside impact of reduced consumer activity in the world’s three largest economies, USA, EU, and China.

As high energy prices, along with food, were a major contributing factor to the initial retrenchment of consumers, we should not be feeling too bright at all about what this latest OPEC decision implies.

I continue to believe there is the prospect of nations beginning to compete in the building of their oil reserves.

Any sign of such nationalistic energy behaviour, given OPEC has already put a floor under the price of oil, would likely generate a very sharp rally indeed back as high as $100, then $112.

We can expect the global economy to slow just that more as a result of the OPEC decision.