OPEC sabre-rattling that takes the oil price up is a splendid opportunity to short oil at a higher price

The Nov NYMEX oil futures contract closed a little higher at $74.25 from $71.85 the day before on the wobblies ahead of the emergency OPEC meeting on Friday that is sure to result in production cuts of 1-2 million barrels per day. But the market is not impressed by OPEC, which always cheats-as cartels go, it’s an ineffective one. The price initially rose to $75.69 but then fell to a low of $73.12 overnight and is trading at $73.86 at noon in London.

Oil economist Jim Williams (www.energyeconomist.com) points out that many OPEC countries are already producing under quota for various reasons, including Venezuela (because it has lost production capability) while at the same time they need the money. He writes “OPEC hasn't published quotas for any country except its new members Angola and Ecuador since 2005. The primary reason for this is that Venezuela would be forced to admit that it lost over a million barrels per day of production capacity since Chavez took office. Since 2005 OPEC has styled its quota as production cuts without actually stating the numbers.”

As usual, everybody cheats. And the Saudis are the biggest producer with the highest capacity, and thus they hold the key. Williams says “The Saudis could gain some benefit from allowing prices to go even lower. A price of $60 per barrel, for example, would harm Iran and quite possibly slow Iran's nuclear progress. As we see it, the Saudis are every bit as concerned about Iran developing nuclear weapons as Israel. Lower prices are an indirect way for the Saudis to slow Iran's progress in developing or acquiring weapons of any sort.

“Ultimately this is a Saudi decision and so far the Saudis are holding their cards close to the vest. Whatever, the cut we do not expect a high level of compliance and it is possible if not probable that oil prices move back below $70 per barrel following the meeting. It would take prices near $60 and another meeting to have the weak sisters in OPEC participate in earnest.”

What we take from this is that any scaredy-cat response over the next few days to OPEC sabre-rattling that takes the oil price up is a splendid opportunity to short oil at a higher price. In other words, an announcement effect that is all tail and no dog.

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Barbara Rockefeller
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