OPEC leaves quotas unchanged - good news only for the short-term

OPEC chose to maintain current production quotas, arguing that better adherence to current quotas would be sufficient to support prices, which have plummeted about $100 to the $45-range in the past nine months as the global economy entered its first recession since World War II.

The bottom line regarding OPEC's weekend decision? Short-term, it's good news for U.S. consumers. Long-term, it's not as good news.

Upside, downside

In its decision, OPEC also cited the danger in a production cut -- that it would lead to rising prices which could harm the global economy. High oil prices cut disposable incomes in most oil consuming nations/regions, such as the United States and European Union, and also increase business operating costs.

"Some participants are understandably disappointed that OPEC did not close the meeting with another cut under its belt," Edward Meir, an analyst with MF Global Ltd. in Connecticut, said in a report, Bloomberg News reported. "We suspect that this downward move will linger for most of the week."

Oil fell $2.05 to $44.20 per barrel early Monday after OPEC's announcement, and many analysts say the price is likely to continue to fall until the U.S. and global economies show signs of recovering.

Short-term, that's good for U.S. consumers and business, as the production stand-pat will likely help put a lid on gasoline and oil prices this spring -- typically a period when gasoline and diesel prices rise due to the start of the summer driving/vacation season.

Longer-term, however, the news is not as good for consumers and businesses. If prices trend toward $30 per barrel, crude will be below levels most oil analysts say is conducive to oil exploration and development. Essentially, integrated oil companies and others will take higher-cost production areas out of service and will reduce exploration and development projects. And that reduced exploration and underproduction will set the stage for the next spike in prices, when the U.S. and global economies recover.

Oil/Economic Analysis: U.S. motorists may interpret any analysis that views higher oil prices as being 'better' very skeptically, but longer-term, a stable oil price of $45-60 will be much better for the supply of oil than a price collapse below $30. Oil exploration and production decisions take 12-18 months (and longer) to implement. Hence, a sub-$30 oil price will take hundreds of higher-cost production zones out of production, setting up the next large increase (or boom) in oil prices after demand growth resumes with the U.S./global recoveries.

For investors, OPEC's decision is bearish for both integrated oil companies and refiners, but it's bullish for any large consumers of oil, such as airlines and delivery companies.

Further, given current supply/demand characteristics, look for oil prices to trade in a $35-45 range heading into summer.

Read Full Story
  • DJI27173.96358.561.34%
  • NIKKEI 22523204.62116.820.51%
    Hang Seng23235.42-75.68-0.32%
  • USD (PER EUR)1.160.00030.02%
    USD (PER CHF)1.080.00070.06%
    JPY (PER USD)105.570.02500.02%
    GBP (PER USD)1.280.00150.12%

From Our Partners