Interesting Times at OPEC

OPEC produces about a third of the oil used worldwide and obviously enjoyed the higher prices that oil fetched earlier in the summer. Prices are now down over $20 from July highs (see the INO chart below).











The problem for OPEC is to decide who will help with production cuts. OPEC President Edmund Daukoru (aka The Little Red Hen) said this week that it was agreed they would cut production by one million barrels a day. It is difficult finding anyone who to admit they will contribute to the drop.

In prior times of declining prices, Saudi Arabia, by far the largest producer, at about 9.1 million barrels a day, has taken the brunt of the cut. In the late 80's it nearly bankrupted itself trying to put a floor on the market. We believe it has little interest this time around to be the sole swing producer simply because it has no interest in causing pain for itself while Iran remains unscathed. While they won't say it too loudly, the Saudi's might enjoy seeing Iran squirm a bit. In any event, we think the plunge in prices causes OPEC to finally grapple with this over the next couple of months. With the decline slowing in the last couple of weeks, this seems to be occurring.

Strategy Update: several strategies are now overweight economically cyclical sectors such as energy, basic materials and commodities. Reason: oversold technically, favorable seasonal factors, low P/E multiples and a belief that we are still in the middle innings of a commodity bull market.