Will Wednesday's OPEC Decision Calm Investors?
OPEC has set a new production target of 30 million barrels per day, and there are a range of trading options you can consider based on this announcement.
Economic concerns appear to loom menacingly on the horizon. The never-ending eurozone crisis, doubts over China, and sluggish employment growth may create an uncertain investing environment.
Yet, investors may have one less issue to worry about: OPEC.
On Wednesday, the Organization of Petroleum Exporting Countries set a new production target for the first time in three years.
The new supply target is set at 30 million barrels per day, which is roughly in-line with current production.
OPEC has not been able to agree to production targets for the past three years. The primary reason for the disagreement has been Saudi Arabia clashing with other OPEC nations over production quotas.
Wednesday's decision represents a victory for Saudi Arabia, and therefore the United States. Saudi Arabia has long been the fiercest ally of the US in OPEC.
The price of crude oil dropped on the announcement, dipping back below $100 per barrel. Still, the move was modest. Tensions remain between Iran and the West, with rumors circulating on Tuesday that Iran would close the Straight of Hormuz.
Also weighing on the price of oil may have been tensions in the eurozone. The EUR/USD pair dropped below $1.30 on Wednesday, perhaps highlighting doubts investors have over the future of the euro as a currency.
If the Eurozone was to collapse, or if the situation becomes a full-blown financial crisis, the price of oil could plummet further on deflation concerns and a general lack of demand.
Iran attempted to frame the decision in somewhat of a negative light, with the Iranian oil minister remarking that the organization would have to cut output to a certain degree.
On a historical basis, $100 for a barrel of oil seems to be fairly expensive. Still, oil has been trading around $100 for months, and economic activity appears to be mixed. Perhaps the US economy can cope with oil at these levels.ACTION ITEMS:
Traders who believe that OPEC's decision will steady the markets might want to consider the following trades:
- Short oil. If investors believe that a friendly OPEC will contribute to lower oil prices, going short oil via options or an ETF such as the United States Short Oil Fund (DNO) may be a profitable play.
- Going long US equity markets. Although the market traded lower initially on Wednesday, the fact that OPEC is acting favorably toward the US may be a sign that the geopolitical situation is improving. That could help drive markets and the Dow Jones Index (^DJI) higher.
- Take a play in an airliner such as JetBlue (JBLU). Airline companies are particularly susceptible to changes in the price of fuel.
Traders who believe that a cooperative OPEC is actually a negative sign, or who believe that economic situation remains unchanged may consider alternate positions:
- Short precious metals. Gold (GLD) and silver (SLV) were hammered in early trading on Wednesday, as deflation fears may have dominated the minds' of traders. If the global economic situation continues to decline, the metals may trade lower.
- Go long oil. A cooperative OPEC could actually be bullish for the price of crude oil, as agreement among the members of the organization could mean further quota restrictions down the line, as all members are acting together.
Editor's Note: This content was originally published on Benzinga.com by Sam Mattera.
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