Market Overview

Will OPEC Prime the Economic Pump in 2012?


If the economy is going to turn around in 2012, resolving three items will lead the way: housing, oil prices, and debt — particularly European sovereign debt.

While the housing market may take some time to unwind, and there isn't much we can do stateside to alleviate the debt crisis, we can lean on our allies in oil-producing regions to increase their oil output, which will drop prices and help boost the economy.

As of right now, OPEC appears to be sticking to its guns, reiterating its June position that 30 million barrels per day is the proper target for the oil-producing cartel. This is, essentially, a middling position to take. As always, OPEC is striving to straddle the fence, pumping as little oil as it can to avoid scaring off consumers of oil, while also bringing itself the greatest profits possible.

With that in mind, OPEC is currently wary of cutting production, as that would surely drive oil higher and price some consumers right out of their market. They are also hesitant to boost production too much, as that would anger the members who rely on high oil prices to fuel their (primarily anti-American) governments, including Venezuela, Iran and Algeria. Those three nations want to keep oil above $100 a barrel.

They might not get what they want. Even though Iran is currently in the chairman's seat of the council, the June meetings were a disaster. Leaving the December meetings without a consensus would be a terrible blow for the Iranians. That might push them to accept a deal that is not as favorable to their interests as they would like.

Given that, it is probable that we will see at least a continuation of the current levels of oil production, with increases possible in 2012. As I have written about before, oil is the ultimate quantitative easing program: lowering oil prices costs America nothing (well, nothing tangible; we can get into the cost of appeasing dictators later) while providing a host of benefits.

Consider the following scenarios in 2012. Europe will either be in bad shape or really bad shape, depending on how the debt crisis shakes out. Similarly, the United States will have some ripple effects from Europe, and its own shaky recovery to nurture ahead of the presidential election.

In my view, all of those forces will pressure OPEC to increase production with the sole purpose of lowering the price per barrel and helping those economies move upward. That's why I take this 30 million bpd target with a grain of, well, sand. Still, OPEC said it, and they just might stick to it.


Traders who believe that OPEC will increase production, lowering oil prices in 2012 might want to consider the following trades:

  • If OPEC increases production and the economy goes north, the entire market could benefit. In that case, an ETF like the SPDR S&P 500 (NYSE: SPY), which covers the S&P 500, might go up as well.
  • If oil is going down, the dollar could be in for a rise against some currencies. Look at some of the USD pairings.
  • If the economy truly heats up, look for strong showings from gadget-makers. A big stock like Apple (NASDAQ: AAPL) might make a lot of sense here.

Traders who believe that OPEC will either stay put or lower production, leaving prices high, may consider an alternate position in the following:

  • An oil-based ETF will give you exposure to the overall crude oil market. iPath S&P GSCI Crude Oil Total Return (NYSE: OIL) is one such ETF.
  • Find a forex pairing that lets you bet against the dollar or the euro, depending on which economy is in worse shape at the time. CNY/USD might be a good pairing. Forex trading can be a lot riskier, so approach that with a lot of caution.
  • Stocks could take a hit if oil stays high and the economy dips again. Consider something that holds up under bad times, such as gold. A gold ETF like SPDR Gold Trust (NYSE: GLD) would give you exposure there.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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