While we were wrong in expecting a 500K cut yesterday as OPEC met to address plunging oil prices and a supply glut that is overwhelming lackluster ( but not negative) demand growth. What we were not wrong in expecting that OPEC would sound coordinated at least on the surface and ready to address the supply issues outside and inside of OPEC.  

500px-Flag_of_OPEC.svgThe amount of panic coming from the market on oil and the impact of OPECs non action is amazing. It’s as if OPEC by cutting could have stemmed some fundamental change in the oil market that people have suddenly woken up to. In other words if price is truth, then oil prices are weak because they should be and the lack of coordination in OPEC means they will go lower.

What more interesting is that oil is now seen as a barometer for risk and for other risk assets not just other commodities. OPECs non decision and the rout in oil is being treated as a wakeup call for equities.

Many of the brokers on the street making a big calls on the fall of OPEC. BAML saying the cartel is effectively “dissolved”. They’re saying WTI will hit $50/bbl in next few months. The disparity within OPEC is what makes this a problem on consensus.

Rich nations like Saudi, Kuwait, Qatar, and UAE don’t care about domestic budget issues. They care about regaining control of the oil price global supply being dictated by U.S. and other non-OPEC producers. Venezuela, Iran and Iraq cannot bear to cut. They need to pump all they can as their economies are in dire straits.   See BAML chart below.

breakeven prices for OPEC

We say watch out volatility for global markets into year end. If oil is going to $50/bbl a lot of countries will benefit and a lot of countries will stare at the brink. All of this will send the USD Dollar significantly higher. That, will be negative for Emerging Market equities.



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