OPEC has agreed to cut production due to rapidly falling oil prices. Airlines and other Oil dependent companies rushed to buy call options to lock in the current prices.
A call option means buyers can continue to buy oil at the current prices even though prices rise. An example of this was South West Airlines who had locked in prices for their company before the rise up to near 150 dollars a barrel. By doing so they were able to continue offering cheaper ticket prices while other airline had to increase ticket prices as oil continued to rise.
Here we see that OPEC can alter production levels such that Americans are defendant upon them. Recently the topic of Oil independence has moved off of the Presidential topics list. One of the major problems with lowering oil prices is that folks stop focusing on getting America and other countries off of energy independence.
This remains a national security issue and really should continue to be a topic for discussion even with lower prices.
The Organization of Petroleum Exporting Countries cut oil production targets for the first time in almost two years as the group battles to slow a collapse in prices.
OPEC decided to lower supply by 1.5 million barrels a day from November, oil ministers said today at the end of a meeting at the group’s Vienna’s headquarters. The reduction will be from the existing quota for 11 members of 28.8 million barrels a day.
“Demand is significantly less than what is being supplied, that is the reason the cut was taken,” Saudi Arabian Oil Minister Ali al-Naimi said after the meeting. Crude oil has tumbled 57 percent from a July 11 record of $147.27 a barrel as the financial market crisis spreads, job cuts increase and fuel consumption slows. Prices fell as much as 7.7 percent today.
“OPEC has offered the market all the ammunition they had,” said Robert Laughlin, senior broker at MF Global Ltd. in London. “With the bearish economic outlook and manufacturing in freefall this accord is not good enough.”
Source: bloomberg.com via politisite
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