OPEC Eyes $80 Oil as Economic Headwinds Rise

Oil may rise to $80 a barrel if the global energy cartel has anything to say about it.

The Organization of Petroleum Exporting Countries, or OPEC, announced that it would target $80 a barrel for oil, a price point nearly double current WTI futures. Oil has continued its downward slide in 2015, after a brief recovery earlier in the year, with prices briefly falling below $40 before recovering.

Oil may rise to $80 a barrel if the global energy cartel has anything to say about it.

The Organization of Petroleum Exporting Countries, or OPEC, announced that it would target $80 a barrel for oil, a price point nearly double current WTI futures. Oil has continued its downward slide in 2015, after a brief recovery earlier in the year, with prices briefly falling below $40 before recovering.

Many traders and hedge funds bet heavily on oil prices continuing to fall, as analysts from investment banks and the International Energy Agency, or IEA, arguing that record reserves would cause pressure on price growth throughout the year.

Deflationary Pressures

The oil glut has also caused a downward trend to inflation, with producer purchasing indices in both the United States and Europe showing year-over-year declines as commodities continued to fall in price thanks to weak transport costs driven by cheaper oil. At the same time, consumer prices, as measured by the CPI, have seen a disinflationary trend in 2015. Most recently in the European Union and the United Kingdom, the CPI rose by 0.1% in August, half of the inflation rate seen in the prior month.

The core CPI, excluding food, energy, alcohol, and tobacco products, saw a 0.9% year-over-year rise, indicating that inflation is being significantly weakened by commodity prices.

Lack of Consumption

In late 2014, economists predicted that a fall in gas prices could encourage greater gas consumption in the short term, with consumers freely driving to shops to purchase goods and services thanks to lower prices at the pump. Additionally, savings on energy costs were expected to flow into discretionary items—a thesis that caused consumer discretionary stocks to post double-digit gains in the latter months of 2014.

In early 2015 as GDP, data was weak throughout the United States, Europe, and China, these stocks erased their gains and eventually fell into losses as it became apparent that, despite lower costs for energy, this was not on its own encouraging people to travel and shop more.

Central Bank Paralysis

With weak aggregate demand and a disinflationary trend in the United States and abroad, the Federal Reserve reversed course and decided not to raise interest rates at its September FOMC meeting—although many analysts had expected a rate hike to come in September. Others argued that weak price growth and a failure to see strong wage growth would give the Federal Reserve more time to pause its rate hike. Several noteworthy economists and economic publications, including The Economist, urged Janet Yellen and the FOMC to postpone a rate hike.

While the Fed has not increased its rate target in September, some analysts believe a rate hike will come in 2015, especially as some Fed officials, including Chairperson Yellen, have publicly said that a rate hike is coming in 2015. A growing number of analysts believe that inflationary trends will remain too weak for the rest of the year to warrant a rate hike.

The Fed’s refusal to increase rates is likely to influence other central bankers. The European Central Bank may increase its 1.1 trillion euro bond-buying program, known as quantitative easing, in an effort to help kick start inflation throughout the Eurozone and across the globe. The Bank of Japan, People’s Bank of China, and several smaller central banks in Asia expect to create their own monetary stimulus programs to help kick start aggregate demand and get prices to rise.