OPEC, at Davos, signals more production cuts are ahead, if needed

Speaking at Davos, OPEC minister pledged further production cuts in the months ahead, if global demand continues to weaken, marketwatch.com reported Thursday. OPEC cut production by 4.2 million barrels per day (bpd) after the U.S. fell into a recession.

Some argue that oil is undervalued, that it should be trading around $50 or $60, and that oil-short positions are distorting the market. Don't believe it, so says economist Peter Dawson. Oil is sloshing around in global markets. Inventories are building in the U.S. and abroad, oil producing nations are storing oil at sea in supertankers. The U.S. recession will not be short and not mild. Fewer employees on the road. Fewer people buying gasoline. And that means a lower oil price and lower revenue for OPEC.

Some say oil 'will find support at $30 per barrel,' its 40-year, real, historical average. But Dawson reminds us that $30 is an average, not an impenetrable floor. The truth is, no one really knows how low oil can drop to. The only certainty is that as long as demand continues to decline or remain sluggish, oil is headed lower, he said. OPEC can prop up prices, he added, if they want to cut production by 7-10 million bpd; that isn't likely, he said.

For investors, the prospect of a lower oil price and an unknown oil floor should provide pause to conduct rigorous due diligence before investing in an oil stock or an oil-related play. Oil could be worth substantially less in one year.

Economic Analysis: For the U.S., it's also a great time to develop and pass an energy policy aimed at weaning the nation first off imported oil, then off oil entirely. Three oil-induced recessions is enough for the world's largest economy.