Earlier in the session we were looking at lower oil prices, but the mood has changed, and the precious crude is trading higher with the overall market today, picking up nearly 2.5% on the day.

Yesterday, despite rumors to the contrary, OPEC decided to leave its oil output alone, and this had the initial reaction of sending prices lower in early morning trading. With oil prices falling sharply since last summer, many analysts had been expecting to see a production cut from the group, but instead OPEC announced that it would be leaving its output unchanged, and stated that previous cuts were starting to take effect.

I recently put together a report of stocks to avoid in 2009. In compiling the list, I used general themes that I thought would struggle during the coming year. At the top of the list were chemical companies.

Though not on the list of specific stocks to avoid, I certainly did consider calling out Dow Chemical (NYSE: DOW) as a stock to avoid in the coming year. That would have been insightful, as shares of DOW lost nearly 20% of their value due to the termination of a joint venture project in Kuwait

The proposed K-Dow Petrochemicals was formed to help Dow reduce exposure to the highly cyclical petrochemical plastics business. More importantly, the $17.4 billion venture was slated to provide Dow some much needed cash, including $7 billion up front.

That cash was going to be needed in Dow's yet-to-be-closed acquisition of Rohm and Haas Company (NYSE: ROH). That deal is currently valued at just over $15 billion and would have been much easier to swallow with the K-Dow deal intact.

Now, legitimate questions are being raised as to whether the Rohm and Haas deal will close. Dow is claiming, and had previously claimed, that it did not need the Kuwait deal to fund the acquisition.

U.S. stock market futures gained at the start of the last trading week of the year. The rally may be short-lived given that many traders have taken the week between Christmas and New Year's off. Stock markets in Europe and Asia advanced as well.

Oil prices are rising amidst growing worries about the clash between Israel and Hamas in the Gaza Strip. In early trading today, oil topped $40 as the death toll in the clash reached 300. Whether the conflict will boost prices at the pump remains to be seen. Members of OPEC are expected to cut production further to boost prices, which are down more than 70 percent since July. Prices may fall further as the economic slowdown further erodes demand.

Meanwhile, faith in the global economy was further undermined by the decision Sunday of Kuwait's government to cancel a $17.4 billion joint venture with Dow Chemical Co. (NYSE: DOW). Shares of the Michigan-based company and Rohm & Haas Co. (NYSE: ROH), which Dow agreed to buy earlier this year for $15.4 billion, fell in pre-market action.

GMAC has given no word about whether bondholders approved a debt exchange program that would give the financing arm of General Motors Co. (NYSE: GM) with access to the $700 billion financial bailout program for financial institutions.

There is an illusion afoot that the record July drop in oil prices is significant. It is not. As long as oil is well above $100, the inflationary effects will be damaging, and the ability of key industries, including the automotive and airlines, to recover will be significantly compromised.

The only real hope for parts of the economy that depend on a lower price of crude is that much of the run-up has indeed been caused by speculation. If so, crude may have much further to drop.

One of the key oil officials in Kuwait has commented that oil will not returned to over $144, but that it will not drop below $100. According to Reuters, "I don't think that prices will return to the record level, nor will they fall below $100 per barrel," Khaled Boodai told al-Seyassah newspaper. If he is right, a sustainable economic recovery is far off.

Much of the recent recovery of the stock market is based on the drop in oil. That means it is a mirage. Oil at $144 would have undermined all economic growth in the U.S. very quickly. As long as crude stays above $100, the process will still occur. It will just be a bit slower.

Douglas A. McIntyre is an editor at 247wallst.com.

Kuwait's finance minister said Tuesday current oil prices are too high and are inflationary, Bloomberg News reported. "I think it's high,'' Finance Minister Mustafa Al-Shimali said in an interview in Isfahan, Iran, today with Bloomberg News. A reasonable oil price would be "more or less $100," he said.

Oil traded Tuesday at midday down $1.04 to $133.57 per barrel. Oil hit an all-time high of $139.89 per barrel on Monday, June 16, 2008. Oil is up more than 100% in 2008 and more than 400% since 2000. Equally significant, oil's 200-day moving average -- the toughest moving average to break from a technical analysis standpoint -- is at $99.77.

"I would like to see these prices go down and in parallel also have the price of goods we import go down,'' Kuwait's al-Shimali told Bloomberg News. Kuwait pumped about 2.6 million barrels of oil per day in May 2008, according to a Middle East Economic Survey estimate.

Oil fanning inflation, globally

Economist David H. Wang said Kuwait, and other oil producing nations who import goods, are beginning to see the downside of extraordinarily high oil prices.

OPEC appeared likely Thursday to ignore President Bush and the west's plea for increased production and to keep production at current levels, The Wall Street Journal reported (subscription required).

Further, OPEC ministers gathering in Vienna Thursday for Friday's meeting mulled whether to take action to address what some members believe will be an oil price slide if the slow-growth U.S. economy slows global growth, and consequently moderates demand increases in both crude oil and gasoline, the Agence France-Presse reported.

Kuwait's acting oil minister Mohammed Al-Aleem told the AFP that OPEC was "a little worried about the impact of a slowdown or a recession in the United States" on oil prices. "The price, for the time being, has been going a little bit down," he said. "We'll hear and see what analyses have been done" and he said they make a decision based on those analyses.

Citigroup (NYSE: C) is about to raise $14 billion, but the press is a bit unclear about who is putting in the money.

The Wall Street Journal reports that Prince Alwaleed bin Talal, currently one of Citi's largest investors, will put in capital along with the China Development Bank. The CDB piece is probably $2 billion.

According to the FT.com "Under the proposal being discussed, the bulk of the money -- roughly $9bn -- would be most likely to come from China, people familiar with the negotiations say. The Kuwait Investment Authority would contribute about $1bn, while $2bn to $4bn would be raised through a public placement of shares."

Leaving aside the fact that two big newspapers have different accounts of the same news, Citigroup may be faced with a challenge from Congress over whether it is OK for such a large U.S. financial institution to have big blocks of its stock owned by foreign entities. Citi's role in lending, underwriting, and trading might be considered "strategic" by the U.S. government.

To investors, that matter of who owns what is hardly important. The big bank's market cap is down to $142 billion. Another $10 billion is significant dilution. In theory, it could push the Citi shares from $29 to $25 of below. The shares have a 52-week high of $55.55.

If the federal government is against having investors from overseas, the Fed should lend Citi $10 billion on its own.

Douglas A. McIntyre is an editor at 247wallst.com.

The Associated Press is reporting that Dow Chemical Company (NYSE: DOW) will sell a 50% interest in five of its global businesses to a Kuwaiti company, Petrochemical Industries Co, for about $9.5 billion to form a new petrochemicals joint venture.

The joint venture will be based in the U.S. and will employ more than 5,000 people worldwide, mostly current Dow employees and will be 50% owned by Dow and PIC.

This will put cash in play that can be used for a wide range of activities. Dow may choose to slash long-term debt, which this tidy sum would eliminate almost entirely. It also may choose to expand other ventures that have a promise of higher returns or diversify into businesses that are less dependent on oil as feedstock and thereby increase potential growth while reducing volatility.

Ryada Capital Investment Company, based in Kuwait, said this weekend that it is designing a hedge fund that will comply with Islamic law. The fund will carry an initial value of $100 million and will target low-risk investments. Fund managers hope to increase the size of the fund to $300 million within the next three years.

The fund will scarcely employ short selling or other speculative strategies. The law of Islam forbids both gambling and lending on interest, and the jury remains out on whether short-selling counts as either, so the practice will be "limited." Ryada Chief Executive Jamal Al-Saeed told Reuters that short selling will only be used "in case we need it," adding "speculation happens, it's human nature. But it's not the essence of the fund."

With the introduction of this fund, Ryada hopes to benefit from building demand for Islam-friendly investment vehicles, as Muslims seek to park their funds in investments that correspond to their beliefs. Barclays Capital is also reportedly at work on hedge funds that respect Islamic laws.

HSBC will hold all of the fund's assets ... the minimum subscription currently stands at $1 million.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.