OPEC stuck between a rock and a hard place

Today was a big day for British stocks, with some dramatic losses and gains weighing on the FTSE after the UK market had closed out last Friday on a seven week high.

The flatness of the FTSE can be traced back to the dismal Monday for companies like Avingtrans and Petrofac, who both saw stock prices drop over 20% today. The former, an engineering group, lowered its full year estimate today due to a decrease in demand in its aerospace sector, and despite reassurances that a new rationalisation programme would be implanted, shares dropped from 137.25 on Friday to a low of 100.4 today. There was similar bad news for Aviva, after its shares dropped 5% after announcing its takeover bid for Friends Life, which itself rose 4.2%. Investors remain sceptical about the wisdom of this move, and Aviva is currently suffering from comparisons to Prudential, who are performing strongly in Asia and the USA.

There was further big news for British stocks, as sources revealed that BT Group was in talks with both Telefonica, the Spanish owner of O2, and EE, as the British communications giant seeks to reengage with the UK mobile market. BT was a winner after the announcement of this news, as its shares rose 3.5% to 395.25, as Telefonica’s shares also grew 1.5% to 1265.75.

In Europe, after strong business climate figure this morning, the DAX continued to rise, with a peak price of 9818, and futures indicting a close of above the 9800 line at 9808. This positive sentiment extended into the euro, as it grew 0.1% against the dollar to 1.24165, recovering slightly after Draghi’s talk of quantitative easing scared the currency last Friday.

The Dow Jones continued to open strong, 17812 at open, and hitting 17856 15 minutes after the bell. If the Dow managed to overcome weak openings last week to consistently break its closing records, then it stands to reason that today, with its bullish open, will continue the trend. With a big Black Friday and Cyber Monday on the horizon, and the Christmas shopping period beginning in earnest just after, there is a significant chance that the Dow could close out 2014 at the 18000 level. This potential breaking of this psychological level is joined by the dollar nearing the 120 line against the yen, as the USD/JPY recovered from a slow Friday to float around 118.39 today.

Finally, as mentioned this above, Petrofac’s shares went into freefall this morning, down 25%, hitting an intraday low of 887.5. This is just the latest news in a sector that hasn’t seen a glimmer of light in a long time. With the OPEC summit on Thursday, oil is reaching a crossroads. After rallying to marginally above $80 per barrel last week, and opening at $80.47 this morning, Brent crude has spent much of Monday languishing below this level again, with futures indicating a close of $79.79.

Currently, commodity fund managers estimate that at least 1 million barrels per year need to be cut by OPEC in order to prevent oil plummeting to $60 per barrel. Yet, as has been seen recently, this doesn’t seem to be enough incentive for OPEC to slash production. OPEC is stuck between a rock and a hard place: if they cut production the US can consume more of the market share, and become less reliant on the oil cartel; if they don’t, oil’s fall will be swift and unforgiving. We won’t know until Thursday what side OPEC’s coin toss will land.