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According to its website, OPEC cuts production by 1.2 million barrels per day (mbpd), even more than the rumored 1.0 mbpd, effective 1 November 2006. I suspect the additional 200 000 barrels is an attempt to signal to the market that OPEC means business. Unfortunately for OPEC, it has a notoriously poor record of actually following through on production cuts. However, in prior years OPEC had plenty of surplus capacity. Now some countries are unable to fulfill their current quota. In fact, Indonesia is a net importer. And prices are much higher. For those reasons, I expect the production cuts to stick

In September OPEC supplied about 29.8 mbpd according to the International Energy Agency. Thus a reduction in 1.2 mbpd is slightly over 4%.

If OPEC believes that the $60 per barrel price (or thereabouts), then holding the line makes sense. It can continue to receive high oil prices and simply wait for demand creep to remove the surplus. If OPEC believes, however, that the current prices will not be maintained, then it should not reduce output and simply let prices fall. Lower prices for a year or two would stall or cancel some larger projects that are being contemplated. Thus, OPEC must be confident that these prices can be maintained.

I believe that oil has broken free from its historical long run real price of $20-25 per barrel. I am doubtful that we will enjoy oil prices less $50 per barrel for a sustained period. Higher energy prices are here to stay.

Like everyone else, I have been paying close attention to the earnings season. So far, I remain unimpressed. IBM, CDW, Yahoo, Motorola, AMD, and Intel have all been unimpressive. In spite of the apparent weakness, the markets keep heading higher. Even increased geopolitical concerns do not appear to slow the market down.

There is not much to say except that I am surprised at the complacency.

As a matter of disclosure, I am short CDW Corporation (CDWC).

In this weekend's Barron's Magazine Sandra Ward interviewed Charles Maxwell, Senior oil analyst with Weeden & Co. for the article Oil Prices: A Pause, Then Up (subscription required).

Where are oil prices headed?

We are now getting a reaction to the higher oil prices. It is translating into slower economic growth and, of course, it is allied with a rise in interest rates. Don't think that it is just that rising oil prices equal lower economic growth. It is a question of rising oil prices and less liquidity and higher rates that's a triple threat. The bottom could be in the high 40s, though that wouldn't be sustainable. On a yearly average, we will stay in the 60s, but we'll spend a lot of time in the 50s. Then they'll start up again in 2008-2009 and go up for some time. When we get to 130 or 150 there will be another pullback.

How do you get to those numbers?

In 1930 we found 10 billion new barrels of oil in the world and we used 1.5 billion. We reached a peak in 1964 when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels. That was the crossover when we started finding less than we were using. In 2005, we found about 5 billion to 6 billion and we used 30 billion. These numbers are just overwhelming.

In the article, a graph titled West Texas Intermediate Crude shows forecasted oil prices. In 2010, the forecast is $85; 2015, $180; and 2020, $300 per barrel. While I am bullish on oil prices, I am not sure I am that bullish. As prices climb, there will be a response. A key point to remember is that prices can only climb as high as consumers can afford to pay. At $300 per barrel, oil will be priced beyond many consumers' reach.

Having said that, I must admit I thought when prices originally went beyond $60 per barrel the consumers' reach. I was wrong. But at some point, the cost of oil will simply be too high for consumers. So I am cautious when the price forecast gets much above $100 per barrel.

As stated, I am bullish on high energy prices and do think higher energy prices will persist. According to an online Wall Street Journal article OPEC to Hold Emergency Meeting (subscription required), OPEC will hold an emergency meeting on October 19th to discuss oil production cuts. OPEC must believe that higher oil prices are here to stay if they want to defend a $60 price level.

Late Saturday, an official from the United Arab Emirates oil ministry said he had received a fax from the OPEC president inviting all OPEC energy ministers to Qatar's capital for a meeting. A U.A.E. official, whose minister is one of the few in OPEC to have remained silent since talks of output cuts emerged, said discussions were continuing in the run-up to the meeting.

"Consultations continue between member countries," the oil ministry official said. The U.A.E. has yet to decide whether or not it will cut production. "We have not agreed a cut in our production yet," the official said.

OPEC ministers have become increasingly concerned in recent weeks over a sharp decline in crude oil prices, from highs of $78 a barrel in July to below $60 last week.

The energy story should be an interesting one. Many people and organizations do not believe that higher energy prices will persist and do believe that the commodities bubble has burst. Others, like myself, believe that commodity cycles take a long time to play out because of the significant amount of time to bring production to the market. The energy story, because of its vital importance to everyone, will be very interesting to follow.

According to The Wall Street Journal article China's Oil Imports Surge Amid Relentless Demand (subscription required), China's oil imports in September surged 24% year over year.

BEIJING -- China, the world's second-biggest oil consumer, imported a record volume of crude last month, underscoring that petroleum demand here and in other developing economies, such as India and the Middle East, continues to rise despite lofty petroleum prices.

Despite Beijing's efforts to conserve energy and curb runaway economic growth, crude imports in September jumped to 13.46 million metric tons, or an average of about 3.3 million barrels a day -- 24% more than in September 2005 and 2.4% more than the previous record in January, according to China's General Administration of Customs.

Meanwhile, China's overall trade surplus eased to $15.3 billion last month, the customs agency said, snapping a string of four straight monthly records that culminated in an August surplus of $18.8 billion. The country's exports last month rose 30.6% from a year earlier to $91.64 billion, while imports rose 22% to $76.34 billion. For the first nine months of the year, China's trade surplus reached $109.85 billion, surpassing its $102 billion surplus for all of 2005.

I remain bullish on commodities in general and on oil and gas in particular. While a slowdown in the U.S. migth slow the rate of growth, oil consumption worldwide continues to grow. That said, OPEC recently decided to reduce its output by a million barrels per day in an attempt to shore up prices. Given China's appetite for oil, I expect OPEC and others to soon be searching for more reserves and production.

I must add that I am always suspect of China's statistics. In this particular case, the statistics favor my argument of increasing world demand for oil and gas. However, I expect in other months the growth will be too low, opposing my argument. Although an increase of 24% sounds high to me, I suspect the true value is still large.

As Muckdog notes on his blog The Learning Curve, there was a very muted reaction to North Korea's antics in the markets today. Muckdog wrote the following in his post Power Lunch.

There was a question heading into the weekend about North Korean and their threatening to test a nuke. Would the market sell-off? The North Koreans tested their nuke, and the market is up as I type. Nobody seems to care. Perhaps anything done by the Axis of Evil is priced into the markets. Now oil is up a bit, but that's probably more due to OPEC talking about production cuts. Of course, this is good for some of my oil buys from last week. Not so good when I stop by the pump in the coming weeks...

I am amazed at the complacency of investors. Muckdog is right, nobody seems to care. Wow.

I wonder how long this complacency can continue. At some point, this geopolitical stuff will matter and it will be the only thing that matters. Until then, perhaps we just close our eyes and think it is a world away.

From my read of the events, major powers are still trying to ascertain whether a nuclear explosion actually took place, because the blast seemed too small. Whatever. Assume it was a dud and did not go off as hoped. I am sure that the scientists will sharpen their pencils and polish their slide rules for the next event. And the major powers are trying to determine the appropriate response. Given that North Korea might or likely has the bomb, they are in a difficult position.

With all the uncertainties and difficult positions, I am surprised by the relative calmness in the markets. Perhaps today's calm was a reflection of the Columbus Day holiday. But in my view, the situation this week is much different than it was last week. Now, we have to concern ourselves with the shifting balances of power. Does this interrupt trade and commerce? Are businesses going to alter their investments in the region? Will countries begin stockpiling key commodities in the event of disruptions? Will countries begin to close ranks and not be as open?

Just from an intellectual perspective alone, I am curious how this situation plays out over the next few weeks. From an investment perspective, I am even more cautious than I was before.