Yesterday’s crashing market sent crude oil to its lowest close in eight months. WTI crude fell even further this morning, to below $76/barrel before turning around to rise above $82/barrel at mid-morning. Did yesterday’s oil price dip signal the begin of a new recession or was it a merely a knee-jerk response to S&P’s downgrade of US debt?

There are plenty of good arguments that yesterday’s -5.6% fall in the DJIA reflected a gloomy outlook for the US and the global economies. Stocks of the major integrated oil companies Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips Corp. (NYSE: COP), and BP plc (NYSE: BP) fell pretty much in line with the overall decline. So did refining stocks like Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), and Western Refining Inc. (NYSE: WNR).

So far today, however, yesterday’s declines in energy-related stocks looks more like a correction that has turned into an opportunity. Western Refining shares are up more than 10%, and both Valero and Tesoro have made up nearly all of yesterday’s losses. Stocks of the oil majors have regained about half of yesterday’s losses.

One might conclude, based on this, that yesterday’s market decline was simply a way to bring market valuation in line with the new rating on US debt. Thus, today is an opportunity for investors to grab some good stocks at low prices.

But are oil and refining stocks really a good value? Crude oil at $85 or less is unlikely to last very long unless a second recessionary wave is about to hit. The Organization of Petroleum Exporting Countries (OPEC) is firmly in the camp of those who believe that the world economy is slowing and that demand for energy will fall leading to softer prices.

The oil-producer’s cartel reduced its estimate of demand growth in 2011 by 150,000 barrels/day, down from last month’s estimate of 1.36 million barrels/day to 1.21 million barrels/day. Brent crude, which has been trading about $20/barrel higher than WTI, fell below $100/barrel this morning before rising again later in the day.

OPEC production rose in July to just over 30 million barrels/day, and there is no indication that the cartel will cut production even though some of its more militant members (Iran and Venezuela) have long argued for more production cuts. If anything, the drop in price and demand have somewhat vindicated Iran and Venezeula’s calls for production cuts.

The cartel wants crude prices closer to $90/barrel than to $80/barrel, and there’s every reason to expect them to move if the price remains low. Many cartel member needs the money to balance their national budgets. That makes calls for production cuts resonate with more of the producers.

The issue, as always, is compliance. OPEC members are already producing more than their agreed upon quotas. Just pulling back to the agreed-upon figures will pull more than 1 million barrels/day off the market. But as prices fall, the tendency of some OPEC members is to produce more to offset the declining price. If the cartel can act together on production, prices could rise quickly to around $90/barrel or more.

Today’s market is getting a boost from low share prices and also from some anticipation that the Federal Reserve will figure out a way to pump more liquidity into the markets. If the Fed fails to do what is expected, what now looks like an opportunity in energy could well turn into a dead-cat bounce.

Finding equilibrium in markets is a bit nerve-racking for many investors.  A few weeks ago the $100 level seemed to be the norm.  Now it may be $80 or $90…

Paul Ausick

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