Is "Gap-Oil" Imminent?

Back in the summer of 2008, when the oil price reached almost $150 a barrel, Western leaders practically implored Saudi Arabia to increase its output of crude oil otherwise their economies would be crippled in efforts to afford the oil that underpins them. Saudi obliged, but there followed the credit crunch and the house of cards that the world banking system proved itself to be, collapsed, with a drop in the price of oil to around one quarter of its zenith.

The economic slowdown means that less oil is being used and in collusion with an upbeat supply, the price has nose-dived, along it must be said with the value of metals and other elements of a global economy whose hunger could barely be fed, only six months ago.

The low price of oil has hit the economies of the Middle East hard, especially Iran, and chaffed further friction there, and in conclusion OPEC has decided to reduce its production of crude oil in an effort to recover more income from it. This strategy was anticipated by all nations but it now looks that the global production of oil is falling at a faster rate than anyone had expected. The reason is that the OPEC cut now coincides with a steep decline in oil supplies from nations outside of that group.

The upshot is that a price increase can be expected, and oil tankers and their cargoes that have been impossible to sell even a month ago because of the glut in the "physical" (real) oil market, are now selling fairly fast, as refineries seek other sources of oil to replace supplies that are no longer coming from Saudi, Iran and Venezuela. Basically, the decline in supply is now falling into line with the reduction in demand, but it may be the case that supply will fall below demand, leading to an oil gap, which is what happened briefly last summer to drive the price of crude to the staggering levels we saw then.

The situation is more complex now, because we are in the midst of a recession and demand for oil has fallen accordingly and will do so further, leading potentially to a cat and mouse game of supply and demand, with violent oscillations in the price of oil, and presumably the stock markets too, since the two phenomena are inextricably linked and one may drive the other. The key factor seems to be whether the economy and its demand for oil will recover or not in the near future.

OPEC controls 40% of the world's supply of oil and this is expected to fall from last summer's 32.5 million barrels a day to 30 million barrels a day this month. Mexico the world's sixth largest producer had a 9% decrease in its production last year, and the financial services company Sanford Bernstein, have predicted that U.S. production could fall by 1.3 m bbl/day in 2009 and early 2010, which is around one third of the 4.2 m bbl/day that OPEC has said it will cut production by.

Related Reading.
"Oil production tumbles faster than expected." By Carole Hoyos and Javier Bias. FT.com http://www.ft.com/cms/s/0/e74cef8e-e8c1-11dd-a4d0-0000779fd2ac.html