Output beats global oil consumption Mismatch In Favour Of Production 1st Time Since ’04-05, Prices Drop 25% In 4 Months

New Delhi:Strange things are happening in the world of oil. Crude prices have dropped more than 25% in the past four months. Global oil consumption has dropped below global production for the first time since 2004-05. Oil production capacity lying idle has increased to 2.5 billion barrels per day — higher than the 2003-2008 average. And, players in the futures trade are sitting on a fence, betting that prices will fall further in the near term, but preparing for an upswing — just in case.      On February 24 this year, spot price of crude climbed to a four-year high of $109.8 per barrel, sending fears across the world that it would very soon kiss the record of $145 set in July 2008. Oil futures contracts for delivery in March were selling at about $125. But oil contracts for later delivery — say, December — were cheaper by as much as $7. The big boys who play the oil market were clearly betting on the prices falling. And, this is what has happened.      Although the Energy Information Administration (EIA) of the US had said in its last report in April that oil consumption stood at an all-time high, it also pointed out that production was outstripping consumption by about 0.5 million barrels per day. The report also said oil stocks increased by 0.2 million barrels in the US and 0.1 million barrels in other OECD countries.      Strangely, oil supply was holding up despite increasing "unplanned production outages", says the EIA report. Although the Libyan crisis resolved somewhat and the valuable Libyan "light sweet oil" started flowing to Europe once more, the unplanned outages were arising out of political uncertainties in Sudan, South Sudan, Yemen, Syria (although not an oil producing country).      The biggest driver of oil prices was the Iran situation. Earlier this year, there was an uproar over the alleged Iranian nuclear bomb drive, and reports on an impending attack by Israel even if the US did not approve were rife. This escalated the prices as fears of a major disruption in global supply — Iran is the world's fourth largest producer — hit the markets.      These fears have receded for the present as diplomatic processes got more traction and Iran allowed limited inspections of its nuclear sites. Meanwhile, the real threat to global oil consumption emerged — the economic slowdown, affecting even the resilient emerging economies. Most of the growth in oil consumption has been driven by Saudi Arabia, China, India and Brazil. As there was palpable slowing in all except Saudi Arabia, global demand started showing a distinct deceleration.      What analysts are puzzled about now is why is Saudi Arabia not cutting production to keep up the prices. This is what it had done in the past. Experts believe that it may allow prices to fall for some more time before clamping down, reviving the prices to between $90 and $100 per barrel.      But Saudi Arabia and several other OPEC countries need to keep up their oil revenues in order to finance their domestic spending programmes started to counter the 'Arab Spring' discontent of the past year. Hence, they may not wait long before cutting production, restricting global supply and thus raising back prices.      Meanwhile, geopolitical uncertainties continue to roil some of the other big players in the oil supply game. Nigeria and both the Sudans are still embroiled in outages caused by violent clashes. Iraqi oil production crossed the high set in 2000 for the first time in 2011 after a decade of disruption due to the US occupation. Iranian oil production is down by more than 25% from 2.2 bpd last year and its exports are expected to further dip as the European Union's embargo clicks into place from July 1.      Commercialization of shale gas in North America is one of the key factors behind the not so panicky response of the advanced countries to oil price fluctuations in recent times. EIA estimates that in April this year, US shale gas production was 2.6 trillion cubic feet, about 46% higher than same time last year. Gas prices fell by $1.55 per million BTUs to just $2.45 MMBTUs.SMOOTH FLOW  A report by Energy Information Administration of the US has found that oil stocks have risen by 0.2 million barrels in the US and 0.1 million barrels in other OECD countries  Oil production in Iraq crossed the high set in 2000 for the first time in 2011 after a decade of disruption due to the US occupation Commercialisation of shale gas in North America also aided the energy supply and helped in countering price fluctuations