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Crude oil prices fell to a three-month low on Friday, briefly touching the $111 level after the Dollar muscled higher. OPEC predicted the world’s thirst for fuel will next year fall to its lowest point since 2002.

Light, sweet crude for September delivery fell $1.24 to settle at $113.77 a barrel on the New York Mercantile Exchange after falling to $111.34, its lowest since May 2 and more than $35 - or 24 percent - below its July 11 trading record above $147.

An OPEC forecast of lower demand put downward pressure on prices. In its monthly oil report, the organisation forecast world appetite for oil this year overall will fall by 30,000 barrels a day.

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Crude oil prices in recent times threatened to breach the $150 per barrel mark, and later fell to $123 levels, clocking an appreciation of almost 30% in the year. In fact, higher oil prices have been sending shivers down the stock markets worldwide, as if the recent global financial crisis was not enough to unnerve them.

Back home, Indian stocks are down by around 30% in the current year. Inflation has already reached double digits at 11.98% and is showing no signs of respite, adding fuel to the fire.

I would start with an interesting conversation I heard recently. I happened to be at an oil trader’s dealing room. I asked the chief dealer, “What’s happening to oil? It is down 20% from its peak. Will you buy now?” He answered: “Oil’s down due to speculative unwinding of long positions and a growth scare in developed countries, which might result in lower demand for the scarce commodity.”
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According to the oil producers’ cartel Opec, the blame lies with speculators in the international markets. But Tony Hayward, chief executive of BP, describes that view as “a myth”.

He argues that the main cause is the tight balance between global supply and demand.

BP’s new Statistical Review of World Energy - a key information source for many people in the industry - highlights what has been going on.
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The weekly average oil prices of the Organization of Petroleum Exporting Countries (OPEC) rose slightly by 0.57 dollars, topping 124.30 dollars per barrel (dpb) last week, the Vienna-based cartel said Monday.

The daily prices set a record high of 127.59 dpb on May 22 and retreated steadily last week. The prices even touched 121.68 dpb Friday, 5.91 dollars lower than the historic high.

OPEC President Chakib Khelil, also the energy minister of Algeria, said Saturday that the high prices were “much more linked to speculation” and insisted that “there is no problem of supply.”
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France called on the G7 on Tuesday to press oil-producing nations to boost their output in a bid to bring down prices that have reached record highs and thrown a spanner in oil-fired economies.

Finance Minister Christine Lagarde said she would put the request to her counterparts of the Group of Seven club of rich countries to seek a common front with Britain, Canada, Germany, Italy, Japan and the United States.

“We cannot forever be in a market system in which the price is permanently on the rise, to the benefit of producers, who are building up major oil revenues,” Lagarde told France 2 television.
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Even as the cost of crude oil has soared in recent years, the amount pumped from the ground hasn’t.

Worldwide oil production has barely budged, despite record prices. Since the start of 2004, oil’s price has gone from $33 per barrel to $132. Production, meanwhile, has risen just 1.8 percent, to 84.6 million barrels per day.

That’s not enough to keep pace with the world’s growing thirst for oil, which has increased 3.7 percent during the same time. And the imbalance between supply and demand keeps pushing prices higher. It’s one of the main reasons gasoline now costs more than $4 per gallon.

This isn’t the way economics are supposed to work. When a product is in short supply, the price rises, and the companies that make it usually produce more so they can cash in. Supply eventually outstrips demand and the price goes down.
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