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The multi-trillion dollar coordinated government bailout of the world’s banking system boosted equity and oil prices for less than two days before a three-day plunge sent oil to $68 a barrel for the first time in 16 months. The $15 drop was enough to spur OPEC to move up its emergency meeting from after the US elections in mid-November to this coming Friday. 
The drop was precipitated by a drop in equity markets and an unexpected jump in US stockpiles. A rebound in the stock markets on Thursday combined with the prospect that OPEC will soon be cutting production resulted in oil prices climbing on Friday to close out the week at $71.85 a barrel.
The weekly US stocks report showed US gasoline and distillate refining coming back from the hurricanes and, combined with very large gasoline imports, resulted in US gasoline stocks increasing by 7 million barrels. Total US oil consumption over the last four weeks was down by nearly 9 percent from last year although some of this drop was due to the disruptions caused by the hurricanes. US gasoline consumption during the last four weeks was only down by 5.2 percent. As average US gasoline prices have now fallen by $1.12 a gallon since July, it will be interesting to see if gasoline consumption increases again during the next few weeks.
Preliminary reports show OPEC exports dropping anywhere from 350,000 to 600,000 b/d during September. Platts reports increasing signs that crude and products are becoming more difficult to sell on the world market, suggesting that an oversupply is developing.
The nearly 50 percent drop in oil prices during the last three months has been for the most part attributed to the belief that the recession will eventually lead to major reduction in demand for oil products. Some have blamed the decline on speculators being forced out of the markets, however, last week new reports suggest that additional factors may be involved. One report concludes that investors pulled $210 billion out of US hedge funds during the third quarter forcing the funds to dump assets, including oil, thereby forcing down prices.
Another new factor is the credit crisis which has reduced the availability of credit to oil traders and shippers all along the supply chain from the oil producers’ ports to the consumers. This has resulted in a drop in demand for oil by traders who can no longer get financing and has left the market largely in the hands of the major oil companies and very large retailers, such as WalMart, who have the size and liquidity to force prices lower. Lines of credit are being reduced to smaller traders and letters of credit that guarantee oil shipments are becoming difficult to obtain.
While in the short term the lack of freely available credit may be forcing prices down, it will not be long before the situation forces production cutbacks, shortages, and eventually higher prices.