There are two major forces behind the recent rise in oil and gas prices – seasonal flux and production cutbacks.

Let’s forget, for a quick moment, that the world is in the worst recession in years – possible even a depression – and say things were “normal.”  This would mean that demand, specifically in the U.S., would really start to pick up.  As a result, traders and producers would start to bid up the price of oil ahead of the expected increase in demand.  The problem, however; is that we are not in normal times and travel and oil consumption in the United States is off anywhere from 10% to 30% (depending on the sources you read).  

Well, even though the price of oil should be heading down – and even though the world faces horrid economic times – Saudi Arabia says the world can cope with the price.

Saudi Oil Minister Ali al-Naimi, speaking on the eve of a meeting of the Organization of Petroleum Exporting Countries in Vienna, said oil prices would continue to rise and that the global economy was now strong enough to support $75-$80 oil.

“The price rise is a function of optimism. Better things are coming in the future,” Naimi told reporters in Vienna.

The guy is flat out wrong.  

Not only are economic conditions deteriorating, such a move on their part will only prolong any economic recovery as companies will need to pay more for energy. Their reaction will be to cut the need for energy.

The ONLY reason Saudi Arabia wants to see elevated prices is simply due to the fact that the majority of OPEC countries obtain their funding from the sale of oil.  Since the recession kicked in, OPEC countries have faced hard economic times… their money well has dried up… and all of a sudden they need more funding.  

Where do the naturally turn– oil.

So, consumption is down, that means producers reduce their inventories and refining capabilities, which in turn means OPEC needs to cut their production in order to inflate prices.  Folks, we are almost paying 2007 gas prices simply because OPEC countries need funding for their government.  Allowing for oil to be at this level, and not speaking out against price gouging,  is another way of providing yet another bailout – this time to foreign governments.

The Weather Research Center, a 22 year old non-profit organization, has released their predictions for the 2009 Hurricane season.  This is interesting news as the Oil production community tends to rely on the WRC’s information to help gauge/predict potential impact on production for the coming year.  Obviously, not an exact science, but still something to pay attention…

So, what does the WRC predict for 2009?

• Number of Named Storms: 7
• Number intensifying into Hurricanes: 4
• Number of Hurricane Days: 7
• Number of Tropical Storm Days: 47
• US Landfalls: 3
• Cat 3 or Higher Storms in the Atlantic: 50%

The WCR suggests the highest risk of landfall for a Tropical Storm or Hurricane is from Louisiana to Alabama with a 70% Chance.  Mighty close to the oil production centers in the Gulf of Mexico.

When Hurricane Ike pushed through the Gulf of Mexico in 2008, the price of oil continued the previously established downward pattern.  Now that oil is range bound from $35 to $45 dollars, and OPEC has cut output drastically, what would happen to the price of oil if a major storm hit production centers in the Gulf?

Remember how I mentioned that oil was dropping uber fast, and that if the decline continued gas has the potential to hit $.99 again?  Do you also remember how I mentioned the only way to prevent the decline is with some major event?  Well, there is one on the horizon – OPEC has signaled “significant” production cuts in hopes of stopping the potential slide.

Via Bloomberg:

A “severe” cut may be needed to halt the decline in prices, group president Chakib Khelil told the Associated Press in a Dec. 6 interview.

The members of OPEC believe that a reasonable price for a barrel of oil is roughly $75, but obviously the market doesn’t agree with the thinking right now.  But why does OPEC hold this view?  The countries that have membership in OPCE obtain most of their government budgets from the profits pulled in from oil sales.  The lower the price of oil, the less funding available.  The less funding available, the less money for things such as roads… schools… and military spending.

In case you were curious as to what countries made up OPCE, here you go:

• Algeria
• Angloa
• Ecuador
• Indonesia
• Iran
• Iraq
• Kuwait
• Libya
• Nigeria
• Qatar
• Saudi Arabia
• United Arab Emirates
• Venezuela

It’s funny what people, or governments, will do when it comes to money.  All of 20 hours ago the countries that make up OPEC were hinting production levels would remain the same until their next meeting.  Surprise, they were just blowing smoke.

Apparently “production levels would remain the same” means “cuts output to shore up falling market” in some languages.  News came out around 10 PM eastern that a 520,000 barrel a day (1.7%) cut was being put into place because “a shift in market sentiment causing downside risks to the global oil market outlook”

Translation – Out government budgets are directly tied to the price of oil and, with oil under $100, we cannot continue to grow.

5 years ago a barrel of oil was $30, today it is roughly $105.  The governments of OPEC countries had no budget issues then and sure do not now.  If there was ever a sign that OPEC is not looking out for the world this is it – they want the money.    Expect more cuts in the coming months.

Other Reactions:

Stocktock: OPEC Cuts Oil Production
Indiblitz.com

Ike slammed into the Bahamas causing serious damage, hurt the relief efforts already underway in already suffering Haiti, and just went ashore in Cuba roughly an hour ago.  The storm is now a Category 3 Hurricane, down froma 4, and is expected to come in to the Gulf of Mexico on Tuesday or Wednesday.

The current storm track can be found here and here.  Storm models show Ike drifting east or west of New Orleans, which can give the city a break but can mean trouble for Houston, Mississippi or Alabama.

Something to keep in mind: the price of oil.  NYMEX Crude and Nymex Henry Hub Futures (Natural Gas) are both up 2.26 and 3.0% respectively.  If the storm causes a shutdown of oil / gas production and OPEC cuts oil output expect the prices to rise.

Update: Oil Price Coverage

• WSJ – Energy sector Hums Again
• Reuters – Oil rises over $2 to top $108 on hurricane threat

  From the Reuters article…

Hurricane Ike is expected to enter the Gulf of Mexico as a severe Category 4 storm, a U.S. Federal Emergency Management Agency official said on Sunday. It may threaten Gulf energy rigs that account for a quarter of U.S. oil output and 15 percent of natural gas production.

• AP – Gulf oil and gas producers give Ike a serious look

With nearly 88 percent of crude-oil and 74 percent of natural-gas output shut due to Hurricane Gustav, it is easy to see how Ike could shut down all production once again.