IEA joins chorus of worry over high oil prices

Brent crude oil 3-month chartThe IEA has remained fairly calm about the climb in crude oil prices since they plunged in late 2008. Although concerns about higher prices, given the slump in actual demand, have been around for well over a year the organisation has remained low-key on the subject, pointing out the need for prices to be high enough to guarantee future supplies, which will inevitably be costly. It has also been reasonably relaxed about speculators (more on that below).

This month, however, things are different. With crude above even the $80 ceiling that Saudi Arabia, among others, frequently refers to, there is more than a little concern around the effect of high oil prices – and the IEA can now be added to the list. In the lead feature article of its April monthly oil market report, published Tuesday, it says that “While rising non‐OPEC investment costs may keep prices above historical norms, this does not preclude some concerns for the fragile economic recovery now that they have shifted higher.”

In other words: prices could indeed be getting too high.

And this of course will be felt more in the developed world:

While ongoing price subsidies may shield non‐OECD consumers from the reality of any potential renewed surge in prices, this, plus tighter credit than two years ago, could stall OECD economic recovery or render it more ‘oil‐less’ than we currently envisage.

Or, to spell it out (our emphasis):

Ultimately, things might turn messy for producers if $80‐100/bbl is merely seen as the new $60‐80/bbl, stunting economic recovery while prompting resurgent non‐oil and non‐OPEC supply investment.

Meanwhile, the IEA tends to be extremely cautious in how it portrays the role of ‘financial traders,’ or speculators in raising oil prices. This month it again notes that the “ogre of a speculative-driven rally” may be overplayed, as open interest for WTI declined in March while prices began to break above $80/barrel.

But it adds:

That said, regulators justifiably seek more visibility on opaque elements in financial markets, with the EU due to propose OTC derivatives oversight measures at midyear and the US CFTC soon closing its consultation on position limits. Ideally, new regulation will lean towards enhanced transparency, without choking off liquidity or the ability of physical players to hedge.

Some of the agency’s regular reports have been more ambivalent about the need for more regulation; in June last year they maintained that they believed fundamentals (including Opec quotas) are the key drivers – though not the only ones – of prices, and again took a sceptical view of speculator-bashing in November. Yet the organisation’s tone has become a little more cautious about the need for market transparency in recent months, as comments from executive Nobuo Tanaka at last month’s IEF meeting show.

In fact the $80-plus prices for crude have come almost ironically close on the heels of that IEF meeting, in which energy ministers and industry representatives agreed that volatility was a problem. If today’s prices are maintained, or move even higher, we can probably expect to see a lot more wary comments about economic sustainability, and the role of financial traders.

Back onto fundamentals: the IEA this month is revising its 2009 crude demand estimate downwards by 70,000 and its 2010 estimates up by 30,000 barrels per day. It also estimates that Iraqi production took quite a tumble in March, accounting for much of a 220,000 bpd fall in global oil supply.

Related links:

How financial traders changed energy markets - FT Energy Source
The oil price problem - FT Energy Source
An ‘oil-less’ recovery - FT Energy Source
High oil prices not so disconnected? – FT Energy Source

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