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Financial Times: Oil watchdog to analyse record highs

By Javier Blas in London
Published: March 12 2008 02:00 | Last updated: March 12 2008 02:00

The International Energy Agency has convened talks with global oil experts to help determine “whether current oil prices are justified by market fundamentals”.

The meeting is being hosted by the western countries’ watchdog as oil prices hit a fresh high of nearly $110 a barrel yesterday, boosted by a forecast of relatively robust demand and investors buying oil as protection against US dollar weakness.

The talks, to be held in Paris on Monday, highlight concern among rich countries’ policymakers about the causes of the recent oil price rises and its implications for inflation and monetary policy.

Participants will include representatives from oil companies ExxonMobil, Total, Repsol, Shell and ConocoPhilips; central banks including the European Central Bank; Nymex, the US energy exchange and the Intercontinental Exchange; market regulators including the US Commodity Futures Trading Commission and Britain’s Financial Services Authority; as well as the International Monetary Fund and World Bank.

“Following the large flows of money into hedge funds and commodity index funds since 2003, there is concern that the oil price no longer retains its role as the best leading indicator of market conditions,” said the IEA in a document setting out the agenda for the meeting.

Lawrence Eagles, head of the IEA’s oil markets division, said that not all the blame should be put on speculation. He said previous rises had also been blamed on speculation, such as when prices moved above $50 a barrel in 2004, but that had turned out not to be the case. “With hindsight, those prices now seem to reflect the increasing cost of accessing and developing reserves. If it was a speculative push in prices, the speculators were right,” Mr Eagles said.

In its monthly oil report, the IEA said yesterday that the global economy had moved into an era of higher oil prices. “Prices are unlikely to return to levels seen in the early part of this decade,” it said.

Although it did not say whether current prices above $100 a barrel were -justified by market fundamentals, the IEA warned that “only a protracted and severe global recession would justify a sustained dip in oil prices below” $60 a barrel.

Crude oil prices broke above the $60 a barrel level only two and half years ago.

West Texas Intermediate crude oil yesterday surged to a high of $109.72 a barrel, and in late-afternoon trading was 40 cents higher, at $108.3 a barrel.

In spite of record prices and the US economic slowdown, the IEA said oil demand would be relatively robust this year, boosted by emerging economies such as China and the Middle East.

World oil demand will grow by 1.7m barrels a day this year, up from a 0.9m b/d in 2007, according to the IEA. Demand will reach an annual average of 87.5m b/d, down just 80,000 b/d from its February estimate.

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