PARIS, March 11, 2008 (AFP) — A slowdown in leading economies will moderate thirst for oil but high prices are here to stay, the International Energy Agency warned on Tuesday.
On the day that oil struck 109 dollars a barrel for the first time, the IEA said: "We are in an era of higher oil prices."
"So if we look at 100 dollars per barrel of oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade."
The agency, observing that politicians tended to blame speculation for the rise in oil prices, said that the underlying factors were more complex.
The chief IEA analyst, Lawrence Eagles, told AFP: "Without a doubt commodities are being used as an (investment) asset class, and the weaker dollar has an impact also."
He said stocks of oil were limited and that as product demand fell "in the second quarter we should see a build in inventories."
The market "seems to be calling for higher stock levels, he added, commenting: "OPEC spare capacity at 2.0 million barrels per day is at historically low levels" and that there "doesn"t seem to be a big move to increase spare capacity."
He said that in the world's major industrialised nations oil demand would respond to "weaker economic growth and high (oil) prices.
But he added that in countries outside the Organisation for Economic Cooperation and Development (OECD), "we still see demand growth continuing."
The IEA held its monthly estimate for world oil demand this year largely steady at 87.5 million barrels per day, shaving last month's estimate by 80,000 barrels per day, highlighting that "downward pressures from weaker economic growth in the OECD mostly offset by stronger former Soviet Union (FSU) projections."
This estimate was an increase of 1.7 million barrels per day or 2.0 percent from demand in 2007, which grew by 1.1 percent.
Stocks held by industry in advanced countries covered by the OECD increased by 32.6 million barrels in January to 2.617 billion barrels or 52.9 days of consumption.
Given that spare capacity was set to remain tight, "part of the price message is surely that higher stocks would provide more comfort," the report said.
But production of refined products "remains under downward pressure" because refiners were having difficulty making an adequate profit and because of operating problems.
The IEA, noting that politicians tended to blame speculation for rises in the price of oil, provided analysis qualifying this explanation.
The agency, an offshoot of the OECD, observed that a "wall of money" had flowed into commodity and oil markets in response to US monetary policy and the fall of the dollar.
Another factor had been a recent decision by OPEC to continue its production levels and not to organise a formal meeting until September despite high prices.
"The market is concerned that producers are more inclined to react to price declines than price rises," the IEA said, asking: "Have the price moves been irrational?"
It noted the view of Saudi Arabia that the oil price would not go below 60 dollars per barrel because other sources of fuel cost this much and commented that "only a protracted and severe recession" could drive prices lower than this.
However, many Gulf producers had production costs of less than 10 dollars per barrel. "The profit margin is huge," the IEA said but access to reserves was constrained, "traditional economics is turned on its head" and "the point is that the price baseline has shifted."
"In 2003, moves above 30 dollars per barrel were widely cited as speculative and irrational. Now they are seen to reflect the increasing cost of accessing and developing reserves. If it was a speculative push in prices, the speculators were right."
Some academics put the long-term price of oil at three to four times development costs, which had risen to 10-30 dollars per barrel and up to 64 dollars for US offshore oil.
The IEA balanced this approach, however, saying that despite these factors, "we have a duty to ensure that the impact of these is not exaggerated."
Given the "current precarious state of the global economy," the IEA said it was vital for producers and consumers to work together to ensure that the right market signals emerged "ensuring that supplies will be there when needed."
World supplies of oil rose by 185,000 barrels per day in February to 87.5 million barrels per day, but "seasonal limits on OECD production and steady OPEC output may flatten global supply over the next two months."
Supplies by OPEC had fallen by 120,000 barrels to 32.1 million barrels per day in February.
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