The European Commission shares OPEC's concern that a new speculative bubble could be forming in oil markets, and has called for greater transparency in a joint statement with the exporters' group yesterday. Analysts have been warning for months that crude's rally to US$73 a barrel has overshot the level supported by supply and demand, and OPEC and European officials singled out speculative investors on commodities exchanges for blame yesterday.
"The 2008 bubble could be repeated if adequate regulatory reforms, including greater transparency, were not made as part of an overall reshaping of the global financial sector," officials said after a meeting in Vienna. Investments from hedge funds and other non-commercial participants in oil markets were widely described as one reason crude reached record levels above $147 a barrel last summer. But even as ministers warned of volatility, prices extended a decline that has already shaved $5 off the price of a barrel in a week.
Oman sour crude traded on the Dubai Mercantile Exchange was little changed yesterday, down $0.09 to $67.91 a barrel after falling steadily from $71.15 last Thursday. West Texas Intermediate crude in New York rose slightly to $68.15 per barrel, after falling below $67 late on Monday. Crude's drop was driven by a downwards revision in global growth issued earlier this week by the World Bank, which said the world economy would shrink by 2.9 per cent this year. The World Bank had previously forecast a decline of 1.7 per cent.
The more pessimistic economic forecast suggests world consumption of oil will also not recover as quickly as markets hoped. With continued weak demand and a large amount of spare oil production capacity on the market, oil was likely to stay within a band of between $60 and $75 a barrel, said David Dugdale, an analyst at MFC Global Investment in London. "I find it hard to see a significant upside in the near-term," he said. "There is so much oil being held off the market."
Mr Dugdale said speculative interest in commodities was being driven by concerns that inflation could surge in two to three years as a result of expansions in government spending in industrialised countries. "It's not just oil, it's the industrial metals and agricultural products," he said. "One of the ways to protect yourself against that [inflation] is to be in commodities." At the meeting in Vienna, OPEC and the EU agreed that current oil prices were not yet high enough to choke off economic growth by raising costs for consumers, Andris Piebalgs, the EU Energy Commissioner, told Reuters.
"What we also discussed in our meeting is that $70 per barrel, the current price, definitely does not impede the recovery of the economy," he said. "We really believe the current situation has some good stability. If it continues it will be a chance for [economic] recovery and also guarantee that upstream investments will continue." Abdulla el Badri, the OPEC general secretary, said oil could rise as high as $80 a barrel without jeopardising an economic recovery, while Jose Maria Botelho de Vasconcelos, the organisation's president, said he would prefer $80 oil to current levels.
OPEC ministers from Kuwait and Iran have previously said they would wait until the price hit $100 a barrel before they would contemplate rolling back current limits on production. Mr el Badri said OPEC nations were currently 75 per cent compliant with quota reductions, a decrease from the 80 per cent compliance that OPEC officials boasted of earlier this year. * with Reuters firstname.lastname@example.org