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Reuters Real, not speculative reasons for record oil: IEA Tuesday July 1, 6:41 am ET By Barbara Lewis
LONDON (Reuters) - It is easy to blame speculation for the doubling of oil prices over the past 12 months, but the real reasons are strong demand growth, coupled with shortages of supply and refining capacity, the IEA said on Tuesday. ADVERTISEMENT In its Medium-Term Oil Market Report, the International Energy Agency (IEA) said there was little evidence speculation had distorted prices over both the longer and shorter term, although it noted a lack of data on inventory levels, as well as on financial market participants.
"Blaming speculation is an easy solution which avoids taking the necessary steps to improve supply-side access and investment or to implement measures to improve energy efficiency," the IEA concluded.
It placed the emphasis on the sheer number of factors responsible for driving up oil, which hit a record of close to $144 a barrel on Monday.
Perhaps the most important driver is the strain on supplies of distillates, which include diesel and heating fuel.
"Distillate tightness has been extreme in late 2007-8 and may have been the single largest factor," the report said.
Power outages, including in China and South Africa, helped to create "a perfect storm" and increased the demand for distillates for back-up generation, it added.
Another ingredient in the rally is the weakness of the U.S. dollar, which has had an impact on oil priced in dollars, but oil denominated in other currencies is also close to records, showing other factors are boosting prices, the IEA said.
ARGUMENTS FOR, AGAINST
Turning to speculators, many, including members of the Organization of the Petroleum Exporting Countries, have suggested there is a link and just as many, including senior oil company executives -- and the IEA -- have largely dismissed it.
Since 2003, the level of money from investors, such as pensions and insurers, in oil and other commodity markets has risen from an estimated $15 billion to $260 billion, partly because of the rise in value of the underlying assets and partly because new money has flowed in.
Even if this has unbalanced the market in the past, the IEA said there was no evidence the investment cash was doing so now.
"There is no sign of distortions in the physical market," it said. It also noted a price surge in commodities that should be immune to speculation because they are not traded on futures markets.
Speculators have been blamed for driving up oil for prompt delivery and also for delivery far into the future, but the IEA said there was a strong case for sustained high prices.
"There is no clear sign of a recovery in crude oil capacity over the medium term. In other words, high forward prices are necessary to encourage a supply response and to ensure that demand is restrained."
Whether or not speculation has driven prices, the IEA said speculators have a valuable market role in both the short and longer term -- providing liquidity, so producers and consumers can hedge to reduce price risk.
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