US easy money risks creating oil bubble – IEA

Easy-money moves by the United States are pumping up the oil price to around $90 and risk causing asset bubbles, but slowing demand growth should contain the price, the IEA said on Friday.

Strong demand in recent months plus the US economic stimulus moves “have stoked expectations of inexorably higher prices even though the framework of market fundamentals for next year, to us, still looks fairly comfortable,” the International Energy Agency said.

But with current demand strength “largely transient”, growth expected to recede in the coming year, and plentiful stocks, the IEA concluded “the recent rise in oil prices may be temporary.” The agency lifted its forecast for global oil demand growth this year to 2.8 per cent, but still expects growth to slow to 1.4 per cent next year.

And although leaders of the Group of 20 powers pledged on Friday at their Seoul summit to avoid a currency war of competitive devaluations, the IEA pointed out that US plans to pump $600 billion risks putting pressure on emerging economies and markets.

The US stimulus measures have led to a slide in the value of the dollar, driving up the price of dollar-denominated oil.

They could also encourage a shift into commodities and emerging market investments as investors seek greater returns and a hedge against a falling greenback, fostering a price bubble, the agency noted.

Whatever the ultimate effects of the US stimulus measures, the IEA said: “traders appear to have already cast their bets on an expected increase in capital flows into emerging markets and/or commodities that would lead to stronger demand and higher prices.”

It warned: “The dangers of a renewed price bubble, borne of perceptions on the timing of ‘inevitably’ tightening markets, seem clear.”

In addition to a weakening dollar forcing emerging countries into accepting currency appreciation or inflation, particularly for those with a peg to the US dollar, those which subsidise domestic oil consumption could face increased demand and pressure on their budgets, the IEA noted.

The IEA raised its global oil demand forecast for 2010 to an average of 87.3 million barrels per day, for 2.8 per cent annual growth or an increase of 2.3 mbd.

The agency noted in its monthly Oil Market Report that the growth of global oil demand is now running at the highest rate since the late 1970s, except for a spurt in 2004.

Nevertheless the Paris-based energy monitoring and strategy arm of the Organisation for Economic Cooperation and Development held its 2011 demand forecast broadly unchanged at 1.4 percent growth or an increase of 1.2 mbd to an average of 88.5 mbd.

It forecast that in the advanced economies of the OECD area, a structural decline in demand for oil and oil products would again become apparent from 2011.

Oil demand in these rich countries would fall by 0.7 per cent.

By contrast, demand in emerging economies outside the OECD would continue to show significant growth, but even this would slow to 3.7 per cent from 4.7 per cent in 2010.

Referring to the new huge influence in the oil market, China, the IEA said that growth of oil demand there could remain strong. The latest data suggested that the much-awaited gradual slowdown of the Chinese economy may be less than expected, “thus putting a floor under oil demand growth.”