DUBAI/SINGAPORE The strength of the global economic recovery and the winding down of government spending programs are among the biggest tests for the oil market that experts will puzzle over at a meeting this week in Tokyo.
Governments have spent big on stimulus packages to revive sick economies during the global downturn. The end of those injections, the risk of worsening inflation and tightening fiscal policy threaten a modest oil demand recovery in 2010 after two years in which the world has burned less fuel.
"In the short-term, uncertainty persists over the path of the economic recovery, the likely phase-down of stimulus programs, and the extent to which genuine demand destruction has occurred (in developed countries)," David Fyfe, head of the oil industry and markets division at the Paris-based International Energy Agency (IEA), told Reuters.
China, the world's second-largest oil consumer, has burned more fuel even as global oil demand fell. But it has already rattled global oil markets with measures pointing toward fiscal tightening that could slow both its economy and oil demand.
"There is a difficult balance to strike for governments, not to remove stimulus before 'genuine demand' has recovered, while at the same time wanting to avoid a longer term build-up of debt and an overheating economy and artificially inflated energy growth," Fyfe added.
Investment bankers, oil firm executives, industry analysts and officials will kick off the two-day meeting in the Japanese capital on Thursday to discuss factors that affect prices in the world's largest commodity market.
Speculation in oil markets will also feature in Tokyo, the third in a series of price formation workshops held by the IEA, which advises 28 industrialized countries on energy. Previous sessions took place in Paris in 2008 and New York in 2004.
The debate over how speculation and fundamentals affect oil prices continues to rumble, although it is less intense than when oil prices hit a record high near $150 a barrel in July 2008.
"We have believed, and still believe, that financial flows do have an influence on prices," said Michael Wittner, global head of energy research at Societe Generale.
"Investors go into commodities and they want to see a bullish long-term story. They can influence prices on an hourly, daily, weekly, monthly or even on a yearly basis," Wittner said.
Producers and consumers had blamed each other for the 2008 price spike. Oil consumers urged the Organization of the Petroleum Exporting Countries (OPEC) to boost output, while members of the grouping asked consumers to take measures against speculators, including tighter regulation.
Investment institutions have since come under intense pressure from governments for their role in the financial meltdown, warming sentiment for greater regulation.
U.S. regulators have proposed measures to limit positions that investors can take in the oil market, and U.S. President Barack Obama has taken aim at banks making market bets.
MARKET MORE RATIONAL?
But while bankers stay in the public focus, oil markets have grabbed fewer headlines than two years ago. Oil has traded in a tight range between $68 and $84 since October, on either side of the $75 top oil exporter Saudi Arabia sees as fair to both consumers and producers.
This price and the prevailing market structure helped finance the storage of high inventories that built up as oil demand contracted with the recession, while allowing long-term investment to develop additional supplies, said Lawrence Eagles, global head of commodities research at J.P. Morgan.
For a graphic on oil prices and inventories, click:
Investors in the oil market have become more sophisticated, as have the methods to hedge risk used by firms with exposure to oil, Eagles added.
A low interest rate environment has allowed investors to make an investment for the longer term, he added.
Revisions to International Energy Agency (IEA) data have shown that the oil markets were much tighter in the run up to the record price than previously thought, Eagles said.
"Everyone involved in trading at the time could feel it was tight. But when you sat down with the data it looked less tight," he said.
"Now it appears we sustained over that period a quite substantial deficit (in supply). Evolving data has shown that fundamentals played a far larger role in the price spike than anything else."
Experts in Tokyo will look at the availability of oil-market data, as the need for more information from emerging economies, especially China, would become more pressing as those countries increase their share in global markets.
Currency fluctuations will also figure as possible determinants of oil price moves.
The inverse correlation between the dollar's value and the cost of oil prevailed for most of the past three years, said Societe Generale's Wittner.
For graphic on oil price/dollar correlation, click:
This year, the IEA expects emerging economies to account for 47 percent of demand, up 10 percentage points from a decade ago. Eagles expects demand from emerging economies to surpass demand from rich nations in 2013.
(Editing by Ramthan Hussain)