Overheated Oil Prices May Threaten Economic Recovery

With crude oil prices sloshing around at $85 a barrel, a new reality may be setting in that could threaten the recoveries of the world's major economies, according to the International Energy Agency's monthly oil market report, which was released Tuesday.

The IEA noted that crude oil futures hit 18-month highs earlier in April, as expectations rose regarding an economic recovery and stronger demand for oil. That said, the agency is wringing its hands over concerns that the oil market remains overheated.

"Underlying concerns remain that oil markets are overheated with WTI and Brent both recently trading around $85/bbl," the IEA stated in highlights of its report. West Texas Intermediate (WTI) and Brent are varieties of crude, both of which are used as benchmarks in setting oil prices.

Goldman Sachs, for example, is forecasting that crude oil could rise to $94.50 a barrel in the next three months and as high as $99 in 12 months. But the investment firm has a different take on the situation and believes an economic recovery could support such prices, which have seen a 25% increase over the past two months.

"Ultimately, things might turn messy for producers if $80-100 (per barrel) is merely seen as the new $60-80 (per barrel), stunting economic recovery while prompting resurgent non-oil and non-OPEC supply investment," according to the full IEA report, cited by the Associated Press.

As crude oil prices rose, the global supply of crude oil fell to 86.6 million barrels a day in March, down 220,000 barrels per day from the previous month.

Crude production took its biggest monthly hit in more than a year, dropping to 29 million barrels a day, down 190,000 barrels per day over the previous month. The IEA attributed the decline to a 10% drop in Iraqi crude production as opposed to an effort by members of OPEC to rein in excess output.

The IEA expects output to increase to 86.6 million barrels a day this year, up from 84.9 million barrels last year.