Andy Xie: Scary Oil

On The Morgan Stanley site, Andy Xie wrote:

China’s imports declined by 1.2% YoY in the first five months of 2005. US inventory increased by 6.4% in the first quarter of 2005. However, prices averaged 46% higher in these five months of the year and 50% higher in the first quarter, on a YoY basis. How to bridge the gap between rising prices and weakening demand? The answer, I believe, is that there are too many traders engaging in price speculation. They will likely keep prices up until an market collapse. That day is not too far away, I believe.

The global economic cycle looks to have peaked out, but the deceleration has been modest so far. This is why financial speculation can still bolster the oil price. I expect economic deceleration to deepen in the fourth quarter of this year, such that the oil bubble may then burst. The trigger could be a sharp drop in China’s crude imports.

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