China 'could trigger oil collapse'
(CNN) -- World oil prices are in a "final frenzy" ahead of a possible collapse soon, with the likely trigger a sharp drop in China's crude imports, according to noted China-watcher and economist Andy Xie.
Xie, who is the Hong Kong-based chief economist for Morgan Stanley in Asia, said in a commentary Thursday that global oil demand is weakening as the global economic cycle starts to turn down.
His warning of a price collapse later this year comes as OPEC lifts its output limits to 28 million barrels a day and oil continues to trade above $55 a barrel, within sight of the $58 record high it reached in April this year.
At the time, rival investment bank Goldman Sachs warned the oil market could be in the early stages of a "super spike" that could see prices go as high as $105 a barrel.
But Xie said on Thursday that the reason oil prices have kept rising this year in the face of weakening demand is the weight of speculative money betting on oil price moves.
"The financial sector may have become dependent on the trading profits from oil. As evidence accumulates over weakening demand and strong supply, I believe oil prices could collapse," Xie said.
On Wednesday the Organization of the Petroleum Exporting Countries, the oil cartel that supplies about 40 percent of world demand, agreed to raise its formal production quotas by 500,000 barrels a day to 28 million bpd and foreshadowed a possible further 500,000 bpd increase within weeks if prices stay high.
While most analysts say oil demand is still strong, Xie says it is weakening and that huge investment in the energy sector, including alternative energy supplies such as LNG, oil sands, coal gasification and liquefaction, should keep supply high for years.
"The hype over 'endless' energy demand from China and India has triggered a massive boom in investment in this sector," he said.
He said the production capacity that would flow from these investments "may keep a lid on oil prices for many years to come".
According to Xie, China's oil imports are declining as it switches to coal for electricity generation, while at the same time the United States' oil inventory is rising.
Xie said China's oil imports declined by 1.2 percent year on year in the first five months of 2005, while the U.S. oil inventory increased by 6.4 percent in the first quarter of 2005.
But instead of oil prices falling in the face of weakening demand, prices were up 46 percent in the five months of the year and 50 percent higher in the first quarter, on a year on year basis.
"The answer, I believe, is that there are too many oil traders engaging in oil price speculation. They will likely keep prices up until an oil market collapse. That day is not too far away, I believe," Xie said.
He said he expected deceleration in the global economic cycle to quicken in the fourth quarter of 2005, to the point where the "oil bubble" may burst.
The trigger could be a sharp drop in China's crude imports.
Xie's view is in sharp contrast to most other analysts. After the OPEC decision on output Wednesday, most said they were concerned about supply constraints in 2005.
"Even at the most optimistic estimate the spare capacity of OPEC is still too slim to reassure the market," William Davie, chief economist at energy consultancy Simmons and Co., told Reuters news agency.
Global demand is expected to hit 86.4 million bpd in the fourth quarter from a seasonal low of 82.5 million in the second quarter.
"What's scary is that we're just moving out of the lowest period of demand for the year and OPEC at full stretch was unable to keep prices down," Gary Ross of U.S. consultancy PIRA Energy said.
"World demand in the second half will average 3 million barrels a day more than in the second quarter."
But according to Xie, while there is little doubt the current energy boom has been driven by China, the demand has been distorted by China's electricity shortage.
He says when power generatation catches up with demand this year, China's oil imports will decline and may fall further in 2006.
"The economic fundamentals for oil look very weak at present and into next year," he said.
Xie said high prices were simply the result of the financial sector hanging onto a position that had become an important new source of profits.
But as evidence of weakening demand became more apparent, the market "may panic and correct in the most speculative fashion -- it could collapse."
Oil traded in New York at $55.57 on Wednesday.
