Thursday, April 07, 2005

How long will speculation last?

Andy Xie of Morgan Stanley has a warning:
Chinese demand cannot serve as an excuse anymore. China’s crude imports in Jan–Feb 2005 declined by 12.8% from the same period last year (see Oil vs. Coal, January 17, 2005). China’s oil demand in the past two years has been exaggerated by the shortage of its electricity production capacity. As the problem is being corrected through aggressive investment, China’s oil demand is softening also. However, it is virtually impossible to explain this story to an oil trader. The demand story for oil traders is that 1.3 billion Chinese are buying cars. The irony is that China’s car sales are declining.

Financial speculation is the key driver of oil prices, in my view. Oil demand or supply is inelastic in the short term. Extra demand from financial speculators can push up prices significantly. There has been an uptrend in oil prices during the current growth cycle, as in any growth cycle. The low interest rate so late in the cycle is causing the speculation in oil and exaggerating the upward price momentum. I suspect that financial speculation has added around US$15 per barrel to crude prices.
I am not sure what to make of this.


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