Morgan Stanley: Oil prices may crash

Economist sees slackening global demand, increased use of alternative energy and market correction.

June 16, 2005: 6:53 AM EDT


SINGAPORE (Reuters) - The oil market may be quickly headed for a massive crash as global economic growth slackens, alternative energy gains ground and financial traders sense a price peak, an economist with Morgan Stanley said Thursday.

His projection for a multi-year bear cycle stands in sharp contrast to the super-spike scenario envisioned three months ago by Goldman Sachs, Morgan Stanley's arch-rival in the world of oil derivatives trading, where they are the two biggest players.

"As evidence of weakening demand and ample supply accumulates, the market may panic," Andy Xie, Greater China economist in Hong Kong, said in a report. "I believe it could correct in the most speculative fashion -- it could collapse."

Oil prices have extended their two-year boom into the first half of 2005, gaining 28 percent since January to top $55 a barrel amid fears that already maxed-out refiners will struggle to supply enough fuel in the second half of the year.

In March, Goldman Sachs Global Investment Research issued a report that said oil markets had entered a "super-spike" period that could see 1970's-style price surges as high as $105.

The report said resilient demand in the United States and China, despite high prices, had forced the firm to revise its forecasts upward, predicting it could take several years of high prices to curb demand and rebuild spare capacity in the taut system.

But Morgan's Xie said increased efficiency and conservation measures and the viability of alternatives like oil sands and liquefied gas and coal was already undercutting demand for oil.

"As energy producers step up production from alternative energy sources...oil prices could stay depressed for many years when the current economic cycle turns down," he said.

A deceleration in the world economy could gather pace in the fourth quarter, causing the oil bubble to burst, he said.
China is key

In particular demand from China, which accounted for more than a third of the increase in global demand last year, may have been inflated by an overheating economy.

China's total oil imports eased 1.2 percent in the first five months of 2005, Xie said, and they could fall further next year as new power plants help prevent the electricity outages that inflated demand for diesel and fuel oil in 2004.

Last year's fall in the U.S. dollar was often cited as a factor behind higher oil prices, since it makes fuel less expensive in non-dollar economies and as it wooed investment from speculative hedge funds. But with the greenback near an eight-month high versus the euro, that too has faded.

As all these factors gather pace, the market may ultimately be doomed to crash by the growing dependence of financial institutions on oil trading profits, Xie writes.

"As oil has worked for so long, the financial community is hanging on to this position," he says. Speculative funds have been increasingly active in commodity markets over the past two years and are often blamed by OPEC for keeping prices high.

"They will likely keep prices up until an oil market collapse. That day is not too far away, I believe... What is occurring now is probably the final frenzy, in my view."

Most fundamental oil analysts are less bearish than Xie, who gave no specific forecasts for oil prices.

A rolling Reuters poll of 29 analysts forecast an average U.S. crude price of $48.71 a barrel this year and $44.18 a barrel next year. Prices have averaged $51.05 so far this year.

Bom dia

Creio que nos próximos dias devemos começar a assistir à exaustão deste movimento de subida. As próximas resistências podem dar o passo para uma correcção, para já limitada, mas que no médio prazo poderá fazer estragos. O teste à linha de suporte ascendente de médio prazo deverá ser feita nos próximos meses. A sua ruptura poderá atirar os preços para a casa dos 40 dollars.

A referência à relação do oil com o dollar é no meu ponto de vista bastante válida. E a valorização do dollar estará para ficar no médio/longo prazo.

Cumprimentos

MigRod