The Energy Report
by Phil Flynn
China Appreciation Day
3/9/2010
The Energy Report for Tuesday, March 9, 2010
China Appreciation Day.
Oil prices are under a bit of pressure to start the day as attention turns again to the forex markets. Comments from China about their currency and their foreign exchange reserves are capturing the attention of traders across the commodity spectrum. Is it possible that the Chinese are on the verge of letting the Yuan appreciate for the first time since July of 2008?
Market Watch News reported that Chinese central bank Gov. Zhou Xiaochuan said China will in due course move away from its current currency-exchange policy, indicating Beijing doesn't plan to keep the Yuan’s de-facto peg to the U.S. dollar indefinitely. These comments, as well as comments surrounding their reserves are giving a boost to the dollar and helping to bring inflated oil back down to earth. Oil prices have been supported by China in many ways and we are just not talking about demand. China’s peg to the dollar, or should we say re-peg to the dollar, has created an excess of printed Yuan’s. The Chinese re-pegged their currency to the dollar as the rising Yuan caused China to lose manufacturing jobs as their exports became more expensive. So China went back to its tried and true formula of pegging its currency to the dollar. Chinese’s stimulus, along with the dollar peg, has created the perfect scenario for the Chinese to buy more oil driving up the price and doing no favors to the strength of the green back. The Chinese peg is another weight on the dollar making oil more expensive in dollar terms. Obviously if China lifts its dollar peg this will be bearish for oil, the question is how bearish. Well that depends how much room they give the Yuan to float and when. Gov Xiaochuan says, "Sooner or later, we will exit [these] policies. Of course maybe that means sooner rather than later.
IFAOnline says that China could end its near two-year currency peg on the dollar as soon as next month, according to respected economist Professor Nouriel Roubini. They say that Prof Roubini believes the Beijing government will authorize a 2% increase against the dollar initially, followed by a further 1%-2% strengthening over the next 12 months. "They will move by a token amount. The world is much cloudier in every dimension. They are super cautious."
Also comments about the Chinese appetite for gold may have an impact on commodities. Market watch reported that China's appetite for gold as a way to diversify its foreign-exchange reserves is limited because of the metal's poor returns over the past 30 years, the nation's foreign-exchange regulator was cited as saying in a report Tuesday. (What, doesn’t he believe G. Gordon Liddy?) Marketwatch says that Yi Gang, director of China's State Administration of Foreign Exchange, said China's gold reserve, at 1,054 metric tons, was the fifth-largest in the world, Dow Jones Newswires reported, citing comments by Yi at a press conference at the National People's Congress. But Yi downplayed any desire to add the holdings as a strategy to diversify the nation's $2.4 trillion foreign exchange stockpile. "Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold," Yi was quoted as saying. A precursor to another China purchase perhaps?
These types of stories are a reminder how the commodity bull market is built on shaky ground. When you build a base on printed money and central bank currency pegs, we know it creates bubbles that can easily burst. Make sure you get out before it does. Call me for the latest updates at 800-935-6487 email me at pflynn@pfgbest.com to open your account. And as always check me out every day on the best in business news in town, the Fox Business Network.
All is well
3/8/2010
The Energy Report for Monday, March 8, 2010
All is well. One dose of a better than expected jobs report and all our troubles just go away. Traders fearful that snow storms would have added to the countries employment woes were pleasantly surprised when Friday’s employment report seemed to suggest that it's not quite as bad as feared. The February unemployment rate held steady at 9.7%, with 36,000 jobs lost. The consensus expectations were for the unemployment rate to climb to 9.8% and for 65,000 jobs to be lost.
Now if that doesn't make you feel good enough on a Monday, then perhaps news that the French say they will stand behind Greece and their economic crises. Or maybe we have to take away some of those good feelings. Is it possible that building concerns over credit in China could wipe away these good feelings? Bloomberg News reports that, “China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases." Bloomberg says that, "The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as early as this month," Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China.
These worldwide happenings in China and Greece could be significant as it may call into question everything oil bears believe about the market.
Call me for the latest updates at 800-935-6487 or email me at pflynn@pfgbest.com to open your account and see me every day on the Fox Business Network.
Oil Held hostage Day 353
3/5/2010
Oil Held hostage Day 353.
It is almost been a year since the day the oil market was changed forever. After collapsing in a heap of deflationary despair, oil was saved by what could only be described as a historic government intervention. It was the day that the US Federal Reserve changed the world by printing more money and therefore, essentially putting a floor under the price of oil. It was the day that the Federal Reserve, after having nowhere to go on interest rates, made a move to save the banks and the economy by taking the unprecedented step to use quantitative easing in the United States to save our economy. This move of course changed the way oil moved and was valued. And to this day this government intervention and newly created Fed policy inspired the largest move in crude oil prices there has ever been even when considering geo-political events or even data on supply and demand. As we come upon the one year anniversary let’s look back and see how the global oil market was changed and what that means for our future.
A year ago the economic world was stunned. We were 6 months away from the collapse of Lehman Brothers investment bank, a failure thought almost impossible. The world started to realize that this sub-prime crisis was a much larger problem than at first glance and wasn’t going to go away very easily. The Federal Reserve was aggressive and moved the target range for the federal funds rate at 0 to 1/4 percent and even took the step to buy some bad assets like mortgage backed securities from the banks. Yet despite these moves and some short term stabilization in the market place many markets still seemed frozen.
Oil, despite a three month spike in price, appeared to be getting ready for a collapse of its own. Tight credit and still plunging demand made price prospects dim. It was obvious that because of lack of confidence and real problems with toxic assets still festering in our nation’s banks, that even a zero percent fed funds rate would not be enough to ward of deflationary fears. Demand destruction was rampant. Oh yes, oil had recovered from its January lows but that was after we had experienced the biggest peak to valley price drop in the history of the oil market reflecting what was the biggest peak to valley drop in the history of oil demand. This drop in demand reflected the fact that the economy was still contracting and we were getting ready to see more de-leveraging and more deflation.
The Fed knew this and they feared increasing economic slack here and abroad. The Fed said the risk of low inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. For oil this meant that the Fed had to stop a major price drop. Why would anyone risk buying oil today if they could get it cheaper a day later? Why buy it a day later if you could get it even cheaper still the day after that? The Fed needed to create inflation and the best way to do that was to print money. On March 18, 2009 the Federal Open Market committee changed the world when they said that, “the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.” In other words, in one sentence the Federal Reserve basically created $300 billion dollars out of thin air.
This instant money creation had a major impact on oil and how it was viewed. Instead of looking to supply and demand we now had to revalue oil on the perceived value of global current exchange rate. The Fed move helped create what was called the mother of all carry trades. Traders taking advantage of the Fed's negative interest rates sold dollars and borrowed money to essentially buy oil. The price of oil is now a creation of the Fed. Now traders had to forget everything they believed about supply and demand and wet barrels and dry barrels and had to focus on the many intricacies of currency exchange rates and global macro economics. Traders had to view a barrel of oil not so much as a commodity but as pawn.
Yet some day the stimulus will have to come off. The removal of stimulus will be a bearish event for crude. We will see the dollar rally and the fear that higher interest rates will slow demand should cause a major break in the price of oil. But after a big drop the low price of oil should create a buying binge creating the type of sizable swings and opportunities that we saw a year ago. The price at that point will be predominantly driven by improving demand but demand that has to be real, demand inspired by low prices and not artificial demand created by fiscal stimulus. Oil could fall as low as the $40 handle before we see a bottom and the prices to work higher once again. The big question is when. While we have been living off printed money for close to a year and the day is coming when the party will finally come to an end.
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