The Energy Report Monday November 11, 2008
Does China have another $580 billion lying around? Well they may need it to help support the commodities and the commodity stocks for another day. Yesterday Oil and the commodities got all excited as China announce a massive $580 billion stimulus plan yet oil gave up all of the China inspired gains before closing higher on the day. Is it possible that the market does not believe that is going to be enough? Just today Dow Jones reported that China's oil products imports fell to their lowest level in at least two years last month as low demand and price volatility curbed purchases of foreign fuel oil. Not only that Chinas domestic stocks of gasoline and diesel hit record highs. Are we talking about potential glut here?
And it isn’t just petroleum, it is coal as well. Dow Jones reports that coal stocks at China's key coal transportation port in northern Qinhuangdao have reached a record-high level. They have so much coal they do not know where to put it as the amount of coal they have is in excess of the port's maximum designed capacity. In fact it is possible that the China domestic coal market could have a price collapse as they look to move excess supply. What a far cry from a year ago when in they were in the middle of winter coal shortage. Now some of that was due to transportation and the weather. China did have the coldest winter in over 100 years as global warming let them down, still the talk of a glut of coal is very telling as to the extent of China’s economic slowdown.
Let’s face it, if china is slowing down to the extent it seems to be then commodity bulls have to question every basic tenant of their belief that has built the bull market for oil. Sure it is possible that at some point this $580 billion package there may be new money or may not help improve the economy but it will not happen overnight.
And there may be broader implications for the global economy and for people in the U.S. If china spends massive amounts of cash to rebuild their economy it is possible that their appetite for U.S. debt will diminish. That comes at a time when the U.S. government has to issue more debt to help pay for the bailout of our own financial system. China normally would be a major purchaser of that debt and their lack of participation may lead to higher borrowing costs in the U.S. and perhaps higher interest rates. Higher rates mean a stronger dollar which could offset some of the commodity price demand impact as well as current over supply. So even if demand for commodities pick up it may not impact prices as much as the previous environment that we were in.
Of course that is still in the future. For now though the market is skeptical that this cash influx will have an immediate commodity demand impact. The market place is still going through a global realignment. Still at the end of the day it will not be china that leads the globe out of this economic crisis it will be the United States. The Chinese pseudo communist capitalistic system is still reliant on a strong global economy to continue their growth. Exports to Europe and the U.S. are critical to their futures and domestic spending though helpful ultimately is going to be a stop gap measure to tie the Chinese over until the U.S. gets its act together.
Speaking of realignment, it is also time to realign more of your portfolio to commodities. In bear markets there is no better way to protect your falling stock portfolio then by correlating some of it with short commodities strategies.
Short December Crude approx 7439 on the rollover! Lower stop to 7110!
Buy December Heat Oil at 18000 stop 17600
Sell Dec RBOB at 14600 stop 15400
Buy Dec natural gas at 515 stop 500
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be at 800-935-6487.