How do you stop China from consuming and make the commodity world go round? Oil prices continued their retreat even in the face of a Department of Energy supply report that looked a lot less bearish than the American Petroleum Institute version. In the face of some strong housing and durable goods data you really have to wonder. Why did crude not rally on news that just a few weeks ago would have caused a solid upward move? Was it possible that some traders thought that perhaps the API data seemed more credible that the DOE data? Well I think that is part of it. I mean you when you see crude oil imports rise by 1.1 million barrels a day and refinery runs up slightly and still we have weak demand, it makes you wonder where all those imports ended up.
Yet the real issue in the oil market is news out of China that seems to suggest the government is concerned that the recent spurt in economic and commodity demand growth might be on an unsustainable path. The Chinese government says it is taking steps to try to cool growth in the commodity hungry industries like steel, cement, coal, glass and power by studying ways to curb overcapacity. This is a sign that the Chinese government is worried that some of their strongest commodity consuming sectors may be growing too fast and could create a bubble unless the government reigns in its excessive growth. This type of talk weighed on China stocks and gave strength to the dollar and at the same time lowered demand growth expectations across a wide array of commodities.
Sort of like what is happening right now in the U.S. biofuels industry. A must read in today’s Wall Street Journal says that “the biofuels revolution that promised to reduce America's dependence on foreign oil is fizzling out.” The Journal quotes the National Biodiesel Board as saying, “Two-thirds of U.S. biodiesel production capacity now sits unused. The Journal says, “Biodiesel, a crucial part of government efforts to develop alternative fuels for trucks and factories, has been hit hard by the recession and falling oil prices. The global credit crisis, a glut of capacity, lower oil prices and delayed government rule changes on fuel mixes are threatening the viability of two of the three main biofuel sectors -- biodiesel and next-generation fuels derived from feedstocks other than food. Ethanol, the largest biofuel sector, is also in financial trouble, although longstanding government support will likely protect it.”
The Journal goes on saying, “Producers of next-generation biofuels -- those using nonfood renewable materials such as grasses, cornstalks and sugarcane stalks -- are finding it tough to attract investment and ramp up production to an industrial scale. The sector suffered a major setback this summer after a federal jury ruled that Cello Energy of Alabama, a plant-fiber-based biofuel producer, had defrauded investors. Backed by venture capitalist Vinod Khosla, Cello was expected to supply 70% of the 100.7 million gallons of cellulosic biofuels that the Environmental Protection Agency planned to blend into the U.S. fuel supply next year. The alleged fraud will almost certainly prevent the EPA from meeting its targets next year, energy analysts say.
The wave of biodiesel failures and Cello's inability to produce even a fraction of what it expected have spooked private investors, which could further delay technology breakthroughs and derail the government's green energy objectives.” Check it out!
Make sure you are signed up for the Phil Flynn energy blast.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.
