China banks and a Bernanke bounce.
The oil bull got a new lease on life helped in part by a refinery fire and an oil spill but mainly because of that old Bernanke bounce. It appeared that Fed Chairman Ben Bernanke's appointment is now more likely and the oil market seems to love what that says about the status quo of cheap money. Of course the growing concerns over the Chinese banking sector and the continuing tightening of Chinese credit may quickly dampen some of that bullish enthusiasm.
Overnight Bloomberg News reported that Chinese banks have begun restricting new loans, responding to a push by regulators to contain credit after a surge in lending in the first half of this month. Bloomberg says that, “China’s benchmark stock index fell to a three-month low today on concern a government clampdown on lending will slow the world’s third-largest economy." The concern for the energy markets is that this will slow manufacturing leading to a major slowdown in oil demand growth for the country. Goldman Sachs downgraded the Chinese banking sector and the Chinese stock market fell 1.1%.
There are also are also concerns in Japan. Market Watch reports that Standard & Poor's Ratings Services said Tuesday that it's placed a negative outlook on Japan's AA sovereign long-term credit rating, saying it would issue a downgrade to AA-, "if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country's high government debt burden and its weak demographic profile." The agency said it was concerned about Japan's diminishing economic policy flexibility to deal with its growing debt levels and deflationary pressures. It said, "the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than we had previously expected," but added that if, "we conclude that government policies, either on the fiscal side or structural reform side, will moderate the government's debt trajectory, the ratings could stabilize at the current levels." It said that even if a downgrade does occur, however, Japan will likely remain "in the AA category."
Yesterday we had some non-macro economic support as well. Bloomberg News’ Barbara Powell reported that we saw a big rally in RBOB gasoline in part because of a fire at a Louisiana refinery and a Texas ship channel was closed by a tanker accident. Bloomberg said that Motiva reported that a leak in a crude unit at its Norco, Louisiana, refinery sparked a Jan. 22 fire. At the same time, the Coast Guard said the Sabine Neches Waterway, which serves four refineries that together process about 6.5% of U.S. capacity, may reopen by week’s end after the Jan. 23 accident. Gasoline for February delivery rose 3.51¢, or 1.8%, to settle at $2.0008 a gallon on the New York Mercantile Exchange, the first increase in four trading days. Prices fell 3.9% last week. That is bad news for gas consumers but the good news is that retail gas prices fell 0.4¢ to $2.709 a gallon according to AAA, the nation’s biggest motoring organization.
How about some exciting OPEC news! Dow Jones is reporting that Qatar's oil minister is saying OPEC was unlikely to change crude oil production levels at its upcoming meeting. Ok maybe it wasn’t that exciting. Well how about this? OPEC continues to cheat on oil production. Petro logistics reported last week OPEC supplied 29.12 million barrels a day last month. Ok, maybe there is no exciting OPEC news after all.
Long term we are still very bearish on crude. With signs that demand in China may slow down and a glut of spare production capacity and weak global demand the market should get heavy. The other factor is the U.S. dollar that more and more looks like it is making a bottom. Heating oil and RBOB should resume their downtrends as well. Natural gas may offer some surprises as spreading activity between petroleum and natural gas may give it some support.
So to the long term players, we are still looking for the $40 handle on crude. For short-term traders, $74.00 is the first big support and it looks like it is going to be tested.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.