Energy report: China gets tough

The Great Fire Wall of China

Google is 99.9% sure it is leaving China as the oil market not only has to deal with the upcoming Fed and OPEC meetings but will also have to focus on increasing tensions between the U.S. and China.. The week ahead in energy will at least be eventful. China is upset with the U.S. and President Obama's calls on the Chinese to allow their currency to rise. China has been very busy over the weekend giving an ultimatum to Google to edit their content or leave, which they most likely will do and they went out and bought a stake in an Argentinean oil company. China Premier Wen Jiabao gave a press conference that was very critical of the Obama administration. In addition to bashing the U.S. on arms sales to Taiwan and the President meeting with the Dali lama he had some tough words about his currency. Reacting to President Obama's call to raise their currency the Premier said as reported by the Wall Street Journal that "I can understand that some countries want to increase their share of exports," Mr. Wen said, in an apparent reference to the Obama administration's goal. "What I don't understand is the practice of depreciating one's own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one's own exports," he added. "This kind of practice I think is a kind of trade protectionism." This of course is nothing like information protectionism.

Of course we also have the OPEC meeting riding high on $80 a barrel plus oil and cheating on production like there is no tomorrow. Bloomberg News Reports that OPEC is increasing oil drilling at the fastest rate in 2 1/2 years even as production exceeds its quotas by the equivalent of a supertanker of crude a day and delegates prepare to pledge no increase in output. The 12-nation group boosted its number of oil and gas rigs 8.4% in January and February, the biggest two-month gain since June 2007, and data from Baker Hughes Inc. show. OPEC members excluding Iraq pumped 26.8 million barrels a day last month, 1.9 million more than targeted, data compiled by Bloomberg show. Shipments will rise again this month, according to tanker- tracker Oil Movements.

That leaves us to the Fed. Will they get out of the business of supporting oil prices? I mean change the language in their statement? The Wall Street Journal reports that as Federal Reserve officials prepare for a policy meeting on Tuesday, some bond and options investors are placing bets that they will decide to shed their commitment to keep interest rates low for an "extended period." Investors are gambling a pickup in U.S. economic activity will convince the Fed to hint at plans to raise the key short-term fed funds rate later this year. The action has been spread across Eurodollar futures contracts, fed funds futures and Treasury notes, where trading and price moves all point to increased expectations for higher interest rates. The market moves point in part to the disconnect between Washington and Wall Street. The Fed has been signaling to the market that it won't change its language, though some traders believe they can profit by betting the language will change.

For the past 12 months, the Fed has said that the economic outlook warrants keeping interest rates "exceptionally low" for an "extended period." Rates have been near zero since December 2008. Many Fed officials believe that the recovery is still fragile and it's too early to start preparing the market for an eventual increase in rates. They believe that low inflation also gives them breathing room. But after the labor market's resilient showing in February, the market started pricing in even earlier rate increases.

In the Eurodollar market, traders are pricing in higher short-term yields and lower prices, and moves in some contracts implies they expect a change in the "extended period" wording.

Traders said put options outstanding on April, May and June contracts-which give the buyer the right, but not the obligation, to sell-jumped by almost 350,000 on Wednesday and Thursday, an unusually large number for a two-day period. These options allow holders to make money as rate expectations move higher. Similar trades have cropped up time and again as the economy recovers, only to end up losing money. Oil prices need help to hang onto the status quo. Despite the recent run oil has failed to break out. As I have said that oil is still in a long term trading range and more than likely we are at the top of the range. My long term technical analysis still projects a breakout to the downside yet I feel that until us breakout taking long term positions is folly at this point.

We have been buying breaks and selling rallies taking advantage of sizeable trading ranges.

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 pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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