G-20 and the price of crude oil

Oil hit a two-year high as US product and oil exports soar, but perhaps the eventual fate of oil and its price level really will be determined by the action or the inaction from the G-20 nations. Imports and exports will be on their mind as China and the US are at a standoff as to whose policies are a bigger threat to the global economic recovery. The Chinese really love QE2 because it really takes the focus off of them for being the only currency manipulator. Of course the Chinese policy of restraining their currency may help them in the short run, but it could also be the seeds of their economic problems in the fore. The Chinese may feel that they have to cheat the world to be successful by controlling their currency, but the truth is, if they want to maintain their meteoric economic growth over the long run, they would be better served by allowing the market, not the government, to moderate their economy.

The truth is that the Chinese current manipulation is creating a bubble in their own economy that will burst at some point in the future. And eventually cause major pain for them in the future. Right now of course that may be hard to imagine as everyone on the globe seems to be so bullish on China that they cannot see the major flaw in this story that is staring us right in the face. The risk of their bubble bursting is increasing everyday yet they refuse to allow their currency to float.

You see, in a way the Chinese currency manipulation was just as much a factor in the global economic meltdown as was the Fed and the US government's ill fated Fannie and Freddie excesses. China's cheating siphoned jobs and wealth from other parts of the globe at a rate that was unfettered by moderation by a rising currency. The huge influx of capital and, by default, artificially cheap goods, helped create and add to deflationary pressures in the U.S. as well as other parts of the globe. That's not to say that cheap goods are not good because they are and they provide products for the economy that we all need and want. Yet at the same time, cheap goods on the back of a major budding economic superpower currency manipulation does not allow for an orderly fall in price which exports deflation. China's overprotective currency ways have exported deflation to other parts of the globe.

China does not want to talk about that. They want to talk about the Fed and QE2. I am not thrilled with QE2 except for the fact that it may help my bottom line as I get an influx of traders that want to trade commodities. (Thank You Mr. Bernanke!) The truth is that the Fed may be reacting to the fact that the Chinese will not play fair. The Fed may feel it may have to fight fire with fire and remind the Chinese that they are not the only country in the world that can manipulate their currency. The Chinese can be outraged all they want and they know that the inflationary aspects of QE2 and the dollar drubbing aspects of QE2 takes away from their wealth as we pay them back on their bonds in deflated dollars. When you are trying to rebalance the global economy I guess Mr. Bernanke believes that turnabout is fair play. Or is turnabout fair trade.

Well, not only is the US exporting inflation to China they are exporting just about everything else. Grains, cotton and of course even oil, gasoline and diesel fuel. Exports dominated yesterday's Energy Information Agency weekly supply report leading to larger than expected drawdown across the petroleum board. The EIA reported that U.S. commercial crude oil inventories fell a much larger than expected 3.3 million barrels putting total stocks at 364.9 million barrels. Total motor gasoline inventories decreased by 1.9 million barrels last week and distillates by whopping 5.0 million barrels. The draws were driven in part by US exports, a phenomenon that I have been writing about for weeks.

Dow Jones Newswires wrote yesterday that, "Since 2006, the U.S. has moved from over 3.5 million barrels a day of net product imports to almost none. That trend is the single biggest bull indicator for U.S. refiners. The U.S. exported 10.8 million barrels of refined fuels in October 2010, up 16% from the same month last year and up 44% from October 2008, according to U.S. Energy Information Administration statistics. The increase is a result of a cheaper dollar, refinery interruptions worldwide, and South America's rising appetite for refined fuel…Meanwhile, fuel imports were 12.2 million barrels in October 2010, down 28% from 17 million barrels in October 2008, as the recession and high unemployment forced domestic drivers to cut back on commuting. While the US has traditionally been an occasional exporter of diesel fuel, its gasoline shipments are also starting to climb…The last time that the U.S. spent the year as a net petroleum products exporter was 1949."
Dow Jones also is reporting that the Organization of Petroleum Exporting Countries boosted its oil consumption views for 2010 and 2011 after upgrading its 2010 global economic forecast for the second time in a week. The revised demand assumption is likely to vindicate the group's relaxing attitude toward rising oil prices and production by its members. In its November report, OPEC upgraded by 190,000 barrels a day its forecast for world oil demand growth in 2010 to 1.3 million barrels a day. It also adjusted by 120,000 barrels a day its views for consumption growth next year to 1.2 million barrels a day.

Today we remember to give thanks to all of the veterans that have served this country with honor and have defended our freedoms at home and abroad. God Bless every one of them! The Energy Report will be off tomorrow but I will still be putting out the daily trades.

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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