QE2 behind energy spike but could force China's hand

Ben vs. the Dragon

The Chinese moved to increase interest rates and Big Ben Bernanke struck back defending quantitative easing and bashing the Chinese. Ben forced the issue with QE2 and now the Chinese are forced to raise rates! Now the question is will the Chinese rate hikes keep coming or will it be too little too late to cool their hot inflation? Right now I would say it’s bordering on too little too late.

Ben Bernanke lashed out at China saying they are causing global problems by preventing their currency from strengthening while their economy booms. It’s just like what I said when I wrote, “The Fed felt it had no choice (but to print more money,QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency." Chinese currency manipulation may help them in the short run yet it could sow the seeds of economic problems in the future. The Chinese may feel that they have to cheat the world to be successful by controlling their currency but the truth is that 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. Chinese currency manipulation is creating a bubble that will burst if they make a misstep, causing major pain the future. Right now that may be hard to imagine as everyone on the globe is so bullish on China yet the recent correction and history is a reminder that things can change quickly.

Chinese currency manipulation was just as much a factor in the global economic meltdown as was the Fed and the U.S. government’s ill fated Fannie and Freddie excesses. China’s siphoning of jobs and wealth from other parts of the globe at a rate that was unfettered by the moderation of a rising currency helped create imbalances. 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 of course that cheap goods are not good because they are and they provide good things for the economy 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. The Fed has forced the Chinese hand. If they fail to allow their currency to float, then Mr. Bernanke will continue to print money and export inflation to China. The Chinese will have to raise rates which in a normal free market world would mean their currency can strengthen. I guess there is more than one way to get the Chinese to move to address the economic pain they are exporting to their partners.

Gasoline prices are surging, increasing prices just as travelers are getting ready to go over the river and through the woods to Grandma’s house for that Thanksgiving Day turkey. And you can in part blame it on the French. Those French refinery strikes are killing U.S. oil and gasoline imports. At the same time a spike in crude due to QE2 and tight supply is making gas prices more sensitive to crude prices. The Energy Information Administration says that 67% of what we are paying for gasoline is the cost of crude and until recently crude prices had gone rocketing up. Tight supplies on the East Cost are creating a squeeze and the front month gas price is surging ahead of the back months. The good news is that this should be temporary.

Well at least propane and natural gas prices are cheap. So when you light your garage on fire deep frying your turkey that should provide you some comfort. The EIA showed record storage but not as much as some expected. Working gas in storage was 3,843 Bcf as of Friday, Nov. 12, 2010, according to EIA estimates. This represents a net increase of 3 Bcf from the previous week. Stocks were 13 Bcf higher than last year at this time and 327 Bcf above the five-year average of 3,516 Bcf. In the East Region, stocks were 70 Bcf above the five-year average following net withdrawals of 8 Bcf. Stocks in the Producing Region were 215 Bcf above the five-year average of 1,031 Bcf after a net injection of 13 Bcf. Stocks in the West Region were 41 Bcf above the five-year average after a net drawdown of 2 Bcf. At 3,843 Bcf, total working gas is above the five-year historical range.

Late Breaking News! Harrah’s canceled its IPO citing market conditions. The real reason may be because they made the Miami Dolphins a three point favorite against the Chicago Bears! What were they thinking?

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.


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