Chinese inflation, refinery glitch gird crude

Can China Control Inflation?

For the third time in just the last five weeks the Central Bank of China raised reserve requirement on their banks. The goal of course is to try to slow lending and quell inflation. This has become a huge test and challenge for the Chinese government and even bigger if you consider the rumors that their November inflation rate will be posted at a sizzling 5.1%. And that is just the number that the Chinese government will admit. The real number most likely is much higher than that as the fallout from QE2 threw fuel on the already burning inflationary fires in China creating a potential bubble that threatens the Chinese economy. If the Chinese fail to act aggressively we could see a sharp spiral in inflation. It is not clear that the Chinese have the political will or the financial necessity to stop this inflationary tsunami.

China is showing signs that perhaps it is uncertain how to act regarding this problem. Their failure to allow their currency to float is one reason that imbalances are being created as their lack of confidence in their own growth. It is also possible that the lack of developed Chinese financial instruments is making it hard for the Chinese government to get ahead of this growing inflationary problem. If China can’t stop inflation then inflation will stop China.

For oil traders they are cautious ahead of China data as the market worries that China may go for a “shock and awe.” The reality is that China most likely will miss the mark. Yet does that mean oil will rally? This week oil traders have been met with failed breakouts and key reversals now have to wonder whether the market has priced in China’s move and the focus will shift back to the dollar.

The dollar was the driver as oil and got a pop from a much better than expected 30-year bond auction. In a week with rapidly rising yields that raised a host of questions about what that was trying to tell us about tax cuts and the health of the economic recovery. Yet the strong auction alleviated some of those fears. Just when I predicted that retail gas prices would top out, a refinery glitch is making me sweat that prediction. Barbara Powell of Bloomberg News warned me to be careful and then she reported that Hovensa LLC shut the 150,000-barrel-a-day fluid catalytic cracker at its St. Croix refinery for repairs, reducing supplies of the motor fuel available to the U.S. East Coast market in a prophetic prediction that the run in gas may not be over! We are on $3 national retail a gallon watch and we'll see if the market will be able to pull back even in spite of this latest glitch! Curses!


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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