Oil pressured as China ups reserve requirements

Inflation Fever
Rising oil and food prices are finally grabbing attention and China took more steps to reel it in as they seem to be fighting this foe on the front lines. China followed up on its Christmas surprise by again raising the reserve requirements on banks. The move shows that China is desperate to combat inflation, especially after their foreign exchange reserves surged to an all time high.

This follows a day where U.S. Producer Prices came in hotter than expected and after European Central Bank President Jean Claude Trichet warned about rising inflation in the Euro Zone. Even Fed Chairman Ben Bernanke said the risks of deflation have receded signaling that more than likely we should expect no more expansion of extraordinary stimulus.

According to recent oil import data, China is still the world's second largest oil consumer as it imported 4.93 million barrels per day. News that China is taking steps to slow things down of course is hurting oil prices as the market grapples with the world's sudden discovery of inflation will impact demand. The World Bank has already dramatically lowered its expectation for China's GDP to 8.7 down from 10 percent this year. Now with China raising reserve requirements this projection seems more ominous.

This type of subdued growth compared to more optimistic China growth expectations should lower demand in China, which now is the world's largest economy as far as purchasing power goes. Bloomberg News reported that China overtook the U.S. last year as the world's biggest economy when measured in terms of purchasing power, according to Arvind Subramanian, senior fellow at the Peterson Institute for International Economics in Washington. They say the size of China's economy in 2010 was $14.8 trillion, compared with the U.S.'s $14.6 trillion, when accounting for the countries' differing costs of living.

This news will be balanced with the continuing saga of the Trans Alaska pipeline. While running at reduced rates, worries of an extended shut down for pure political purposes are making the rounds. Obviously adding to the pain of the economy to make a cheap political point really should be beyond the pale or the barrel anyway.

Natural gas inventories may be signaling the first signs of stress of the winter season. The EIA reported that working gas in storage was 2,959 bcf and this represents ending at a net decline of 138 bcf from the previous week. While supplies are still 5.8% above the five year average the year over year number is tight! The EIA says that supply is only 2.4 percent above year ago levels. If we fall below year ago levels, then we should see a pop. Weather will be key. If we get cold that could happen driving gas prices to year ago price levels.

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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