Losing the Inflation Battle
Do you remember when a blowout Chinese GDP number would push oil prices higher? Well not any longer as China reports a much hotter than 9.8% reading compared to expectations of 9.2%. The news sent oil prices lower as the odds of more China monetary policy is going higher.
While the market was fixated on Chinese inflation data, that number actually came in tamer then some forecasts had expected. The Chinese said that consumer prices rose at a 4.6% clip down from November's 5.1% increase. Yet is the drop inflation really what it seems? That number was forced down by the Chinese government by releasing grain and oil reserves and lowering exports of gasoline in a desperate attempt to tame prices. The intervention worked in the short run, but the truth is it only serves to create even more inflationary pressures in the future.
Yet we see the impact of that stimulus and artificially suppressing prices that created a surge in demand and economic activity driving their GDP to those lofty levels. By just artificially lowering prices by flooding the market with more supply will only created more demand and more pressure in the future. The Chinese, to keep up this charade, will have to buy more and more commodities from the global market to keep it going. The more artificially cheap commodities they feed to their ravenous marketplace will only leave the country wanting more and more. This of course would lead to an eventual monster bubble that if popped could take China's economy down.
The market already realizes what the Chinese should do. China needs to take more significant steps to moderate their explosive growth and inflation. They must realize that you just can't sweep inflation under the rug and play with the numbers or there will be greater risk that these pressures will come back to bite you in the future. If you encourage more demand for commodities you will be dooming yourself to pay record high prices for those commodities only to feed a bubble that will burst and leave you broke.
This is the polar opposite of what helped build China's meteoric growth in the early part of the last decade developing an economy on record low commodity prices. There was a time when I used to tell people to watch China's GDP as an indicator of future oil demand growth and an indicator of sharply higher oil prices in the future yet few wanted to heed it. Now we are seeing early warning signs that unless the Chinese act fast, their growth will be unsustainable unless they decide to deal with the inflationary elephant in the room.
The oil market also has to deal with a very bearish American Petroleum Institute report. The API defied market expectations and a leaky Alaskan pipeline and reported a build in crude supply. The API blindsided analysts by reporting a whopping 3.53 million barrel build leaving bulls to scramble trying to figure out how that could have happened. Most will defer to the Energy Information Agency version which if it agrees with the API will be a significantly bearish development.
The API also reported a build in distillate supply to the tune of 940,000 barrel and an increase in gas supply of 1.87 million barrel leaving consumers screaming asking why prices continue to go higher. Global pressures are in part the answer as Brent crude soars and Asian demand is strong and Europe is still cold.
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 firstname.lastname@example.org.