Oil sells off after China raises rates

February 7, 2011 06:00 PM

China Goes Lunar!

Talk about some fireworks to end the Chinese Lunar New Year celebration! China raises rates and oil sells off. The People's Bank of China said it will raise the one-year yuan lending rate to 6.06% from 5.81%, and the one-year yuan deposit rate to 3.00% from 2.75%. It is clear the government in China is becoming very uneasy with the recent inflationary pressures that have been building in this nation and could slow the demand that has kept oil so strong. The Fed policy of QE2 has helped drive commodity inflation and demand in the emerging markets and the Chinese are looking to cool off these hot prices before it bubbles over.

Are things still bubbling over in Egypt? With Hosni Mubarak still in power and the demonstrators not out in force, Egypt's problems were kicked down a notch. The crude curves as a stronger dollar and the sense that Egypt may be more of a problem a few months from now, kicked the crude longs out of the front end and into the back. The rollover is due in part because the market believes Mr. Mubarak bought time but senses that this is far from over. Opposition leaders are saying they are preparing for a Million Man March 2 to try and regain the momentum.

There is no inflation in the U.S. unless you have to eat or fill up your gas tank. Gas prices soared to the highest level since October of 2008. Gas prices, according the Energy Information Agency rose 3.1 cents to 3.00 dollars and 13.2 per gallon. Normally when much of the nation is blanketed with snow, demand and prices fall. The surge in gas prices came as motorists in the Midwest had nowhere to go and refineries were falling like snowflakes. Refineries have had a run of bad luck and winter weather may in part have something to do with it.

Gas refiners are having a very bad winter. Perhaps the refinery outage that hurt the most was the February 3 outage of Valero Energy Corp.'s McKee oil refinery in Sunray, Texas due to the crazy weather they have been having in Texas. Still it appears that the crazy weather shut-down that McKee refiner experienced is not the only one that has had problems. It was a bad week for refineries all around.

ExxonMobil Corp. reported failure of equipment at its 344,500 barrels a day refinery in Beaumont, Texas. Apparently they slowed production after emissions that were routed to the catalytic hydrotreater creating a flare. Which is not a not a good thing if you are working around hydro carbons. We also had Alon USA shut a sulfur recovery units at its oil refinery in Big Spring, Texas due to another flaring incident. And of course you have seasonal maintenance going on. Exxon Mobil Corp. shut down a key gasoline-making unit at its joint-venture refinery in Chalmette, La. on January 22. Chalmette Refining LLC is jointly owned by Exxon Mobil and Venezuelan state oil company Petroleos de Venezuela SA.

Of course it is not just the United States that is having problems. Shells Pernis Europes refinery will have a whole section of that refinery shut down until the end of February. Not only will that tighten supply, but it also will increase the demand for higher quality crude in Europe.

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 is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.