Oil rallies as China raises reserve requirements

February 17, 2011 06:00 PM

If at first you don't succeed, give it another go! China tries again to battle inflation as the Chinese central bank raised their bank reserve requirement ratio (RRR) by 0.50% to 19.5%. This latest move comes after the commodity markets laughed off its measly 0.25% increase in their key interest rate only last week. The timing again coincides with another holiday. Ok, maybe President's Day is a stretch, but the Chinese seem to move around holidays.

In reality, they moved ahead of the G20 meetings where global leaders will pressure the Chinese to raise the value of their currency as their reluctance to do so is sparking global food and energy inflation. The Chinese of course say they won't be bullied into raising their currency faster than they want to but that arrogance may lead to their economy's downfall. In fact global commodity markets are only showing a modest reaction to the China move and sold off a little do to the surprise aspect. Yet if recent market reactions are any guide, the commodity bulls will say thank you very much for the buying opportunity.

Uncertainty in the fluidity of the constantly changing picture in the Middle East sent the soon to be delivered WTI futures contract rallying despite a record supply rebound as its partner in risk aversion, Brent crude, retreated after the spread soared to a record high.

The warships that Iranian TV boasted would be sailing through the Suez Canal never showed up and what Israel called a proactive act will not happen.

The oil risk premium receded despite the fact that Bahrain was in turmoil and borders the very important oil route, the Straits of Hormuz. It will be interesting to see if the risk premium comes back into the close.

What a better way to start the weekend than with a little moral hazard. Another factor to focus on is the possibility of a bailout for Portugal. Bailouts are bullish for oil! With the bailout happy G20, that is another reason to be long oil over the weekend.

From the “No Kidding!” department, DOW Jones reports that IEA head Nobuo Tanaka said that the global economy would suffer from sustained oil prices of $100 a barrel. Natural gas continues to sink on warm weather! Still beware of a profit taking rally as the market is extremely oversold.

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.