China cuts, but buys crude up

May 11, 2015 08:22 AM

China's economy is slowing but they are buying crude oil like it's going out of style. We have said that oil demand would exceed expectations with global economic stimulus and that is exactly what is happening. To combat a slowing economy, China cut rates by a quarter point over the weekend for the third time in the last 6 months, yet they also imported a record 7.4 million amount of oil last month passing the United States as the world's biggest oil importer.

If China is importing this much oil in a struggling economy just how much would they import if the economy starts to do better? With the Chinese government cutting rates and pumping up growth it bodes well for strong demand in China.

Demand in the United States for oil also should be strong as the U.S. jobs report hit the sweet spot for the market. We saw a strong rally in stocks after the Labor Department said the United States added 223,000 jobs and the unemployment rate was lowered to 5.4%, which is the lowest level since 2008. That means we should get a pretty good kickoff to the summer driving season. AAA says they expect U.S. travel over the Memorial Day weekend will hit 10-year high with 37.2 million Americans hitting the road traveling more than 49 miles. That's up 4.7% from last year. That comes as gas prices hover near $265.9 per gallon. Up from the lows but still more than a dollar cheaper than it was a year ago.

Yet, while demand is rising U.S. production prospects continue to show signs of slowing as the U.S. oil rig counts continue to fall. The U.S. rig count for rigs targeting oil fell, extending the string of record drops to 22 weeks in a row. When the rig count drop started 22 weeks ago many analysts argued that falling rig counts would not matter. They thought that U.S. drillers would take off older rigs and output in the U.S. would continue to rise. Now it is hard to see anyone still making that argument as production in the United States is already falling. As for the total U.S. count we are at the lowest level since June 2009.

We still maintain our bullish outlook.

The oil products look a little weak and oil seems a bit light on gusto but use the weakness to put on longer-term bullish option strategies.

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.