China Bubbles

The Energy Report for Thursday, January 21, 2010

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China bubbles in the wine. Makes me happy, makes me feel fine. The day after China told several major Chinese lending institutions banks to raise their reserve requirement ratio by half a percentage point, the Chinese economy continues to bubble. The National Bureau of Statistics of China reported that the Chinese economy grew at an expanded at a rate of 10.7%. That drove the full-year economic growth rate of 8.7% which was higher than the so called market expectations. Still while beating expectations, the market's immediate reaction was somewhat subdued. Is it because that the market fears that this hot data will inspire the Chinese government to reign in more credit? Or it is possible that the market already anticipated this hot number because of the actions that the Chinese government took yesterday. Or is possible that the market's lackluster reaction could really be saying something more profound about how the market feels about the Chinese economy and even more the health of the Chinese banking system as a whole. Are some Chinese lending institutions making some of the same mistakes that US banks made over extending credit? Could this be a problem if the Chinese economy takes an unexpected turn for the worse?
In the beginning of the year many Chinese lending institutions went on a massive lending spree, seemingly lending money to anything that moved. It is possible that these intuitions were either driven by greed or the realization that they knew that soon the Chinese government would raise rates and stop the lending party. Bloomberg News reported that the Chairman of the China Banking Regulatory Commission said that loans in China were relatively high. He said that some banks were asked to stop lending because they failed to meet reserve requirements. 
Obviously the failure to meet these requirements and the Chinese government dramatically moving to reign in credit means that many lending institutions in China are trying to lend every penny they have available to them and if we see a global double dip in the economy, it is possible that these intuitions could have some problems. Or then again maybe not. Still it was another reason that the markets fascination with China and the carry trade may be in jeopardy.
Yesterday we saw a flight to the dollar and the China news, along with the continuing saga with Greece and the EU, saw safe haven buying in the dollar and the treasuries. The euro took out some key support which put pressure on the price of oil. Dollar strength and the worries about whether the market place has been too bullish on China and their banking issues is one of the reasons that petroleum was able to shrug off what was a very bullish weekly American Petroleum Institute inventory report. All right, maybe it was a little cold after all. The API reported that distillate inventories dropped by 3.38 million barrels the bulk of which was heating oil. Market expectations were lifted upward by last week's supply distillate build only to be reminded that when it comes to distillate supply cold obviously still matters. Crude supplies also increased which means traders will be on guard for a bullish DOE report.
Exxon was in front of Congress defending fracturing and their acquisition of XTO. The Wall street Journal wrote a great piece on all of those issues today. The Journal writes that, a mounting backlash against a technique used in natural-gas drilling is threatening to slow development of the huge gas fields that some hope will reduce U.S. dependence on foreign oil and polluting coal. The U.S. energy industry says there is enough untapped domestic natural gas to last a century, but getting to that gas requires injecting millions of gallons of water into the ground to crack open the dense rocks holding the deposits. The process, known as hydraulic fracturing, has turned gas deposits in shale formations into an energy bonanza. The industry's success has triggered increasing debate over whether the drilling process could pollute freshwater supplies. Federal and state authorities are considering action that could regulate hydraulic fracturing, potentially making drilling less profitable and giving companies less reason to tap into this ample supply of natural gas. Exxon Mobil Corp. placed itself squarely in the middle of the wrangling when it agreed last month to acquire gas producer XTO Energy Inc., a fracturing pioneer, in a deal now valued at $29 billion. Wary of the rising outcry, Exxon negotiated the right to back out of its deal if Congress passes a law to make hydraulic fracturing illegal or commercially impracticable. A must read in today's Journal!
Long term we still feel oil is headed down to near $40 a barrel. We see choppy ranges along the way. Make sure you call to get the latest entry and exit points. All you have to do is pick up the phone and call 800-935-6487 or email me at pflynn@pfgbest.com to open your account. Make sure you get the best and most entertaining business news on the Fox Business Network!

Phil Flynn
Senior Market Analyst
800-935-6487

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