It seems like the whole commodity universe is focused on China. The Shanghai stock market rebounded giving up losses early in the session to close moderately higher but it may not be enough to shake off the negativity that has permeated the market's mood in recent weeks. Not even a report that the Chinese Purchasing Managers Index hit a 16 month expansion high of 54.0 was enough to cause a strong, passionate rally in energy complex. The worries are that all the feel good medicine the Chinese pumped into the economy is staring to wear off leaving the market with a bit of a hangover and potentially slowing Chinese demand.
Adding to slowing Chinese demand came a report that China is raising the prices of domestic fuel. Dow Jones Newswires reports that China's National Development and Reform Commission will increase both gasoline and diesel prices by CNY300 per metric ton effective Wednesday. Dow Jones says that the price hikes, if confirmed by the agency, would come despite increasing concerns about inflation that NDRC voiced in a statement last week. Such concerns may help explain why the expected increases from the current average gasoline and diesel retail ceiling benchmarks of CNY7,310/ton and CNY6,570/ton would be only around 4%-5%, at the low end of analysts expectations. At this time Dow says that an official with NDRC's pricing department would neither confirm nor deny the reported fuel price hikes. Rising prices would help China's refiners that have struggled to make profits due to government price controls but at the same time, the timing of the increase coincides with efforts in the Chinese government to reign in some overcapacity issues in some of China's industrial complex.
Now despite the negative news and the fact that the step drop in oil we have to remember that today is treacherous Tuesday. What is treacherous Tuesday? Well it is the day when the market seems to price in the weekly American Petroleum Institute report before we get it. Two weeks ago oil rallied big ahead of a surprise drawdown. Last week oil rallied big ahead of a surprise draw. Look at the market the last hour and a half and whatever direction we go probably will give you a good indication how the report is going to turn out. My bet is we will see a surprise increase in inventories across the board as imports will continue to be strong. Now that is not to say that oil will rally or break hard after the report. It will all depend on where the market is going ahead of the report. After yesterday's steep sell off, the bulls will be tempted to try to rally the market again. I feel that high inventories will cap rallies.
Holy Fracturing!!! Even with natural gas prices bouncing around near 7 year lows, Baker Hughes made a big play to acquire BJ services for their pressure pumping technology. Baker Hughes Inc. bought BJ Services Co. for $5.5 billion as BJ Services is the third-biggest provider of pressure-pumping services which is used in unconventional gas plays such as shale formations. They are experts in fracturing technology (fracing) that along with new drilling techniques have revolutionized the natural gas industry in just the last few years. Even despite the record amounts of gas in storage and relatively low prices, these new technologies are so cost efficient that it still makes sense to pursue it. Short term Baker Hughes may take a stock price hit but long term it is a great investment. These fracturing and horizontal drilling technologies that have added to the US proven reserves of natural gas are now being coveted by the rest of the globe to increase production everywhere. And as the world is increasingly worried about global warming (record cold in Chicago, thanks for getting our hopes up Al Gore) natural gas may be the only proven fuel that can compete directly with gasoline and oil. (Oh yeah and those nukes as well) Baker Hughes made a wise deal. Reuter's reports say that pressure pumping made up less than 1 percent of Baker Hughes 2008 revenue, but is expected to comprise about 20 percent of the company's revenue after the deal is complete.
Good consumer news going into the Labor Day weekend! The Energy Information Agency says that gas prices fell 1.5 cents to $261.3! Consumers start your engines.
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Sell October crude apprx 7350 - stop 7620.
We're short October heating oil from apprx 19000 - lower stop to 18700!
Sell October RBOB at 1900 - stop 19300.
Sell October natural gas at 310 - stop 317.