Knee JERKS

Oil closes almost $5 lower on China's fuel price hike

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed Thursday with a nearly $5-a-barrel loss as news that China raised retail fuel prices sparked concern over a slowdown in demand.

The price hikes for the world's second-largest oil consumer came sooner than most analysts had expected and caused a sharp decline in crude-oil futures.

The price of gasoline was raised by 17% , diesel prices were raised by 18% , and jet-fuel prices were raised by 25%.

"I don't expect this to have much impact on energy demand in the short term nor likely much impact on economic growth," David Fridley, leader of the China Energy Group at the Lawrence Berkeley National Laboratory in California, said in emailed comments.

Sean Brodrick, a natural resources analyst for MoneyandMarkets.com, said, "oil bears and stock bulls alike are seizing on this news from China like drowning men grasping at lifelines."

"I hope they can live with disappointment," he said in emailed comments. The effect is to raise China's gasoline and diesel prices by 46 cents a gallon, he said, and that's "probably not enough to have much impact on existing demand."

At the same time, Brodrick points out that China will see at least 6.6 million new cars, trucks and vans hit their roads this year.

Given that, "I think this pullback is one that can be bought. Give it a few days -- maybe look to enter early next week," Brodrick said.

Freight transport, not personal cars, is the major driver of Chinese oil demand and demand growth, according to Fridley. As a result, the price hikes mean that moving goods and commodities around the country and to ports will become more expensive.

"That may eventually work its way through to reduced demand for certain goods, but it won't have any impact on the need to move hundreds of millions of tons of coal by truck and over a billion tons by train," Fridley said. "It will simply raise costs."

China's move to raise energy prices will exacerbate already high inflationary pressures. The consumer-price index, a key measure of inflation, eased to 7.7% in May from 8.5% in April, but still remains relatively high.

"Today's hike will greatly raise inflation pressures in China, but we think the impact on production, investment and consumption should be quite small," said Ting Lu, economist at Merrill Lynch, in a note to clients.

The latest price hikes may encourage refiners to import more crude oil, thereby causing a small rise in short-term demand.

"If they get a better price for their products, there is less reason to starve the domestic market," said Mikkal Herberg, director of Energy Security Program at the National Bureau of Asia Research.

However, "Chinese refiners are still experiencing negative margins," Herberg said. "The question is whether the government will reduce subsidies for the refiners. China's prices are still 25% to 30% below regional prices."
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Shocking news? Only to those that print the news, and write the headlines. As recently as May 22 China's economic planning department dismissed as a "groundless rumor" reports saying the country might liberalize the prices of refined oil and natural gas soon. So shocking is too strong a word. Surprising? Perhaps. Most observers were convinced that China would raise the cost of fuel following the Olympics in August. Is is coincidence that the price hikes come as China and the United States wrapped up their latest so-called strategic economic dialog and ahead of a meeting this weekend in Saudi Arabia between members of the Organization of Petroleum Exporting Countries and representatives from the world's oil-consuming countries? Probably not.

That this price increase by China for fuel "sparked concern over a slowdown in demand" was your A-typical knee jerk reaction in the markets. Yes, it is rational to believe that rising costs "may" curb demand. But if there is anything traders should know by now, these markets are anything but rational. The fact is, there is really little "fundamental" evidence to conclude that Chinese Oil demand will decrease just because they raised the price of gasoline by 18%.

China last raised the price of gasoline in November 2007. At that time the Chinese raised prices by 9%. Gasoline demand in China wasn't even dented. Demand for gasoline in China increased by 11% in January 2008.

China is the world's second-largest consumer of petroleum, behind the U.S. The nation's robust demand for oil, to support its booming economy and rising standard of living, has contributed to higher global prices and has prompted Beijing to scour the world for energy resources. China relies on imports for roughly half its oil use, which is growing at about 7% annually. The US consumes about 20 MILLION barrels of Oil Daily. The Chinese consume about 8 MILLION barrels of Oil Daily.

Gasoline prices here in the US have risen about 35% since the first of the year. Demand for gasoline has dropped less than 2% year over year. And Oil prices have risen 65% since January 2008. Presently the Chinese consume about one-eighth the gasoline American use in a day. The transportation industry uses about half of the gasoline and diesel in China, while ordinary motorists accounted for 7% of gas consumption in 2006, according to China International Capital. But the number of car owners is growing rapidly, they buy one new automobile about every six seconds in China. Gasoline demand is going to be rising in China no matter the cost of gasoline right now.

It is also significant that Chinese Oil refiners presently produce gasoline at a huge loss, and are subsidized by the Chinese government to do so. PetroChina and Sinopec (as China Petroleum is called) also produce, refine and import oil. They buy crude at global prices but must sell at government-set levels. Although the companies are state-owned, their executives are nevertheless loath to sell at such a huge loss.

The upshot: They're holding back supplies until the government lets prices rise, some analysts say. This would suggest that their is "pent-up demand" for gasoline in China. Analysts are all to often wrong when projecting the Chinese economy. How many times have we been led to believe that Chinese GDP would be falling, only to have their GDP numbers defy predictions time, and time again? Falling oil demand in China? Not likely, but certainly rising inflation.

What's the benefit to Gold? Rising fuel prices will only add to rising prices of everything in China. Inflation is a GLOBAL scourge that will not be tamed anytime soon. Rising prices in China will equal ever higher rising import prices for the US. Take that to the bank and ask for Gold in exchange for your so to be even more worthless Dollars.