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China embarked upon its remarkable GDP growth under the leadership of Deng Xioaping, Mao?s successor. Deng?s message to his comrades: ?To get rich is glorious.? China responded by creating a middle class which is now nearly the same size as the entire population of North America. By meeting the country?s energy demands to feed such rapid growth, China has engendered a worldwide race, most notably with neighboring India but also with others, to accumulate sufficient energy sources and raw commodities. Yet on the horizon, China has a serious energy crisis which could reduce this amazing GDP growth.

By the late 1990s, northeastern China?s vast Daqing oil fields passed their peak, and no new oil fields of that magnitude were discovered. A net oil exporter until 1993, China?s growing appetite for energy sources and other commodities has created what some call a ?super cycle? bull market in commodities. Now the world?s second largest oil importer behind the United States, China?s dependence on foreign oil jumped by 10 percent during the first six months of 2006, compared to the same period a year earlier. Oil imports during the first half-year grew to 47.3 percent.

In the context of previous years, the growth of oil imports clearly illustrates China?s astonishing escalation of imported oil. According to the Xinhua news agency, the country?s percentage of imported oil stood, in 2001, at slightly less than 27 percent of total consumption. As of 2004, this percentage had soared above 41 percent. By that year, China was driven to diversify its country-mix of energy sources. The Middle East supplies about 45 percent and Africa exports some 29 percent to China.

Having about 20 percent of the world?s population, China only consumes four percent of what the world?s oil fields produce. But, a growing middle class will simply consume more petroleum products as the decade comes to a close. Presently importing three million barrels of crude oil every day to fuel the growing number of automobiles, where will China find the oil to produce gasoline in 2020, when the country could have as many as 140 million cars on its roads?

Because of China?s Industrial Revolution, Beijing?s streets, once overflowing with bicycles, are now jammed with nearly three million automobiles. The Chinese middle class want more energy to accompany their new wealth, but where will it come from? Since 2001, China has acquired more than 100 oil fields and companies to sustain its heavy flow of imported oil for this demand. Chinese state-owned oil companies have spent $15 billion over the past five years to build up their oil reserves.

The country?s state-owned media arm refers to China?s exploration and acquisition expeditions for new oil fields beyond its borders as developing ?new silk roads.? These roads have led to Central Asia, South America and Africa in China?s quest to establish more and more energy sources. Is this strategy working fast enough or not?

Are China?s New Silk Roads Filled with Pot Holes?

China?s creation of new silk roads of energy sources has been challenging. Emerging in the mid 1990s as an economic powerhouse to be taken seriously, in the wake of Japan?s economic slowdown and the collapse of the Soviet Union, China has all but dictated world commodity prices in a frustrating drive to continue fueling the country?s rapid growth. Unfortunately, both Russia?s resolve to monopolize energy assets in Central Asia and U.S. political paranoia about China?s global ambitions have led to a number of disappointments and setbacks.

Remember China?s failed attempt to takeover of UNOCAL? Had China National Offshore Oil Corporation (CNOOC) bought UNOCAL, the acquisition would have impaired U.S. economic influence in both Thailand and Burma. Despite this setback, China continued investing heavily in Burma. The Chinese hope to someday export their neighbor?s hydroelectric power, by helping the Burmese build a dam across the Salween River.

By acquiring rights to Daewoo?s recently discovered offshore oil and natural gas in Burma, China will probably build another pipeline into its country. With each major stride forward, China is frequently pushed back a step. China has grown accustomed to the habit of settling for less in order to meet the country?s demand for energy security. Meanwhile, China has been criticized for buying marginally producing oil fields, overpaying for commodities and doing business with unsavory nations.

Trouble in Central Asia

In Kazakhstan, China was delayed for seven years in Read more…

China?s Problem: Putin?s Desire for Superpower Status

With Putin?s star rising, Russia has aspired to block China?s energy ambitions in Central Asia. When China embarked on a Sino-Kazak strategy, Boris Yeltsin was still president. Since then, Putin and his inner circle of Chekists (named after the Soviet Union?s first secret police squads) have begun tightening the noose around the ex-Soviet states. The mandate driving Putin?s fellow ex-KGB insiders is Russia?s return to superpower status.

This became evident on October 26th 2005, when SCO?s top officials met in Moscow for their annual conference. Because India?s Foreign Minister and Pakistan?s Prime Minister attended as SCO-invited observers, Putin boasted the populations represented by SCO member states and observer countries exceeded three billion people. He bragged he had gathered ?half the planet? at the Kremlin. At the top of the SCO agenda were energy issues, such as expanding the oil and gas sector and exploration of new hydrocarbon reserves. Of course, these are the issues which are clearly foremost on the mind of the Chinese.

But has Putin?s mood swung further toward impudence? When Chinese Prime Minister Wen Jiabao announced the Sino-Russian bilateral trade turnover might surpass $28 billion, Putin challenged, ?I hope this happens.? While even Russia?s media suspected Putin used the SCO conference as his egocentric publicity showcase, Russia depends upon China?s economic prowess to uplift its own economy. Will there come a time when Russia is less fearful of China?s economic might? This might be well into the future. Russia?s economy continues to require an ally in China. Politically, Russia depends upon China politically as a buffer from the U.S. The September EU-China Summit to be held in Helsinki should offer clues about the tentative Sino-Russo alliance. Chinese Premier Wen Jiabao will give the keynote address, and possibly helping to forge closer alliances with Russia?s neighboring Finland. After all, Nokia is based in Finland, and China is the world?s largest consumer of mobile phones and services.

One has to wonder if Russia has been slowly closing China?s door to Central Asia over the past few years. Gazprom?s press secretary, quoted in a 2004 interview in Vedomosti, announced, ?? sharing mineral resources with foreign countries is against our policy? In fact, sharing oil with the Chinese would be even more inappropriate.? Gazprom, for example, is now developing Uzbekistan?s gas fields for export to the West, and not to China. (See part two of this series.)

The delicate equilibrium between Russia and China ? one where both countries hope to maneuver against further U.S. meddling (or as cynics call it, imperialism) in the Middle East ? requires yielding as few concessions to the other as need be conceded. When China moves too boldly, Russia plays upon its alliance with Japan to keep China in check. Both use their U.N. Security Council vetoes as negotiation tools in carving out petroleum, and other commodity interests, to preserve their energy security issues.

China serves Russia?s political aspirations in quelling U.S. expansion into the Middle East. Having decades-long ties with Iran and other Muslim states, Russia has a convenient ally in China, when using Iran as a thorn in Washington?s backside. And China still remembers the oil concessions it lost in Iraq, after the U.S. invasion of that country. China likely frets about the unending squabble over Iran?s uranium enrichment aspirations in light of having lost those Iraqi oil concessions.

Pragmatic China Resorts to Trading with

Rogue Nations for Energy Security

At the mercy of a ruthless global energy market, pragmatic China has turned to nations which are shunned by U.S. interests. One productive Silk Road leading to China begins in Iran. More specifically, it starts in the Yadavaran oil fields where the Chinese oil company Sinopec plans to import about 150,000 barrels of crude per day, after it has developed these oil fields. Initially, the October 2004 deal was reportedly valued at $70 billion. However, additional developments and China?s substantial purchase of Iran?s vast natural gas reserves may increase the value of this multi-decade energy deal to more than $200 billion. What could go wrong? Look at the daily headlines: Iran wants to enrich its own uranium. Unless this situation is resolved, escalated political tensions could impair China?s ability to import oil and gas. Obviously, China would take great pains to avoid an Iraqi rerun in Iran.

Out-maneuvered by western oil companies in obtaining many of the world?s proven oil reserves, China has cultivated the Sudan as its largest oil provider. Sudan depends upon the pragmatic Chinese for its economic and military strength. China is also the principal source of hard currency for Africa?s largest country. Rejected by the world?s community for the genocide it is committing in West Darfur, Sudan exports its oil to China for Chinese weaponry. China finds little competition for Sudanese oil. The Chinese are the largest single shareholders dominating Sudan?s oil company consortium. It is the largest investor in a 1,500-kilometer pipeline delivering Sudanese oil to the Red Sea, which is then shipped by tankers to China.

China has not limited its African oil purchases to one country. Another blighted nation, Angola believes it could soon surpass Nigeria as Africa?s largest oil supplier. According to the World Bank, China may have recently offered Angola about $9 billion in credits and loans. Two years ago, it was reported that China extended a $2-billion loan to Angola for 10,000 barrels of crude oil per day. Now, it appears China is eager to help Angola build sufficient infrastructure in that country to develop another strong energy source.

Hoping to create a Silk Road across the Pacific from South America, China has continued its hunt for energy security by developing ties with Venezuela?s Hugo Chavez. This may come to naught. Venezuela?s highly sulfurous crude would first have to be refined in the United States. China lacks the refineries for handling the heavy crude oil. Over the past year, China?s oil imports from Venezuela Read more…

If you read Monday?s article you will have seen we were bullish crude oil and unleaded gasoline based upon geo political concerns and are looking for a big move up to test contract highs.

We did not get any strength on Monday, but prices have bottomed today and are moving higher. Could this see another test of the highs or will the bears take control?

Geo political reasons will keep prices firm

Forget the supply and demand situation – it?s geo political concerns that are the major driving force in crude and unleaded gasoline and we have an important meeting on Thursday.

The 35-nation board of the International Atomic Energy Agency is scheduled to meet in Vienna on Thursday to debate the situation.

Can there be a compromise?

The problem with the whole Iran situation is a hawkish American administration that are not be in the mood to concede much and neither will Iran.

No one wants to lose face here.

This problem is while we don?t know what will exactly happen, the problem does not look like it will go away.

The technical view

The markets have been trading in a channel for several weeks now and prices have steadied at near term support.

Taking a look at unleaded gas, prices have firmed at the bottom of the Bollinger band and near term momentum is Read more…

For around six weeks these contracts have traded in a range, but this may be all about to end.

A trade is now presenting itself with great risk / reward which have potential to spike prices to new highs and a 100% profit.

Geo Political Concerns

Forget all the talk about supply and demand and inflation – Geo political reasons are the main reason crude prices are high and could spike higher.

From Iran, there were reports that Tehran wants “unconditional” talks on the incentive package western governments are offering it in an effort to persuade it to stop its uranium enrichment.

Iran’s deputy foreign minister said Tehran will “very soon announce our position.”

We don?t really hold much hope the Iranians will do anything to pacify the USA with their “position”.

Therefore, any interruption or perceived interruption in supplies is a distinct possibility if the dispute drags on, which it looks likely to.

It?s hard to see a compromise as Iran and the USA, do not want to lose face and there is no common ground. The 35-nation board of the International Atomic Energy Agency is scheduled to meet in Vienna on Thursday to debate the situation and prices will should remain firm into the meeting.

While there has been a lot of debate about the inflationary impact of high oil prices its minor and the global economy can still expand with prices at higher levels than they are now.

So how can this move be traded?

Well firstly let?s put the fundamentals aside and look at the technical picture.

Below we are going to focus on unleaded gasoline, although a similar picture is present in crude.

Unleaded gasoline ? Technical picture

The trend:

Is sideways at present and prices are trading in a range.

Short term trend:

Is down, prices have declined to the bottom of the range and bounced from the bottom Bollinger band.

Momentum:

Has been down, but prices after dipping lower on Friday, recovered and settled off the lows. Stochastic momentum is now set to cross with bullish divergence.

Resistance

QUESTION: what do North-American real property owners have to do with the Middle East conflict? ANSWER: everything and anything they can possibly imagine.

Fluctuations in the world economy are largely driven by confidence. A changing level of public confidence is the ultimate driver behind much of the variation in individual and national incomes, in employment rates, in corporate earnings, in interest rates and in many other measures of the world economy. All the more so when nations, and indeed entire continents, are as economically intertwined as nowadays. In these times of globalization, the political-economic policies of the European Union, for good or bad, are exported to North America. Unrest in China or a terrorist attack in Mumbai are reflected in the public confidence of financial and investment markets. A more and more despotic and dictatorial Putin has the effect of altering the commodities markets by undermining investors’ confidence worldwide.

But there is nothing, nothing at all short of another September 11 disaster that works so much as an impediment to financial and real estate markets in North America than a conflict in the Middle East. And this week’s attack of Lebanon on Israel is yet another proof of it. Just take a look at the dive of the Dow Jones of these past few days. Just take a look at the spike of the price of crude. To be sure, it is not so much the Lebanese or Hizbollah per se that kill investors’ confidence in North America. Afterall the Lebanese or Hizbollah are, taken all and by themselves, nothing more than a bunch of ignorant, fanatical boors. But it is what’s behind them that worries Capitalism.

It’s the crude, dude!

There is a very specialized field of Economics, known as ?Behavioral Finance’, which applies scientific research on human and social cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources. Behavioral Finance is the heart of Capitalism, the pump that moves money worldwide. To better realize how important is Behavioral Finance, one must understand that one of the tenets of Capitalism is that democracy has significant indirect effects which contribute to growth. Democracy is associated with higher capital accumulation, lower inflation, less political instability, and greater economic freedom. Anytime democracy is threatened either by war, terrorism or unwarranted attacks to free and soverign countries, even in places as far away as the Middle East, Capitalism grinds to a halt. Capitalism abhors the uncertainty created by political instability.

This particular concept is very clear to the ?Masters of Capitalism’ – all the American Administrations since the end of WWII. And of all places on the planet, no one is as important to Capitalism as the oil fields of Islam. This is the reason for American direct political involvement in the Middle East since mid-1947, following the departure of Britain from Palestine and the creation of the State of Israel. This is also one of the key reasons behind Washington’s intervention in Iraq – to take control of that country’s massive oil resources. Controlling the region in order to ensure US access to its ample oil resources has been one of the key features of American foreign policy for decades, dictated in large part by Arab flimsiness and unreliability. And in light of this policy, a strong, powerful and nuclear Israel has been and is the best sentry America can have in the region. Thus the USD 4 billion plus that America shells out to Israel annually in loans, grants, financial aids and military armaments, as well as the political support at the United Nations (another unreliable organization in large part financed by America).

Oil is essential to the economies of the industrialized world, at least for now. Yet it is a finite resource, and there is less of it in the Earth’s crust than the general public probably wants to realize. We have at least enough to last for another few decades – although that is not a huge amount of time, considering how central oil is to our lives. Furthermore, while we are not about to run out of oil, we may soon run out of cheap oil. That is, oil which can be pumped out of the ground without great difficulty, and that therefore can be brought to markets at the sort of prices we have become accustomed to in recent years. In the coming decades, we can expect an intensified international competition, even military rivalry, over the increasingly valuable remaining reserves of cheap oil, most of which are located in the volatile Middle East.

In light of this geopolitical and economic context, naturally one might expect a relation between oil and house prices, since high oil prices Read more…