Wednesday August 3, 2005 - 11:26:07 GMT
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Black Swan Capital - www.blackswantrading.com
A crude view
“When I first look at a trade, I don’t ask, ‘What is the potential profit I can realize?’ but rather, ‘What is the potential loss I can suffer?’”
“China’s installed capacity of electricity production has roughly caught up with demand this year. As the capacity under construction is very large, China may enter surplus in electricity generation capacity in 2006. 83% of China’s electricity production is coal-based, with hydro accounting for another 15%. Hence the need to use petroleum products to generate electricity is vanishing. We believe China’s overall imports of crude and petroleum products will decline in both 2005 and 2006,” writes Andy Xie of Morgan Stanley. [our emphasis]
We read this in the Australasian Investment Review back on July 19th, a view on China oil demand from economist at Credit Suisse: “…actual year-to-date growth in Chinese oil demand is about 2%, compared to the consensus 8% estimate.” [our emphasis]
Are expectations regarding Chinese demand running ahead of reality? Does $60-plus cost for a barrel of crude oil strike anyone else as a bit high given the views from Morgan Stanley and Credit Suisse?
The crude oil futures chart below shows it has lurched into nose bleed territory—but for those that enjoy the upper decks the chant of “$100 per barrel crude” keeps bringing them into the game.
We admit to knowing almost nothing about the dynamics of oil supply or demand—no more and probably less than what everyone else reads. We have seen the “Peak Oil” stuff. But we also remember back in the 70’s when experts predicted we would soon run out of crude. So, despite admitting our inability to judge or argue the quality of the science behind Peak Oil, we are major sceptics. Man’s ability to find crude and engineer ways to get crude out of the ground with increasing integration of technology has always impressed us more than theory. Not to mention the ability to increasingly use energy more efficiently.
We so know this: The rising cost of crude has done little to reinvigorate the inflation bogey man, either here or in China. But it has transferred spending out of the pockets of consumers and business. Run the car and the factory, or buy new clothes and new equipment is the gist.
Yet, in spite of this transfer of spending to energy, that didn’t disappear but was absorbed and will be used by the energy industry, the US economy continues to chug along. And here is the point of all this conjecture: If crude oil prices break, the economy might just chug along faster. And if so, Mr. Greenspan & Co. could decide to step up there game a few levels beyond what anyone in the stands now expects to see. And that potentiality might just coincide well with the correction we are seeing in the dollar. So for now, enjoy the euro run, but keep an eye out for a peak in crude.
Black Swan Capital
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