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China: Oil, Money, And Power Projection. Oil: Dennis Is Gone. Here Comes Emily. Stocks: Momentum Tries To Build.
by Dr. Joe Duarte,
Dallas, TX, July 12, 2005, 08:00 EST * excerpts from daily reports
Traders will be watching for signs of more strength in stocks as they keep one eye on Europe, where threats of more terrorist attacks are still on the dock.
Today’s Analysis: China: Oil, Money, And Power Projection
China’s oil strategy goes beyond supplying its own needs, and focuses on power projection as well as financial gains.
The Unocal deal is gathering all the attention, but China’s oil strategy is global and cleverly involves other major North American players, as well.
According to the Wall Street Journal, Canada’s Encana is considering the use of Chinese workers “to construct and operate drilling rigs in the Colorado Rockies, as the region struggles to keep up with demand and rising energy prices. EnCana, a major player in the Piceance Basin of western Colorado, said Chinese labor is cheap and the workers are well-educated. The move would be scrutinized in Washington, where politicians are uneasy about allowing Chinese workers to acquire access to U.S.-based oil and gas facilities.”
At the same time Exxon Mobil is joining China’s Sinopec and Saudi Aramco in a joint venture to build an oil refinery in China, even as the U.S. is in dire need of new refinery capacity.
The Journal reported that this is the culmination of several years of negotiation and that “ Exxon and Aramco will each hold a 25% interest in the Fujian Refining & Ethylene Joint Venture Project, while the remaining half will be owned by Fujian Petrochemical,” a Chinese company partially owned by Sinopec.
According to the Journal, “Aramco, the world's largest oil exporter, is looking for a market for its high-sulfur crudes, which many of the world's refineries aren't designed to process and, therefore, don't want. Saudi Arabia also wants to extract more value from its crude by refining it into oil products.”
The deal is interesting in other ways as well, given the fact that China has also made deals to build refineries that will focus on high sulfur crude from Venezuela. There is no mention in the Journal article about Venezuela playing a role in this refinery, but it does raise an interesting set of possibilities, given Exxon’s presence in the deal, as well as the fact that Venezuela’s long term strategy is to stop selling oil to the U.S. altogether, and essentially replace the U.S. as customer by selling the bulk of its oil to China.
According to the Journal, “the deal would add some 160,000 barrels a day of crude-processing capability to an existing 80,000 barrel-a-day refinery in Quongang, in Fujian province. The refinery will be designed to handle sour Arabian crude.”
Energy Sector
Oil Market Summary And Outlook: Waiting For Hurricane Dennis Damage Assessment
Crude oil futures remained below $60 for August delivery, but remained above $60 all the way into March 2007.
The market is now focusing on a new potential hurricane, Emily, even as reports surfaced of a BP rig that is tilting in the Gulf.
Energy stocks have held up despite the relatively contained but volatile futures markets.
Supply data is due out on Wednesday. Expectations are for a decrease in inventories due to the hurricane, but it could take a couple of weeks before all that becomes factored into the equation.
Supply data, last week, showed a rise in distillates but a larger than expected drawdown in crude supplies. If the hurricane season disrupts supplies, by delaying production and hampering shipments, we could end up with still another potential supply squeeze as winter arrives, as the current bump up in products are used up.
Our very long term opinion on oil has not changed. We are still in a very long term bull market in oil, until proven otherwise. The long term line in the sand, for us, remains $40 per barrel.
Technical Summary
Moderate Momentum Building
The good news is that momentum is starting to build in the market. The bad news is that momentum runs always end up badly, at some point.
It’s too early to make too many long term decisions here, given the fact that the Nasdaq has yet to break out above 2135, its most recent important resistance level. But small stocks have been making all time highs for several days now, putting the focus on that section of the market.
Strength in tech stocks has helped the Nasdaq and the S & P 500, which could get another boost, if oil stocks start rallying again.
HMO, biotech, and hospital stocks have also been acting well lately.
The New York Stock Exchange advance decline line made a new high last Friday, and another one on 7-11, as the small stocks broke out to all time highs.
Investors and traders should remain vigilant, though, as major global events are possible now on a daily basis, and could disrupt markets.
For now, we are cautiously positive on this market, and our stock lists reflect it. The heavy weighing of our picks remains toward smaller stocks, which are the ones doing the heavy lifting for now. Our ETF timing systems are also in position to profit from higher prices. And our Fallen Angels portfolio is well positioned once again.
Remain patient. Buy strength. Take this market one day at a time, and be ready for reversals.
What To Do Now
It’s time to buy stocks that are acting well, and to keep sell stops within daily sights.
