China Crack Down
China cracks oil. Oil futures are lower as weak Chinese Industrial data and a regulatory crackdown on Chinese stock broker’s raises concern about oil demand. Reuters reported that the “China Securities Regulatory Commission (CSRC)” urged brokerages to cease financing clients' stocks purchases through over-the-counter swap contracts, the government's latest step to reduce leverage. On top of that they started investigations into China's biggest brokerage CITIC Securities and its smaller rival Guosen Securities, while sources told Reuters on Friday that another major brokerage, Haitong Securities, was also under probe. This is a blow to Chines market confidence that was already a little shaky after it was reported that profits earned by Chinese industrial companies fell 4.6 percent in October from a year earlier marking a drop for the fifth month in a row.
Traders had rallied the oil market into the Thanksgiving Holiday on the expectations of another drop in US rig counts and a spattering of geo-political risk aversion. Now oil is retesting the lower end of the recent range on light volume because of China concerns and some relief that World War III may not have started after all.
Tensions have been high after Turkey shot down that Russian warplane but both sides say they want to avoid war. Russia says it will put economic sanctions on Turkey that may slow some economic activity. This comes as France and Russia will coordinate attacks on ISIS.
In the meantime the market is taking its direction from the stock market and OPEC chatter that we will start to hear as the OPEC meeting gets closer. The Saudis talk that they want to “stabilize the market is interesting and should keep some traders guessing. Yet from a big picture stand point the talk from Saudi Arabian oil minister Ali-Naimi that the energy industry needs to continue to invest in oil or face shortages down the road. Naimi warned that because of the price drop global production lost four million barrels per day due to natural depreciation and predicted an increase in demand of one million bpd. He says that the oil industry is required to add new production capacity of 5.0 million bpd to compensate for the natural loss in production and meet the growth in global demand. He says that are investments are required to meet such needs. We must continue and even increase the pace of investments in the energy sector. OPEC Meets December 4.
Yet of course it is hard to look through the current glut even though we are seeing signs of a longer term bottom. Oil is deep in the bust end of the cycle and those who position well should be in for the boom cycle. Of course the China crackdown may raise larger concerns about Chines oil demand and that is a negative in the short term.
In the long term it is time to put on longer term bullish strategies.