After falling from $147 to $35 per barrel towards the end of last year, crude oil has once again gained and touched $45 per barrel on speculation that China’s stimulus plan may spur demand for the commodity near term. However, some experts are of the view that this is not just speculation but real purchases driving the prices up.
China is said to be considering buying crude oil as part of its strategy to diversify holdings from US Treasuries. This is to hedge against the risk of US Treasury prices dropping and dollar depreciation in the long run, with the Obama government issuing government bonds worth dollar trillions to finance economic stimulus measures.
The Asian giant, which has been building a national oil stockpile since 2004, is planning to stock 100 million barrels by next year, Japanese business daily Nikkei reported. China has about $2 trillion in foreign reserves, the largest in the world. It put Japan behind as the No 1 holder of US Treasuries last September. Two-thirds of China’s foreign reserve assets are said to be dollar denominated.
Incidentally, a publication run by state news agency Xinhua has reported for the first time figures for China’s domestic crude oil stocks, showing inventories surged by nearly a third last year to the equivalent of 34 days of forward demand. China’s crude oil inventories jumped 30 per cent over the past year to stand at 37.20 million tonnes, or near 272 million barrels, by the end of January, data published by China Oil, Gas and Petrochemicals, a biweekly Xinhua publication showed.
Chinese oil demand runs at about 8 million barrels per day (bpd). While the data appeared to refer only to inventories held by oil companies, with no specific mention of strategic stocks held in the government’s newly built 100-million-barrel reserve tanks, it offered rare evidence of long-suspected stock building. Data on inventories of diesel and gasoline have become more accessible in recent months, but figures for crude stocks –even commercial ones — are rarely reported in China, says Reuters. In countries such as Japan and the United States, it is reported weekly.
One of the Chinese top brass recently hinted that the country may review its large purchases of US Treasuries, saying that future buying will be adjusted to meet the nation’s need to maintain the value of its foreign currency reserves.
Even Warren Buffet has warned of low US government debt yields in his recent letter to the shareholders. He says: “The U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary to previous bubbles in housing and internet stocks.” He says the government stimulus efforts will likely generate an “onslaught” of inflation.
Relation to gold
And to aid it is the gold price. Oil and gold are arguably the most important commodities on the planet today and the ratio of their nominal prices is far from a trivial issue. The gold/oil ratio expresses the interrelationship between the commodity that forms the foundation of our entire global economy and the commodity that has been the ultimate form of money for six millennia of human history.
The gold/oil ratio is such a crucial measure because it expresses the entire complex interrelationship between the king of commodities and the only timeless real money in a single data series. This ratio allows us to discern when gold or oil prices are probably out of whack and hence a mean reversion is highly likely. If we can figure out which component of this ratio is most likely to lead this mean reversion, gold or oil, then we can position trades to ride the move.
There is no dispute that gold has been on the climb since bottoming out in 2001. With little confidence in the dollar or in the equity markets, it is likely that investors will continue to bid on gold stocks. Also, the possibly that OPEC will switch to pricing oil in euros instead of dollars could further devalue the U.S. dollar, making even spot gold more attractive. Indeed, the investor who bought junior gold stocks or even gold ore in 2001, with prices around US $250 per ounce, and still hold the asset at the current price, hovering just over US $900, would surely be pleased with its appreciation so far.
Be that as it may, the world is set to get a $1 trillion economic stimulus if oil prices stay at around $40 a barrel through 2009, the head of the International Energy Agency told Reuters on Thursday. IEA Executive Director Nobuo Tanaka warned of a possible repeat of last year’s record high oil prices. Lower fuel bills were now supporting an ailing world economy, and Tanaka urged the club of oil exporters, OPEC, to be cautious before cutting oil supplies at a meeting on March 15.
Oil prices have fallen from a record high of nearly $150 a barrel struck last July and have since mid-December traded in a narrow band near $40, caught between slumping demand and the possibility of further OPEC output cuts. On Thursday, world stocks careened lower as a dismal forecast for euro zone growth and renewed worries about banks, dragged down equities and boosted the safe-haven appeal of the dollar and government debt.
However, Toronto’s main stock index could open higher, analysts say, after touching a five-year low in the previous session, supported by firmness in the price of oil and base metals.
“I think oil has bottomed. I think we should be buying oil stocks,” said Jim Cramer on CNBC. “The multiples are the lowest I’ve seen, and if oil stays in the $40s, there are several companies that are going to make a lot of money,” he added. He specifically recommended Exxon( (NYSE:XOM), ConocoPhillips(NYSE: COP) and Occidental(NYSE: OXY ).