Will Oil and Coal stocks rise after the Olympics?

[MaryKay1965]

Oil and coal stocks seemed to make a dramatic decline just about the time China announced it was trying to reduce its' emmisions in prepartion of the Olympics. The country seemed to cut back on its' output of "pollution" from the factories, as well as enforcing manadatory cut-backs of automobiles. All of this was an attempt by China to reduce its' smog, mainly because of hosting the Olympic games.

During the rising oil/coal/commodity prices, all we seemed to hear about was how the Chinese middleclass were becoming more dependant on cars, as well as their factories were importing a majority of the worlds' coal supply. China then, obviously, was part of the huge "global demand," thus driving the price of oil/coal/commodities through the roof.

Was it a coincidence that China was "cutting back" at the same time oil started dropping and continued dropping while China continued to "cut back."
If that's the case, wouldn't it make sense that once the Olympics in China are over, and China's smog problem is out of the public spotlight, that things may go "back to normal." ie. more automobiles back on the highway, more output of factories, etc.

If so, then it would make sense that oil/coal, etc. would increase in prices, thus driving up the stocks of these particular sectors. I have been thinking about this for a couple of weeks now, but have yet to hear any of the so called "experts" on CNBC mention this. Surely, I'm not the only one to be thinking like this. Anyone care to offer their opinions on this "theory" or was the recent commodity boom pure speculation and since the "big money" can now make money in other sectors, they will not return to the commodities sector.

[aiki14]

To answer the question in the title, I think so.
Here's why I could be wrong:
1) The Chinese put the restrictions on in the Bejing area which only represents a small percentage of the demand. It is the national capital but is really only a political area not a major industrial area, thus the reduction in industrial demand is minor. Imagine if the same restrictions were placed around Washington DC, how much of our national output would be affected.
2) The economic downturn we have suffered over the last 10 months which was thought to be a localized condition is now clearly spilling over into the world market. The concept of decorrelation of the emerging markets from the American economy is being debunked somewhat by the markets in those countries as they show signs of a worldwide recession. This results in a demand destruction in the commodities.

We'll see.

[Wreck_IT]

I thought this was interesting

"Also note, commodity (http://www.minyanville.com/articles/gold-hui-gdm-mines/index/a/18540/from/yahoo#) cargo fees increased the most since January 30th last night in Asia. The Baltic Dry Index advanced 323 points, or 4.6 percent, to 7,420 yesterday on speculation Chinese demand for raw materials will increase after the Olympics. "



http://www.minyanville.com/articles/gold-hui-gdm-mines/index/a/18540/from/yahoo

[aiki14]

Another interesting corollary is the USD which has had a tremendous upward move against the world currencies over the last month. This keeps the commodities depressed as they are priced in dollars. I think the dollar is likely to retrace a little which will buoy the commodities this week.
3587

I see the look of a top here in the Dollar index as the rise seemed to peter out over the last three days of trading.

Here's a longer term chart that shows the pattern I am basing my feelings on. The last three days have held below the longer term trend line and may signal a return to the general bear movement.
3588
Of concern is the matter of long term Bear markets in the USD which have typically lasted 5-7 yrs. Are we at the end or can we continue the down trend further?

[Thunderbolt]

Another interesting corollary is the USD which has had a tremendous upward move against the world currencies over the last month. This keeps the commodities depressed as they are priced in dollars.
Right, and when Ron Paul stated during the "debates" that the collapse of the dollar was the main reason driving oil prices higher the other candidates just snickered and refused to even comment on the subject.

What is remarkable is the surprize of some so called experts regarding how far and fast oil prices have fallen.
These are probably the same people who thought the wheels would never fall off the housing market.

[CSSVT]

Right, and when Ron Paul stated during the "debates" that the collapse of the dollar was the main reason driving oil prices higher the other candidates just snickered and refused to even comment on the subject.

What is remarkable is the surprize of some so called experts regarding how far and fast oil prices have fallen.
These are probably the same people who thought the wheels would never fall off the housing market.

Love him or Hate him, Glenn Beck was the only news guy or candidate I heard saying that Ron Paul was the only one participating that had any idea of what the economy needs/what is effecting the economy.

[wallstreetsedge]

Another interesting corollary is the USD which has had a tremendous upward move against the world currencies over the last month. This keeps the commodities depressed as they are priced in dollars. I think the dollar is likely to retrace a little which will buoy the commodities this week.
3587

I see the look of a top here in the Dollar index as the rise seemed to peter out over the last three days of trading.

Here's a longer term chart that shows the pattern I am basing my feelings on. The last three days have held below the longer term trend line and may signal a return to the general bear movement.
3588
Of concern is the matter of long term Bear markets in the USD which have typically lasted 5-7 yrs. Are we at the end or can we continue the down trend further?


its funny that you mentioned this... as i was making a post here.. http://www.onlinetradersforum.com/showthread.php?p=131581#post131581

i was thinking that its a bit odd how the us dollar has been moving higher aggressively against other currency especially vs oil. i think that we end up getting the reset button pushed on oil prices and we head back towards $80/ barrel but we're about to head into a long bear market with a pair of inflation shoes to match

[cramerica1972]

its funny that you mentioned this... as i was making a post here.. http://www.onlinetradersforum.com/showthread.php?p=131581#post131581

i was thinking that its a bit odd how the us dollar has been moving higher aggressively against other currency especially vs oil. i think that we end up getting the reset button pushed on oil prices and we head back towards $80/ barrel but we're about to head into a long bear market with a pair of inflation shoes to matchoil's heading LOWER,not higher now since china doesnt need any since they have built the olympic venues.

[wallstreetsedge]

maybe in the long term, sure oil will head to $80 rather than $200 but in the short term, commodities have been oversold in my opinion there will be a short lived biased rally from the massive short selling

[madcowdisease]

Love him or Hate him, Glenn Beck was the only news guy or candidate I heard saying that Ron Paul was the only one participating that had any idea of what the economy needs/what is effecting the economy.

Not a huge Glen Beck fan but kudos to him for pointing this out. I watched the debates and thought the same thing. It was the typical blow-everybody-away-who-is-not-American national security mumbo jumbo from the other candidates but, though he seemed a little irritable, Ron Paul was the only one that "got it" in regards to the economy.


In regards to commodities, I can see the potential for the dollar to rise. If there is merit to the global slowdown story and the fact this is led by the USA and the USA should emerge first then it seems likely that the dollar will rise as the economy turns. Typically the stock market, and I must assume the Forex markets, turn 6 months ahead of the economy. I'm not saying we're out of the woods but perhaps the traders have come to the realization the US, with our massive purchasing power and technological advantage, will lead the emergence of next global bull market further strengthening the dollar.

[MaryKay1965]

Oil and coal stocks seemed to make a dramatic decline just about the time China announced it was trying to reduce its' emmisions in prepartion of the Olympics. The country seemed to cut back on its' output of "pollution" from the factories, as well as enforcing manadatory cut-backs of automobiles. All of this was an attempt by China to reduce its' smog, mainly because of hosting the Olympic games.

During the rising oil/coal/commodity prices, all we seemed to hear about was how the Chinese middleclass were becoming more dependant on cars, as well as their factories were importing a majority of the worlds' coal supply. China then, obviously, was part of the huge "global demand," thus driving the price of oil/coal/commodities through the roof.

Was it a coincidence that China was "cutting back" at the same time oil started dropping and continued dropping while China continued to "cut back."
If that's the case, wouldn't it make sense that once the Olympics in China are over, and China's smog problem is out of the public spotlight, that things may go "back to normal." ie. more automobiles back on the highway, more output of factories, etc.

If so, then it would make sense that oil/coal, etc. would increase in prices, thus driving up the stocks of these particular sectors. I have been thinking about this for a couple of weeks now, but have yet to hear any of the so called "experts" on CNBC mention this. Surely, I'm not the only one to be thinking like this. Anyone care to offer their opinions on this "theory" or was the recent commodity boom pure speculation and since the "big money" can now make money in other sectors, they will not return to the commodities sector.

Here is an interesting email I received (Aug. 20th) from Energy and Capital. With the end of the Olympics coming, it seems to be a general concensus that China is going to "full steam ahead" mode once again.



Coal Stocks Set to Soar, Part 1
By Chris Nelder | Wednesday, August 20th, 2008
Old King Coal is about to be a much merrier old soul.

After a stunning 60 percent gain for the sector in the first half of the year, and then a correction almost all the way back down, my research suggests that we're about to see another breathtaking run for the group.

Curiously, it seems to have much to do with the Olympics.

As was widely discussed in the press, China severely cut its use of fossil fuels, particularly coal, right around June in an all-out effort to clean up the air for the Olympics.

What has not been discussed much at all are the global implications of that cutback on the energy markets, and how the resurgence of Chinese energy consumption after the games spells higher prices for grid power and many other commodities...and profits for coal investors.

This week, I take a methodical look at China and coal, and what it means for the US.

Demand
With coal powering 80 percent of its electricity supply, China is both the world's largest coal producer and its largest coal consumer.

China's demand for coal rose 9 percent last year. This year, the Coal Sales and Transportation Association of China anticipates that the nation's requirements will rise another 5.3 percent, to 2.76 billion tons. (By comparison, US consumption of coal last year was less than half that, at 1.1 billion tons, according to the EIA's July 25 Quarterly Coal Report.)

The reason is simple: About two-thirds of global coal consumption is used to fuel electric power plants, and most of the rest is used to make steel and cement.

China's manufacturing base is of course utterly dependent on electricity demand to run its factories and assembly plants. It is also the world's top producer of steel, with more than double the output of the entire EU, the number-two producer by tonnage.

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With China's economic growth rate still running at about 10 percent per year, and India right behind, it's no wonder the US Department of Energy estimates that 70 percent of the increase in global coal demand over the next two decades will come from China and India.

Neither country can satisfy its needs with domestic coal production anymore, and both have slashed exports this year in order to ensure they'll have enough for themselves. (My longtime readers will instantly recognize this as another example of the "Export Land Model.")

As the temporary damper on production and consumption for the Olympics comes to an end, and full demand is restored, it's entirely possible that China may become a net coal importer within the next year.

Production
China capitalized on coal's run up earlier in the year in a big way, and was a net exporter for the first seven months of the year. Their profits were excellent: China Business News reported that as of July 4, the global price was more than $54 per ton higher than the domestic price, which is controlled by the state.

But then, to clear the air for the Olympics, China curtailed its coal production by restricting consumption, and limiting the supply of explosives used in coal mining.

According to the National Bureau of Statistics, coal output in July fell 8 percent from June, to 220 million tons. (I should note that very recent statistics of any kind on Chinese coal are rare and hard to come by if you don't read Chinese, and even if you do, their reliability is completely unverifiable. But we use what we can get.)

But the big picture is even clearer.

Five years ago, China sported an 83 million metric ton trade surplus in coal. Last year, that dropped to a mere 2 million, effectively taking 12 percent of the global trade in coal off the market.

Imports
Coal inventories have been chronically low this year in China. A massive heat wave in the early summer had caused its coal consumption to soar, and the supply just wasn't able to keep up.

"After aligning the current stocks figure for comparison purpose, they were only two-thirds of last year's highest level," said Li Xinfang of the State Grid, the country's chief grid operator.

Then came the Olympics, and the kibosh on coal.

China's coal imports fell 36 percent from May to June, and June imports were down 32 percent year over year:



Type of Coal Imported
Change
June ‘07-‘08






Anthracite
-51.13%

Coking Coal
-7.41%

Coke and Semi-coke
-53.59%

Non-coking Bituminous Coal
-10.91%

Total
-32.11%


Source: China General Administration of Customs

We'll get out the outlook for imports in a moment.

Coal Shortages
The scaling back of both domestic production and coal imports produced a predictable result in short order: widespread and frequent outages. I have been reading a steady drumbeat of news reports chronicling the blackouts for the last several months.

Approximately half of China's provinces are now rationing electricity, with forced limits on local governments and priority allocation to the Olympic venues.

If you doubt that the Olympics are a big deal in energy terms, consider this: Beijing invested over 20 billion yuan ($2.91 billion) to beef up its grid for the Games. It's a good thing too, because on the first day of the event, peak power demand in Beijing—a city of over 17 million people, just under the population of New York City—jumped 21 percent.

The shortages have been due in part to government-imposed price caps on grid power, which have not kept up with the rising global price of coal. This forced smaller producers to operate at a loss, and so many of them simply stopped running their plants. The large state-owned plants, however, have been compelled to keep the lights on, putting a drain on the national coffers.

According to the China Electricity Council, over a third of the nation's power plants had net losses over the first five months of the year, most of which were coal-fired. The State Grid reported that about 3 percent of the country's coal-fired generation capacity was idled last month, due to a lack of coal.

Regional outages can be even worse. Last month, more than 15 percent of generating capacity was shut down due to a lack of steam coal in Shanxi...China's top coal-producing province. How's that for irony?

This week, the State Grid Corp. announced that power output was down 17 gigwatts from a year earlier in its territory.

In an effort to restore profitability for coal-fired power producers, Beijing announced a 5 percent hike in electricity rates on Tuesday this week.

Even so, according to estimates by BNP Paribas SA, the price of electricity in China is still 30 percent lower than it would be if it properly reflected the current price of coal.

Import Surge Dead Ahead
Now that the Olympics are nearly over, stocks at coal-fired plants are slowly building again. But supplies are still far too low for comfort, and the central government is signaling that it's about to further release its restrictions.

A statement this week by Liu Tienan, vice chairman of the National Development and Reform Commission, encouraged power plants to stockpile coal early this year, before the additional demands of the winter season set in. If coal supplies are not soon increased, he warned, power shortages would worsen.

Last week, China's General Administration of Customs said that coal imports should be increased to bring the grid back up to full power.

And Wang Dexue, China's vice minister of the State Administration of Work Safety, said on August 9 that China will increase production at its larger mines in the second half of this year.

I have no doubt that the minute the last Olympics tourist flies home, China will be going full bore to produce and import coal, particularly steam coal, once again.

Next week, we'll explore exactly how that's going to work, and the implications it has for grid power and many other commodities.

And of course, how to profit!

Until next time,



Chris

P.S. This is the sort of early warning that gives investors a shot at the best profits. To discover our very best picks in energy, subscribe to the $20 Trillion Report.



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[madcowdisease]

Good read, thank you.

Does anyone have a favorite in metallurgical coal? I hold FDG but with the recent buyout bid don't expect it to go higher - however I'll hold for the 11% dividend yield until the deal goes through. FDG was my play on the metallurgical variety so I need to look elsewhere for a replacement. MEE gets tossed around a lot. Is this a decent play in this sector?

[MaryKay1965]

Good read, thank you.

Does anyone have a favorite in metallurgical coal? I hold FDG but with the recent buyout bid don't expect it to go higher - however I'll hold for the 11% dividend yield until the deal goes through. FDG was my play on the metallurgical variety so I need to look elsewhere for a replacement. MEE gets tossed around a lot. Is this a decent play in this sector?

MCD, Check out the link below.

It gives very detailed information on each coal company traded in this sector.

This should help you make an educated decision on your quest for a replacement.

http://www.coalsectorstocks.com/CSS/Stock_List.asp

[Rich]

Very interesting thread.

MaryKay, the link you gave, what a disapointment :-(
PCX, Patriot Coal isn't listed ~~ Now I'm REALLY scared ! LOL

Aiki, you bring very good issues to think about, thanks. I still however don't understand why it was reported that coal was in such short supply and then in a week portfolios dropped up to 50% or more. All this because of the dollar ? I'm begining to believe when oil went down the entire energy sector followed in fear and not in logic. PCX for instance made arrangements before the stock turned to increase their prices by a huge amount and they have the entire year sold, but the stock still seemed to follow oil, even thought the contracts have been established, making Patriot a much bigger profit.
Rich