Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

In our 2005.04.14 "Crisis on the China Rim..." (CCR) analysis, Laguna Research Partners made several important statements regarding the impact of China's economic emergence on our outlook for crude oil prices.  The following are excerpts from page four of CCR:

"Based on our analysis of the intense economic, crude oil, and military confrontations developing among the China Rim region’s largest economies, we believe that the most aggressive crude oil price targets calling for $100 per barrel within the next three years will prove to be conservative."

"The analysis supporting most of the crude oil price targets that we have reviewed is focused primarily on the "demand side" of the crude oil price equation. We see the future of crude oil pricing as being determined by key demand side and supply side variables."

"We expect crude oil prices to become increasingly volatile as the market’s time horizon swings back-and-forth between near-term inventory analysis and the emerging crisis on the China Rim, and as the market transitions towards emphasizing a new set of demand and supply drivers."

There are few Wall Street veterans who aren't familiar with the chart work generated by Ron Griess, now CEO of his own technical analysis firm named TheChartStore.com.  Ron has a well-deserved reputation among Wall Street pros for creating historical charts that provide his clients with valuable insights and actionable intelligence.  Simply put, if a chart has an important story to tell, Ron will find a way to present that story in an easily accessible and highly actionable way.

Ron has been kind enough to make available to our research users two crude oil-related charts that are among my TheChartStore.com favorites.   The first provides a bird's-eye view of daily West Texas Intermediate (WTI) spot crude oil prices from 2000.01.01 through yesterday.  The second plots the year-over-year price change during the same period.  (Please click on the thumbnail images below to access full-size pop-up charts.)

There is enough "revelation" in these two charts to keep an analyst busy for days.  Today we'll focus on the fact that there is a striking dichotomy between the pre-9/11 market for crude oil and the post-9/11 market.

During the 2000.01.01 through 2001.09.10 period, nearly all WTI spot traded hands between $25.00 and $35.00 per barrel.  The low price during that timeframe was $23.85 (2000.04.10) and the high was $37.20 (2000.09.20).

The year-to-year percent change in the price of WTI was in a steep decline from early 2000 through 2001.09.11.  In fact, the year-to-year percent change in WTI prices turned negative starting in early 2001.   The year-to-year price decline reached approximately 50.0% in November 2001.

WTI spot prices bottomed on 2001.11.15 at $17.48 per barrel, and since that day "there has been no looking back" as prices have trended steadily upwards.  The post-9/11 peak to date has been $57.28 reached on 2005.04.01.

Most importantly, from a corporate earnings standpoint, the year-to-year change in WTI spot prices since late 2001 has been burdensome.  Two post-9/11 peaks in the year-to-year WTI price change are notable.   First, prices were up 85.0% to 90.0% in late-December 2002 and early January 2003.   Second, prices were up 80.0% to 85.0% during early October 2004.  As recently as late March 2005, prices were up 65.0% to 70.0%.  In general, the year-over-year increase in WTI spot prices has persisted at 20.0%-plus since 2004.03.26.

Finally, at 10:30 am ET today, the US Department of Energy announced that crude oil inventories in the US fell 1.6 MM barrels during the past week, only the second drop in 15 weeks.  Industry experts indicated that, following weeks of intense focus on near-term supply factors as inventories climbed to multi-year highs, the market today switched its focus back to longer-term demand issues, particularly those related to China and India.  Light, sweet crude for July delivery rose $1.31 today to $50.98 per barrel on the New York Mercantile Exchange, after hitting $51.60, up $1.93, earlier in the day.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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