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 the wake of today’s sharp price rise in crude oil futures, many of our research users have contacted us for an update on our outlook for crude oil prices. Laguna Research Partners continues to stand by the key forecasts made in our 2005.04.14 "Crisis on the China Rim..." (CCR) analysis calling for crude oil prices in excess of $100 per barrel within three years and increased crude oil price volatility. Here are two 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."

"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."

Crude oil prices have surged significantly following last Wednesday’s report from the US Department of Energy (DOE) indicating that US crude oil inventories had fallen 1.6 million barrels versus expectations that had called for a modest inventory increase. This surge in prices has been persistent despite the following data points:

OPEC’s 11 member states are currently producing crude oil at a total rate of more than 30 million barrels per day, despite an official OPEC production quota of 27.5 million barrels per day agreed upon at the oil cartel’s March 2005 huddle.

Despite the inventory slip announced by DOE last week, US crude oil stocks still totaled 332.4 million barrels. This is well above the upper end of the historical range for early summer.

As we described in detail in Post 5 (May 25) of this blog, the excellent chart work of our technical analysis expert Ron Griess, CEO of TheChartStore.com, indicates that a fundamental shift has occurred in the worldwide crude oil market since 2001.09.11. And that shift, in the view of Laguna Research Partners, heavily favors crude oil price bulls.

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

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