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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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A Limp Oil World

China was the savior of commodities the past year. And a particularly hot spot today.

China's customs agency released some impressive trade numbers. December exports were up 17.7% year-on-year. Imports jumped even more. Up 55.9% year-on-year.

Markets worldwide rallied on the news. Investors took the numbers as a sign the global economy is picking up.

Some of the enthusiasm should be tempered by the fact these are year-on-year figures. Meaning we're comparing December 2009 to December 2008, the latter having come at the depth of the financial crisis and therefore being one of the worst months on record for a number of economic indicators.

(As an aside, this is part of the reason a lot of economic data has turned positive during the last couple of months. It's easy to look good when you compare to the awful months late in 2008. Year-on-year comparisons are going to look less rosy as 2010 wears on.)

But despite that caveat, it appears the Chinese economy is doing well. Look at trade with the U.S.

American imports of Chinese goods totaled $80 billion in the third quarter of 2009 (the last quarter for which American authorities have reported data). That's down 17% from the record $96 billion in Chinese goods America imported in Q3 2008.

During the same period, America's total imports fell by a much-larger 23%. U.S. imports from the Euro Area dropped 29%. Japanese imports fell 26%.

All told, Chinese-American trade has held up much better than other pairings. Mostly because China exports the type of things people still buy during a recession.

U.S. apparel imports (a market where China dominates), for example, are down only 13% during the past year. Likewise food and beverage imports. Compare that to vehicle and parts imports, which have fallen 33%.

But the real excitement over today's news came in the oil sector. Oil hit $84 per barrel after it was reported that China's December crude imports hit a record 21.26 million tons. That's 160 million barrels. Or 5.15 million barrels per day.

This is indeed an impressive figure. Up 25% from China's November import total. Some oil bulls took this as a signal that the crude market is tightening. Potentially meaning rising prices ahead.

But events elsewhere in the world are not as encouraging for crude. America for one has seen a sizeable drop in oil demand over the past year.

As late as fall 2008, U.S. crude imports were averaging around 10 million barrels per day. But imports steadily declined through 2009. In the week ended December 18, 2009, imports hit a year-low of just 7.7 million daily barrels.

It appears that America has lost somewhere between 1 and 2 million daily barrels of oil demand (we'll see where the import figures stabilize). Meaning that even with the Chinese demand increase of 1 million barrels daily in December, global demand probably fell.

And it's not just America using less oil. Japan's Tokyo Electric Power (Asia's largest utility company) reported last week that its December oil consumption fell 63% year-on-year, from 1.1 million barrels in December 2008 to just 400,000 barrels this past month.

This staggering decrease is partly due to the firm bringing back on-line its Kashiwazaki-Kariwa nuclear complex, damaged by an earthquake last year. Reducing the need to burn oil for power generation.

But the Japanese are also using less oil, period. In December major fuel supplier Nippon Oil announced plans to shut 200,000 daily barrels of oil refining capacity at three facilities across Japan. The company has said it will cut 600,000 daily barrels of capacity by 2015. That's 20% of the firm's production.

All told, Japanese oil demand is down almost 1 million daily barrels over the past year. The OECD nations have shed 5 million daily barrels in usage. And world demand is down 2 million daily barrels, even with China's ravenous imports.

We've long feared peak oil supply. Have we passed peak demand?

Here's to energy efficiency,

By. Dave Forest of Notela Resources


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