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By Keith Fitz-Gerald
Money Morning/The Money Map Report
Here's a headline investors probably never expected to see: The United States and Chinaon the management of the two countries' strategic oil reserves.
We don't know whether to find this story – first reported by China's state-run Xinhua News Service – amusing, or downright terrifying.
So for now we will think logically about the possible reasons why such an unlikely alliance would be formed, and ponder what we should do about it.
Let's talk about the why first.
Ostensibly, this agreement is about curbing oil speculation in the international markets. By including China, the consortium of international members who report their oil-reserve plans through the International Energy Agency in Paris, not only get a look at China's current inventory, but also at that country's potential future energy needs.
Considering it's the United States that's shepherding China through the admissions process, we suspect this is what's really driving the agreement.
China's growth is unprecedented. But as a Communist nation, its workings are all too often closed off to the rest of the world. Having international disclosure of China's oil reserves and future stockpiling plans will theoretically provide advanced notice to other nations of higher oil prices in the event one or more nations makes a run on the markets.
Knowing how secretive Chinese traders can be – and the potential competitive advantages they are giving up in the interest of international cooperation – we're more than a bit stunned over the prospects of a China that would be willing to disclose this information.
As for how we might use this agreement to create bigger profits in the years ahead, that's a crucial point to consider.
Our sources suggest that China is slated to spend between $300 billion and $500 billion in the next five years on energy conservation and environmental protection equipment. And that's in addition to the $1 trillion or more that nation already has apportioned to energy production and other petroleum-related matters. Therefore, any storage and demand figures can conceivably be utilized to develop better investment intelligence on where it plans to spend its money and in what order.
Indeed, now that the OPEC crowd has finally conceded that the global supply outlook for petroleum is nowhere near as serene as they've tried to have us believe for years, this kind of market intelligence becomes all the more valuable to investors.
And given that $300 billion to $500 billion represents nearly 30% of the total global market for such conservation and protection equipment, this could be a powerful indicator when it comes to future profits. With regard to energy production, that's more of a wildcard. But since oil remains priced in U.S. dollars, the potential demand figures carry a highly correlated relationship to the strength – or weakness – of the greenback.
Moreover, given that much of this equipment – as well as China's reserves – come from the United States, China's participation in the IEA consortium could serve as important political antacid when it comes to reducing China's trade surplus, which has been a major point of controversy in Washington.
News and Related Story Links:
- Money Morning Commentary:
Investors Will Clean Up From Beijing's Toxic Mess for Years to Come
- Money Morning News:
Oil Hits $100 a Barrel on Global Political Tension and Supply Concerns
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.