| Saturday, September 12, 2015 | |
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How 200 Arrests Sparked a Market Meltdown The markets ended August down... and began September with a swoon.
The epicenter is in China. On top of a subpar report from the Chinese government on slowing industrial activity, authorities created even more uncertainty last week...
China arrested 200 people - journalists, brokers and regulators - for spreading rumors about the country's economy.
Arrestees went on television, apologized and took personal responsibility for the heavy losses the country, its market and its people suffered.
That's how much trouble China is in at the moment.
This mentality is what helped spark the decline in global shares on August 25.
These ridiculous claims by the Chinese government undermine any confidence the world may have in the country's economic situation. If the government is conducting witch hunts like this... what's really going on?
Triumph Amid a Slowdown
On September 1, China's official Purchasing Managers' Index (PMI) fell to 49.7 - the lowest level in three years, since August 2012. It also fell below 50, which is a sign of contraction. The Caixin manufacturing PMI slipped to a six-year low.
For crude, the picture was just as bleak. In July, China's oil demand fell 4% from June. Though, year over year, demand was up 4%, from 9.72 million barrels per day (bpd) in July 2014 to 10.12 million bpd in July of this year.
In July, automobile sales declined more than 7%. They dipped lower another 2.98% in August, marking the fifth straight month of declines.
This is a sign that consumers are concerned about China's situation.
A looming Chinese economic slowdown is a detriment to global growth. China is the world's manufacturing floor. It's also the world's second-largest economy behind the United States. Its growth helped the world stay out of a recession over the last several years.
The recent fragility of its markets has shaken confidence the world over.
But its stock market was fanned higher this year by overleveraged speculation... by its government encouraging people to invest, and to do so on margin.
At its peak in June, the Shanghai Composite Index was soaring, up 128% over the past year. Today, it's negative for 2015, falling 12.5% in August and for the third straight month.
 But, according to China, everything's fine. Right?
In August, the Dow suffered its worst single-month loss since May 2010, while the Stoxx Europe 600 tumbled the most since August 2011.
All eyes turned to China and saw weakness where previously there had been strength...
Understanding That OPEC Already Won
So, what does all of this mean for energy investors?
China is the largest energy-consuming market in the world.
But global demand for crude has been increasing at a breakneck pace - the fastest growth in five years, in part driven by China. According to the International Energy Agency, global demand for crude increased 1.6 million bpd this year.
Unfortunately, global supply is also increasing at a record pace. Worldwide supply of crude is up 2.7 million bpd over last year.
One of the largest issues comes back to China. In August, China's crude imports fell 13%. Combined, the U.S. and China consume a third of total global oil. And in the U.S., we're sitting on a cache of record inventories.
So, the two largest energy-consuming economies in the world are suffering from two very different problems... The U.S. has a surplus of crude and China's consumption is declining.
Two very different situations. But both put downward prices on crude, especially as OPEC sees no need - for now - to slow its production.
Regardless of whom the government blames for the current situation, as China's consumption continues to slow, the crude markets are in a perilous position.
As we've seen, it's not great news for traditional energy companies. But it's great news for oil consumers and the companies working to move America's growing inventory.
Good investing,
Matthew
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