Oil's Outlook Remains Good

Includes: DBO, OIL, USO, XLE
by: Lawrence York

One day after the Sino-US Economic Dialogue, China announced it was raising prices on electricity, gasoline, diesel oil and aviation kerosene to reduce demand and help its domestic refiners. US investors were surprised by the news announced late in the day and oil fell almost $5.00 a barrel. This weekend Saudia Arabia will host a Oil Producers Meeting in Jeddah to discuss how to deal with the rampant, worldwide rise in the price of oil.

China's announcement explains Secretary of Treasury Hank Paulson's ear to ear podium grin following his remarks at the conclusion of the dialogue. Unfortunately it doesn't add up.

We have said before and we reiterate it again that other nationstates are gaming the US, acting in their best interest, just like we are. The point this time is that China simultaneously announced subsidies to certain rural and urban residents, taxis, farmers and fertilizer makers.

At the same time Hong Kong's Transport & Housing Bureau issued a relief proclaimation from double taxation for airlines originating flights between Hong Kong, Mexico and Finland. The three jurisdictions will be tax exempt as for income and profits derived from international flights in an efffort to cut operational costs and and improve income and efficiency. This means the 17-25% "energy" hike will have an effect. It will affect GM (NYSE:GM) and Ford (NYSE:F) sales in China as well US airlines, freight carriers, and export prices of US goods that have to be transported within china. Moreover it will be inflationary for China so that one can bet China's proclaimation was essentially lip service appeasement to compliment Paulson's rhetoric of the US policy for a strong dollar.

Look for oil to decline a bit, perhaps to 120-125 per barrel in the next week or so while people goo-gaw over the mutual cooperation of nation-states. But don't expect OPEC or Exxon (NYSE:XOM) to want lower prices, nor China to ruin its upcoming Olympics by stoking inflation and creating disincentive to travelers to come to China.

In the end the US, China and the oil producing nations are acting in their own best interests which are a weak dollar to help US exports, a Yuan artificially pegged to the weak dollar, and record high profits repectively. In other words trade the sentiment or just hold your stake.

As a matter of fact, you may want to boost it on any decline. Remember the terrorists. One faction wants to drive the prices up to bankrupt the West and will likely sabotage oil production to keep prices high. The other side requires devisiveness and a common enemy to sell weapons (for protection) and may soon take out Iran's nuclear factilities. Get the picture? It's a theme you can trade because its unlikely to end anytime soon.

Disclosure: Long XLE