[China sees 9.5 pct growth, slower FX reserve rise]
but the article quotes the Chinese govt official: "Li said on the sidelines of the ADB meeting in southern India that this year's growth could be 9.5 percent but added: "Because there could be more tightening policies, growth of 8 percent to 9 percent is also likely."
China's awareness of monitoring their growth will imply a reduced demand for oil as compared to recent GDP growth. So I anticipate (if not for FEAR) this will have a bearish affect on oil prices. OK, we know this with the economics of supply/demand/pricing. What is interesting now is the other part of the statement and its affect on the USD.
My Mandarin skills are not so good, but if China is saying they will be reducing their purchases of US Treasuries, this is most likely to contribute to further weakening the USD. Since oil sells for dollars, the oil-producing countries are losing revenue as the value of the dollar continues to decline. With suppliers paying oil production costs in local currencies they have to charge more USD to get the same forex to local in order to make or grow profits.
How does this affect ECA? Those with analytical minds run correlations over the last five years (weekly) between oil-gas-fx-ECA-sectors. Then note if ECA is receiving the majority of their profits in USD from ng revenues, and compare the CAD expenses incurred in Canada. Yeah, you have to make some assumptions but a trend is apparent and you'll have some fun with the data knowledge. Enough where this answers my question of how to fit ECA in my energy portfolio.
But, going back to the China article, I imagine the talking heads will be chirping on this come Monday, in both the oil and currency markets. The US has been through this before and it resulted in rising interest rates and eventually global recession (funny, wasn't Iran in the picture at that time also?). That does damper the demand for oil - and most everything else. What is different now is the alternative of the Euro to base oil prices on. But that?s a situation rather depressing for the US?s economy.
IMO, the US must dramatically increase the tax on gasoline to ease demand and incite fiduciary responsibility of the natural resources. The proceeds from the tax must be used to begin reducing the deficit the country has built. At current burn rates of 400m gallons daily, a $.25 tax provides $100million daily $36.5billion annually. Every little bit helps.
"$0.01 decrease in the US/Canadian Dollar exchange rate = $ 5 million in Net Earnings"
... but recently the chnage has been an "increase" hence the effect on earnings of recent Cdn $ appreciation would be negative. For example at 90 cents US to 1 Cdn $, the effect is ($25 million US) or negative.
Yes for 2006's assumptions, the situation the USD is in will take several years to work out without significant rate hikes. Though I am not pleased with ECA's performance the last few months, as compared to my other energy stocks, I have little concerned with ECA. I've held it for two years and it has a niche - perhaps a new one now - in my portfolio. My concern is the US economy and what will happen if reduction in foreign investments begin snowballing. There will be much more important concerns than EnCana's stock price. Though I think they will wait, I wouldn't be surprised if the Fed jumps from 25 to a 50 bps move on Wednesday.