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What China’s Stock Market Implosion Means For Oil at Trader’s Narrative





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The last time I revisited the Chinese stock market, it was in the throes of a major bear market. Fast forwarding to now shows things have only intensified with the Shanghai composite trading at less than half of its top in October 2007:

shanghai composite fall by half june 2008

While we quibble about a percentage point here and there to see if our market decline fits into the classic definition of a bear market, there are no qualms regarding that in China.

Support?
The scary thing is that even after falling so much, the index is still far from major support areas. If you look at the link above, you’ll see a long term chart of the Shanghai composite going back to its founding. According to that chart, significant support is somewhere in the vicinity of the 2000 level. That would put a potential fall to almost 70%!

I have no idea if that will happen but the Chinese stock market certainly has precedent. It is not for the faint of heart. The Shanghai Composite can go ballistic: rising as it going ten fold in the span of a year (1991-1992) but it can also lapse into deep stagnation, as it did from 2000 to 2007, treading sideways.

Dire Portents
But what interests me more is the portent of such a dramatic decline for the price of crude oil. From what I read, China holds significant responsibility for the current price of oil because of its voracious appetite. But if the stock market is a forward discounting mechanism, that means that the Chinese economy is about to decelerate or even go into a tailspin.

The corollary of that is lower demand for oil and, if I remember Economics 101 correctly, that would mean a lower oil price - all things being equal.

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18 Responses to “What China’s Stock Market Implosion Means For Oil”  

  1. 1 Bruce

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    STREWTH!! (When to have a crash when you’re not having a crash!)

  2. 2 Bruce

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    I omitted to say that the significance of your comments re this chart Babak, must surely be potentially blooming serious for every economy. If China’s “not playing” it’ll be a slow game one would think???

  3. 3 StockJockey

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    Babak,

    Well I hope you are right. Everyone was cocksure of a ramp into the Olympics, but that theory got shot to hell.

    Oil has been trading very funky IMO, and there are very few bears, and a slowdown where it counts.

    Oil Bulls are cockier than iPhone/AAPL fans and that has not been working out so well of late.

    lets see how they open up oil tomorrow, I am hoping for an Island top that Gartman put out there tonite.

    SJ

  4. 4 paul

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    At the top, the SSE Composite had days where the volume was over 6 billion and months where it averaged 5 billion.

    The price was speculation that did not pan out. And ripping a speculative bubble out of a market can have little change in the need for oil. They are still going to need X% more than last year.

    Commodities go through bubbles. The Shorts and Longs get so out of whack — especially with huge long-only funds — there if nothing holding the price back. So oil will eventually pop, but $110 oil sounds cheap now.

  5. 5 Babak

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    paul,
    the end of speculative bubbles are much more traumatic than that. When the Nasdaq bubble ended it threw the US economy into a funk. A look through market history reveals similar consequences for every bubble.

  6. 6 Darrell

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    Hey Babak, couldn’t help but notice this post just got put up on seekingalpha.com . Cheers, darrell

  7. 7 countryboy

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    Babak, I suspect that yes, in the US and other highly developed countries where the capiptal markets are tightly integrated with the broader economy, then the end of a speculative equity bubble will have much wider and significant economic implications.

    But in an economy like China’s, the equity market plays a far less important role than is the case in the US, Europe, Japan etc etc. Therefore the ending of the bubble will have much less direct impact on the overall economic situation within China (including its oil consumption).

  8. 8 Ben Gan

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    Every bubble has to burst. Oil is no exception. It is only a matter of time and, when it
    comes , it will be fast and speedy. At the present price of slightly under 140, there are already hue and cry in many countries.
    Once an efficient replacement is found or invented, oil will come a crumbling.
    Just wait for the day. It may happen sooner than expected.

  9. 9 tapereader

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    Nobody wants to go against the crowd. A popular delusion, china`s grwoth will be stable over the next years.
    Tankers full of oil, waiting for higher prices.

    What about Soybeans and Corn ?

    Few industrial metal bubbles already collapsing….I think its time to go short commodities !

  10. 10 Bruce

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    One way to bring the oil price down quick smart is for some fair dinkum political will on the govt’s part, and the population to stop being so blooming wasteful of resources. Drive smaller cars and convert to gas/electric - not petrol. There’s too much oil company bum-kissing going on!

  11. 11 Ian

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    1) GHM an oil stock was recently uncovered by my TRIGR stock system. Check out my blog / for daily TRIGR stock picks.

    Thanks,
    Ian-

  12. 12 Joe Grossman

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    Oil and energy price is heavily subsidized in China. While China has allowed oil prices to increase recently, it’s still heavily subsidized. For the government, the subsidies cannot be reduced to zero overnight as it will wreck a lot of havoc in the daily living of Chinese, and political unrest could very well follow.

  13. 13 shareinfoline.com

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    Shareinfoline.com will help you if you want to invest in share market.We provides tips on all BSE,NSE shares or commodities.We Provide Recommendations on Indian Shares & Commodities via SMS. We provide recommendations
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  14. 14 Jon G

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    I respectfully see this situation a bit differently…

    This post assumes the stock market is highly correlated to real economic activity. At best the correlation is loose and such cause and effect statements like Stock Market down therefore Oil down is a stretch.

    By any measure the Chinese Stock Market was in a bubble, as is speculative oil trading. Both burst, as all bubbles do.

    Recall the Nasdaq was down 77% from the peak and economic activity did not slow down by 77%, more like 3% overall with sectors, such as high tech getting hammered.

    It is also not unusual for developing economies and stocks to boom and bust much more violently than developed established mature companies.

    Great blog, great content.

  15. 15 campton-stock market investing

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    During an oil price rise, it is advisable to hold on to energy stocks shift focus from the mass market general retailers. It is a rather straight forward approach. i think china is doing that.

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