China's gross domestic product grew by an unexpectedly strong 10.2% in the first quarter and fixed-asset investment rose an incredible 27.7% from the year before. A separate report indicated China's demand for crude oil rose 6% in March from a year earlier, the strongest increase since last September.

Over the next 15 years the number of automobiles in China is expected to increase fivefold, which could double China's overall demand for oil. China has already passed Japan's to become the second largest importer in the world. By 2020, China is expected to import 70% of its oil needs, compared with 40% today. Meanwhile, the growth in U.S. oil consumption, starting from a higher base, rivals China's growth when measured in barrels per day.

China, which has over 1.3 billion citizens, is now the world's largest consumer of steel, copper, and zinc. According to Morgan Stanley, China accounts for between 25 and 35 percent of global demand for aluminum, copper, iron, and steel.

The dramatic drop in total gasoline inventories over the last few weeks (see the Raymond James chart at right – the green triangles are 2006 inventory levels) has some energy analysts concerned. The decline may reflect the fact that some areas are switching from Methyl Tertiary Butyl Ether (MTBE) reformulated gasoline (RFG) to ethanol RFG. The trend over the next few weeks will be telling.

A recent Raymond James report summarized the state of the gasoline markets as follows:

The MTBE to ethanol switch scheduled for May 6th has the markets nervous of potential gasoline shortages in the near future. For that reason, speculators have bid up the price of gasoline in recent weeks to capitalize on any disruptions. More expensive gasoline has also helped to push oil past the $70 mark despite record crude inventory levels.

While we believe there is the potential for localized gasoline shortages in the coming weeks, the probability of widespread shortages is remote, and the low gasoline inventory situation should improve through the summer. However, volatility in the gasoline market should help keep oil prices at or near record levels into the June timeframe, at which time the markets will then become more concerned with new sulfur regulations in distillate fuels such as jet fuel, heating oil and diesel. In short, look for oil products to drive commodity prices over the near-term as the markets digest new fuel regulations.

Another recent Raymond James report summarized the state of the crude oil markets as follows:

We believe that the oil markets have entered a new paradigm where chronically low excess OPEC production capacity will likely lead to increased price volatility, along with generally higher average prices. Production from such OPEC members as Venezuela and Indonesia already appears to be in permanent decline. Non-OPEC supply continues to face an uphill battle, with most mature producing regions in decline and dramatically decreasing growth rates in Russia over the past year.

As rising demand, particularly from China and India, has outpaced non-OPEC supply increases, the resulting increase in OPEC production has left the world with an extremely low level of excess production capacity. In fact, OPEC’s excess capacity is the lowest in three decades. This is the main driving factor behind our optimism about longer-term oil prices.

Electric utilities are worried they might not be able to ship enough coal to power plants this summer to meet electrical demand if the nation’s railroads have to untangle the logistics of ethanol deliveries to oil refineries. Refineries are making the switch to ethanol instead of using MTBE as a gasoline additive, and due to the corrosive nature of ethanol it must be shipped by tanker truck or by rail tankcar. MTBE was mixed and transported with the gasoline by pipeline. Rail deliveries of coal have been an issue for the last year, and several utilities have filed suit in the last month alleging damages for non-delivery of coal shipments.

AccuWeather has issued their long term summer forecast and it calls for hotter than normal temperatures across much of the nation. If this is the case, electrical demand from cooling loads should keep natural gas fired plants running at utilization rates well above normal.

AccuWeather is also forecasting an above-average hurricane season which might impact natural gas production in the Gulf of Mexico and along the Gulf coast again this year. Water temperatures in the Gulf are above last years’ level – heat from the Gulf supplies energy to tropical storms and hurricanes.