Seadrill just issued the following news report:

Hamilton, Bermuda, July 30, 2010 - Seadrill has been awarded a six months contract extention for the ultra-deepwater semi-submersible drilling rig West Hercules by Husky Oil China Ltd. The estimated value of the contract extention is approximately US$90 million. The extention secures continued employment for the ultra-deepwater unit offshore China until May 2012. Husky Oil China Ltd. has the right to extend the assignment by another six months on the same terms and conditions.

$90 million works out to $500,000 per day, so this is a very, very good sign that dayrates are not falling as much as I feared they might. On the other hand, the extension was only for six months. But this news tempts me a little closer to buying more Seadrill.

Now, on to a bigger picture for the rest of the year. Russ Winter has a chart from Worldsteel showing that China is using 2.25X the steel of the USA, Europe, and Japan put together. This is not sustainable.
China is not sustainable. I think deflation will really pick up over the next year. This means two things: bonds, and short commodities and commodity equities. I already have the bonds at a 50% position. Short commodities is currently limited to 10% short copper via SCCO. I have two positions in FXI puts, but need to look for some more. Russ Winter recommends EDZ. Until I find something better, I'll look at trading in and out of this due to the volatility.

I need to look for where the margins will get compressed when Chinese demand finally drops. A quick check shows the large Brazilian miner Vale (RIO) at a P/E of 4.7, versus Arcelor Mittal (MT) at a P/E of 25. Another possibility is CAT, which is near a 52 week high with a P/E of 36.

I'm also going to look for an opportunity to lock in a long-term Jan 2012 oil put via USO or perhaps the more aggressive DIG. Oil has the added advantage of Iraqi production reaching a possible 5M bpd by the end of 2012.