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Oiling the Chinese Economic Growth Engine

Companies / Oil Companies May 19, 2010 - 07:16 AM GMT

By: Tony_Sagami

Companies

Best Financial Markets Analysis ArticleBlack gold, Texas tea. Bubbling crude. No, I’m not talking about Jed Clampett and the Beverly Hillbillies. I’m talking about oil.

I talked about oil in my last Saturday video report, but the news and growing global demand for oil is worth discussing again.


Last week, OPEC raised estimates for global oil demand in 2010. OPEC, responsible for about 40% of the world’s oil, expects the world to consume an additional 950,000 barrels a day to 85.38 million barrels per day.

Guess where the bulk of that additional demand for oil is coming from? Yup, China.

“The recovery in the world economy appears to be continuing at a steady pace. China has been among the main drivers behind oil demand growth so far this year, which should continue for the rest of the year,” said OPEC.

OPEC is the only organization that expects oil demand to keep growing.

Norway, the sixth largest oil exporter in the world, said that it expects the price of oil to rise by an additional 11.8% this year. Why? Increasing demand from emerging markets like China.

“The demand for oil is now increasing, after a decline last year. The increasing oil demand is especially visible in growth economies such as China,” said the Norwegian Oil Minister.

OPEC-member Venezuela is selling 460,000 barrels of oil to China every day, a 21% increase from a year ago.

“Today we are selling more than 460,000 barrels per day to China (and) we are building a refinery jointly with China,” Oil Minister Rafael Ramirez said.

The Chinese numbers confirm the same trend. In April, China imported 21.1 million metric tonnes of crude oil, a new record high. To give you some perspective, that is 30% more than the 16.20 million tonnes China imported 12 months ago.

For the first four months of 2010, China has imported 77.8 million tonnes of oil, a 36.7% year-over-year increase.

China itself is gearing up to use a bunch more oil. China now has the world’s second-largest capacity for crude processing (after the U.S.) and is now capable of refining 477 million tonnes of oil each year.

That is a whopping 72.8% increase in refining capacity over the last decade. The U.S., by the way, has not constructed a new refinery in 33 years!

China now has the world's second-largest capacity for crude oil processing.
China now has the world’s second-largest capacity for crude oil processing.

In case you’re curious, Sinopec (NYSE:SNP) is China’s largest refiner and the third largest in the world behind ExxonMobil and Shell. China National Petroleum Corporation, China’s second-largest refiner, is the eighth-largest in the world.

Clearly China is expecting to refine a bunch of oil and it is cutting supply deals all around the world to assure a steady supply of oil. In just the last two weeks:

Oil Deal #1: China signed a $23 billion deal with Nigeria to construct three gasoline refineries and a fuel complex. Nigeria has vast riches of oil fields, but lacks the ability to refine it into fuel. China’s cut is that it gets to siphon off an undisclosed — but no doubt huge — amount of that oil for its own use. China imported just 28,000 barrels a day of Nigerian oil in 2009, but that number will skyrocket from this deal.

Oil Deal #2: A subsidiary of Sinopec signed a supply deal with Qatar for oil from offshore wells. China, in 2009, imported 614,823 tonnes of crude oil from Qatar.

Oil Deal #3: PetroChina (NYSE:PTR), in 2008, signed a LNG purchase deal with Qatar to import three million tonnes of LNG a year from 2011 for 25 years.

Oil Deal #4: Devon Energy sold its offshore oil fields in the South China Sea to CNOOC for $515 million. This oil field produced 12,000 barrels of oil per day last year.

Oil Deal #5: China Investment Corporation, the sovereign wealth fund of China, signed a deal with Penn West Energy for 55% of its Canadian oil sands fields for $817 million. Under the joint venture, Penn West will give CIC a 55% stake in its lucrative oil sands fields.

As an investor, you should be following China’s lead and adding some oil to your portfolio. If playing a little monkey-see-monkey-do makes sense to you, here is an assorted of energy exchange traded funds that you should consider.

United States Oil Fund (USO) and PowerShares DEB Oil Fund (DBO) attempt to mirror the price performance of West Texas Intermediate Crude.

United State Gasoline Fund (UGA) tracks the price of gasoline and the United States Heating Oil Fund (UHN) tracks heat heating oil.

SPDR Energy Select Sector Fund (XLE), Vanguard Energy ETF (VDE), and iShares Dow Jones U.S. Energy Index Fund (IYE) invest in a broad base of oil and energy related stocks.

iShares S&P Global Energy Index (IYE) and WisdomTree International Energy ETF (DKA) have a heavy emphasis on oil companies all over the world.

You can also invest up and down the oil food chain with ETFs like the Oil Services HOLRDS (OIH) or iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ) that invests in companies that provide various drilling, platform, engineering, and pipeline construction companies.

iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO) is somewhat of a wildcatter fund that tracks the performance of companies engaged in the exploration for and refining of oil and gas products.

PetroChina is Asia's largest oil producer and second most valuable company in the world.
PetroChina is Asia’s largest oil producer and second most valuable company in the world.

If you prefer individual stocks, you should take a look at China’s three state-controlled oil companies: China National Petroleum (NYSE:PTR), Sinopec (NYSE:SNP) and China National Offshore Oil Corporation (NYSE:CEO).

By the way, PetroChina is Asia’s biggest oil producer and the second most valuable company in the world (as defined by market capitalization) after ExxonMobil Corp.

Is today the best time to invest in these ETFs and stocks? You’ll need to do your homework and make your own decision about when to buy. But make no mistake, the long-term trend for oil prices is higher … much, much higher … and the above securities could soar in price.

Best wishes,

Tony

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