China’s Hoarding Oil… What It Means For Your Investments
I’ve been watching the commodity markets very closely. Over the last few months, I’ve discovered something utterly amazing. I think China is stealing oil…
Seriously. Just look at a handful of articles from the Wall Street Journal.
“Reality Check for China’s Impact on Crude”
“China Faces Unexpected Problems Drilling for Oil in Iraq – Farmers”
“China Wields Credit Clout Again to Lock in Brazilian Oil”
If you have an online subscription to the Journal, take a look at these articles. You’ll also find many more on the same topic. Now a word of warning. This was just a small sampling. I could have gone on for several pages listing all the articles about China and commodities.
I’m concerned about what I’m reading – let me tell you why.
China is quietly slipping into bed with oil suppliers around the world. Not only are they aggressively looking for oil in their own country, they’re branching out. It’s like a thick spider web of locations around the globe.
China National Petroleum is drilling for oil in Iraq.
The Chinese government is cutting long term supply deals in Brazil.
They also recently invested $10 billion in Kazakhstan… and $25 billion more in Russia.
The list goes on and on.
Here’s the scary part. Some of these investments carry mandatory supply agreements. For example, in exchange for the investment in Brazil, Petroleo Brasileiro (the government owned oil company) is agreeing to send China oil.
A lot of oil. I’m talking 150,000 barrels a day for the first year… then 200,000 barrels a day for the rest of the 10 year contract.
Do you see what’s happening here? China’s using recent low prices (in the last few months) to scoop up extra oil supply on the cheap. They’re stealing oil supplies right out from under our nose. It’s a brilliant move.
China realizes oil wells can’t be turned on like a light switch. It can take years to get them up and running – especially those deep in the ocean. The low hanging fruit’s already been picked. All the easy oil is gone.
As demand starts picking up, stockpiles will disappear… and prices are sure to rise.
China’s no dummy. They know before long, their economy will be glowing red hot again. They need a steady supply of oil and now’s the time to cut those deals, lock in prices, and guarantee supply.
What’s it all mean for us?
Most certainly, it means higher oil and gas prices in the long run. And worse case… we might see oil shortages. Can you envision a time when we need to wait in line to fill our tanks with gas? It might even mean rationing.
There are a few macro investments anyone can make to profit from China’s bold attempts to lock up oil supply.
Investing in oil is simple. You can track the commodity itself with an oil ETF. It’s a great way to profit from growing Chinese demand in the years ahead.
Buying oil producers with proven reserves is another good move. Some of these companies even pay generous dividends… so you get paid to hold your stock. You can never go wrong there.
One other direction you can go is alternative energy companies.
As oil prices move higher, the economics of alternative energy become more attractive. These companies will soon find increased demand for their products… and one day it may be the energy source available. I’m closely watching these companies. I’ll let you know when I find something interesting.
Category: Foreign Markets
