Which Stocks to Watch on China's Growing Oil Consumption 7 comments
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By Julian Murdoch
China oil consumption grew - yes grew - 4% during the month of April, according to a report by Platts. The amazing thing isn't the size of the growth, but that it occurred at all. After all, oil demand in China dropped 6% during the first quarter of the year.
Given all the hopes that are resting on a China-led global economic recovery, a 4% increase is quite good news - especially when everyone else is looking at consumption dropping. The U.S. Energy Information Administration has forecast global consumption to drop by 1.8 million barrels per day in 2009, and the International Energy Agency said in its latest monthly report that global oil consumption is at its lowest levels in two decades.
What's behind the increase?
For one, China has been buying up commodities - including oil - in order to increase stockpiles and inventory while prices are low. On Tuesday, it was reported that China's total oil stocks ended at 38.6 million tonnes - up 1 million tonnes from March to April, even though consumption increased during the same period. (There are roughly 7 barrels of oil per ton, which puts China's oil stocks at 270.2 million barrels.)
At the same time, there has been real domestic demand as well. All in all, it points to a rosy picture for companies operating in the Chinese oil patch.
So how do you, as an investor, play that news? Does investing in oil in general give direct enough exposure to the increases happening in China? Or do you need to take a look into companies closer to the source - perhaps PetroChina, China's largest oil producer (and one of the biggest companies by market cap in the world); or Sinopec, China's No. 1 producer of refined oil products.
Oil In China
The problem with investing in oil futures as a way to capture what happens in China is self-evident - changes in oil prices result from a combination of forces. Optimism, economic data, OPEC decisions, supply-and-demand shocks from all over the world all push and pull at the price of crude. So if you want to ride the wave in China, you've got to invest in China.
Detailing the numerous Chinese companies that are involved in the oil industry is beyond the scope of this little article, so we're going to look at just a few of the biggest.
On the oil production side, that means giant PetroChina [NYSE Arca: PTR] and CNOOC [NYSE Arca: CEO], the China National Offshore Oil Corp. On the refining side we have Sinopec, aka Shanghai Petrochemical Co. [NYSE Arca: SHI]. All three of the companies have ADRs on the New York Stock Exchange.
Plotting the three companies' stock performance against the iPath S&P Crude Oil ETN [OIL] as a proxy for crude futures shows why investors might be interested. Over the last three months, all three companies outperformed OIL's performance quite handily.
PetroChina seems to mirror OIL's performance most closely, followed by CNOOC - which makes sense since these companies are in the business of selling oil.
Sinopec, however, is a different story. Sinopec jumped ahead early at the beginning of April, posting almost a 25 percentage point gain in stock price over just a few days. This jump coincided with the first time this year that the Chinese government decided to raise the price at which refiners could sell gasoline and diesel. Coincidence? You decide.
Another interesting point to look at is mid-April: That's when the price of oil took a sharp dip, but Chinese companies' stock prices continued to rise. It points to the partial detachment of the Chinese domestic oil market from the market for international crude. Because the government is involved in setting oil prices, and because the Chinese economy has decoupled to some extent from the rest of the world, these companies seem to march to a slightly different drummer.
Reuters explored the decoupling of demand this way:
"Implied demand for gasoline, the dominant fuel for passenger cars, jumped over 13 percent in April from the month before, far outpacing the overall 4 percent rise in oil use."
That rise in gasoline can be directly tied to the increase in the number of cars on the road. There were 25% more cars on the road in 2008 than in 2007, and that number continues to rise, with more cars sold each month in China than in the U.S.
Any way you look at it, and no matter the variation during April, by the end of May all three companies had converged to put up between 80% and 90% increases in stock price.
Chinese Companies, Chinese Government
Investing in these companies is essentially investing in the Chinese government. The government sets price limits, or as is the case now - sets the rules that govern when the price limits will be changed. This means that Sinopec will only be allowed a certain profit margin, but it also protects the company from getting squeezed too hard when crude rises like it did last summer.
The other thing to note is that the government is a big buyer of crude oil and oil products, and recently announced that it will be increasing the size of its strategic oil reserves eventually up to a 90-day supply. Current reserves are about a third of that right now - and full with oil, that averaged $58 a barrel.
Which To Choose?
With the government's new pricing policy which, while not a free-market approach at all, is better than the previous policy of holding gasoline and diesel prices down so the Chinese people could afford them. Combined with continued increases in auto sales in the country, Sinopec may be the best bet of the three companies.
If gasoline and diesel prices continue to rise, the Chinese people could quickly cut back on driving, much like we did here in the U.S. So far, however, we haven't seen that happen.
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"Separately, a shipping source said another new VLCC had been fixed to store gas oil off Malta's coast by a trading house."
So there will be a lot of talk about inflation, Chinese demand, devaluing dollar, Oil valuations coming from most of the trading houses over the coming months, notably Goldman Sachs already has a price target of $85 for this year alone.
www.dailyfinance.com/2.../
Information regarding Sinopac is incorrect and confused.
SNP: "China Petroleum & Chemical Corp," is the official name of the company commonly called Sinopec. It is an integrated oil company with more downstream then upstream assets, and often hurt by China's gasoline price control more than PetroChina does.
SHI: "Sinopec Shanghai Petrochemical Co " is only one of the listed subsidiaries of Sinopec, It is a producer of synthetic fibers and resins, and plastic products, NOT a refiner.
You should use SNP, not SHI, in the comparison charts.
YOU IGNORE ONE OF THE BIGGEST FACTORS:
HEDGE FUNDS THAT PUSH THE PRICE FAR BEYOND WHAT THE MARKET WOULD DETERMINE.
It obviouslt has nothing to do (short term) with supply and demand:
The EIA publishes its weekly stock numbers on oil and other petroleum products each Wednesday.
www.eia.doe.gov/oil_ga...
or you can look at the raw numbers here:
tonto.eia.doe.gov/oog/...
(Click on the Data 1 tag)
This week analysts thought stocks would drop by some 2 million barrels. Instead they increased by 2.866 million.
May 29, 2009 365.977 million bbls
May 22, 2009 363.111
That’s a 5 million bbls error which is huge. But it doesn’t begin to capture just how insane the oil market really is. This is the crude oil stock number from last year at this time.
May 30, 2008 306.757 million
We are currently carrying 59.22 million bbl more this year than last year. This is in large part due to the fact that the economy is doing so much worse this year. But that is rather the point. Supply is through the roof. The economy sucks, and the near oil crude future has doubled from its low of $30.28 which it hit on December 23, 2008 at the bottom of its collapse from the previous speculative binge, --or if you prefer the 2009 low, $34.03 on February 12, 2009.
tonto.eia.doe.gov/dnav...
What this screams is manipulation. It is a subsidy for oil producers, a windfall for investment banks, and a hidden tax on already cash strapped American consumers.
"...the additional drops in consumption from the major industrialized countries since the start of 2008 have been quite remarkable. U.S. oil consumption in the first three months of this year averaged 18.8 million barrels per day, almost 2 mb/d below the value for 2007:Q1. Japan’s real GDP fell at a 15% annual rate in the first quarter, and its overall oil product output for April was 14% below year-earlier values, though the April measure of Japan’s industrial production showed a sharp gain. GDP declines in Europe also exceed those in the United States.
So to the extent that oil speculators see any green shoots, perhaps they’re in the nature of Asian bamboo rather than American prairie grass. Chinese oil consumption was up 4% in April, though that was the first year-on-year gain for them in 6 months. India’s oil consumption also seems to be growing. But so far those gains are well below the drops seen in the U.S. and elsewhere."
--- James Hamilton 5-31-09
On Jun 05 02:25 PM jimmy46 wrote:
> changes in oil prices result from a combination of """"""""
>
> YOU IGNORE ONE OF THE BIGGEST FACTORS:
> HEDGE FUNDS THAT PUSH THE PRICE FAR BEYOND WHAT THE MARKET WOULD
> DETERMINE.