What Goldman Learned from a Trip to China

Goldman Sachs has been bullish about all things BRIC for years now. In a recent trip to China a number of Goldman analysts visited local and foreign oil and gas related companies as well as various equity investors in major Chinese cities. Their main takeaway from the trip was that their bullish thesis on the country was justified, China commodity demand would drive prices higher and they feel increasingly confident about their current $94 crude oil price target. Their micro takeaways from the trip included some focused ideas on the energy markets:

• Sustained oil demand growth on-track, with the rebound this year having been driven mostly by domestic drivers as export-oriented markets have been weak.

• Domestic crude oil supply growth expected to remain anemic, leading to growing crude oil imports and a hunt for international oil acquisitions by Chinese major oil companies.

• Government “stock piling” of crude oil is likely to be a sustainable source of demand growth for many decades into the future.

• New refinery start-ups and product pricing mechanism impacting refined product inventories.

• China-based investors focused on supply side of our bullish view as opposed to demand in sharp contrast to most investors in US and Europe we meet with that are focused on demand uncertainty as opposed to oil supply.

How to play it? Goldman likes 10 international names in particular. Most are traded in the U.S. or other accessible markets:

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Comments

[protrader101:]

I just bought into ETFC after GS upgraded them to BUY. GS has serious power play when it comes to the dd done by the analysts at the firm.

Oct 22 04:55 PM

[Gary A:]

Bottom line here is that Goldman thinks that oil will soar and that Reits will tank. I saw a trader analysis from Goldman that circulated on the net a few months ago. They must think that America will be very disabled by commercial real estate while China flourishes. That is an assumption that is based upon decoupling, which has not yet been proven.

But the way to play the Goldman trade could be long oil and short SRS. It is a trade that could work for awhile. I do not pick stocks for people, but am just interpreting the Goldman analysis.

Oct 22 08:27 PM

[Popham:]

And yes, just last week Russia and China signed a contract (s) for pipelines from oil rich Siberia to China worth $3.5 billion.
Demand for energy resources in the far east is high, which is another reason why the seven major oil companies want to run a pipeline from Siberia through 400+ miles of Afghan territory to Pakistani ports on the Arabian Sea and on to the Indian Ocean and oil-hungry countries of the far east. Surely, this level of competition will indeed
drive up the cost of oil......$94/barrel? Maybe more.

Oct 23 08:35 AM

[sunnsea:]

And surely this will result in a continued explosive situation in Pakistan/Afghanistan spilling over into India and Southwest China. China is also making solar panels and other green technologies. What about that?

Oct 23 09:59 AM

[James Lewis:]

Gary A - I don't think commercial real estate will become toxic like sub-prime as the FED will print whatever is necessary to inflate the price of this asset class.

If oil is not replaced by a new energy source, in USD terms over the next 10 years it can only go up. I hope that a new energy source will replace its dominance. After all Russia, China and USA fighting over oil can not be a good thing.

Oct 23 11:45 AM

[schminkie:]

well over a trillion in loans so far this year. there seems to be a question of risk in many banks' loans. if the gov't tightens policy on easy loans the markeets will react badly. however if this is a major problem, easy loans with lack of due dilligence and lack of banks' capital reserves to back them up, there may be a toxic loan situation as we had. this looks like a rock and hard place situation if correct.

the government seems to be cognizant of these shortcomings and more including more loans for 'small businersses' rural population, closing inefficient unsafe and polluting mines, more.

i don't have a problem with the prc gov't. but frankly i can't find information as to where they are heading with loans stimulus programs other than 3rd parties - news - and policy staements, results unknown. anybody know where more info is?

Oct 23 12:26 PM

[untrusting ...:]

James,
You must be kidding - CRE - not toxic. Of course it is. There are dozens and dozens of factual reports showing that it is. Some good articles and links on SA about CRE.

As just one example, saw a mini-documenatary by a long time NY commercial real estate broker. He maintains there are big problems in CRE. One example he gave was: NY office building sold 2 years ago for $2.1 billion with buyer putting 1% down. Buyer walked in downturn. Same NY office building was just resold a few months ago for $600 million and is 50% vacant. That means some banks and investor took a REAL LOSS in 2 years of $1.5 billion or about 66% of their investment. That is big money losses for one building. And there are tens of thousands of similar CRE in the same postion. The CRE broker said some commercial propery in Florida was selling for 10-15 cents on the dollar now.

In short CRE will be big trouble for the banks and finance industry in the US in 2010 and 2011.


On Oct 23 11:45 AM James Lewis wrote:

> Gary A - I don't think commercial real estate will become toxic like
> sub-prime as the FED will print whatever is necessary to inflate
> the price of this asset class.
>
> If oil is not replaced by a new energy source, in USD terms over
> the next 10 years it can only go up. I hope that a new energy source
> will replace its dominance. After all Russia, China and USA fighting
> over oil can not be a good thing.

Oct 23 03:10 PM

[adamnb:]

Correction: I think you got your pipelines mixed up. First off, it the pipeline to Siberia is with Gazprom, regarding nat. gas from Siberia, not oil. Second, the contract has not been signed but is being considered (there is a dispute over pricing). The Russians say it's a done deal, the Chinese say it's being considered. Third, there are two pipelines being considered, one from Iran through Pakistan (IPI pipeline) to the port of Gawar (destination China and possibly India). This is supported by Iran, Pakistan, Russia, and China but opposed by the US and Europe. Another line being proposed by the US and backed by Europe is from Turkmenistan's huge gas fields, crossing Afghanistan, Pakistan, destined for India
(TAPI pipeline), originally proposed years ago by Unocal (which later was acquired by Chevron, and prospective co-venturer, Halliburton.

Russia has been building an oil line, with a spur to China, Japan, and the Pacific (destined for SW Asia and US), and underwrote major financing for 20 years of supplies from Rosneft, the company that took over Yukos assets.


On Oct 23 08:35 AM Popham wrote:

> And yes, just last week Russia and China signed a contract (s) for
> pipelines from oil rich Siberia to China worth $3.5 billion.
> Demand for energy resources in the far east is high, which is another
> reason why the seven major oil companies want to run a pipeline from
> Siberia through 400+ miles of Afghan territory to Pakistani ports
> on the Arabian Sea and on to the Indian Ocean and oil-hungry countries
> of the far east. Surely, this level of competition will indeed<br/>drive
> up the cost of oil......$94/barrel? Maybe more.

Oct 23 03:56 PM

[JohnLocke:]

I worked in Afghanistan from 2002-2006 ( 2 years with HAL) and know the country very well. Don't plan in TAPI in our lifetimes:-)

I can see IPI being the direction the region is going to head.


On Oct 23 08:35 AM Popham wrote:

> And yes, just last week Russia and China signed a contract (s) for
> pipelines from oil rich Siberia to China worth $3.5 billion.
> Demand for energy resources in the far east is high, which is another
> reason why the seven major oil companies want to run a pipeline from
> Siberia through 400+ miles of Afghan territory to Pakistani ports
> on the Arabian Sea and on to the Indian Ocean and oil-hungry countries
> of the far east. Surely, this level of competition will indeed<br/>drive
> up the cost of oil......$94/barrel? Maybe more.

Oct 23 07:18 PM

[Peter Cooper:]

So China keeps oil prices high and that keeps its biggest export customers in recession, or back in recession, due to high oil prices. Decoupling is one thing, reality is another.

Oct 24 03:35 AM

[jeff6666:]

if you think that REITs will tank, shdnt you be going long SRS, not short?


On Oct 22 08:27 PM Gary A wrote:

> Bottom line here is that Goldman thinks that oil will soar and that
> Reits will tank. I saw a trader analysis from Goldman that circulated
> on the net a few months ago. They must think that America will be
> very disabled by commercial real estate while China flourishes. That
> is an assumption that is based upon decoupling, which has not yet
> been proven.
>
> But the way to play the Goldman trade could be long oil and short
> SRS. It is a trade that could work for awhile. I do not pick stocks
> for people, but am just interpreting the Goldman analysis.

Oct 24 10:20 PM

[granger:]

great post, great comments, I am learning a lot

Oct 25 12:45 PM