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Arie Goren, Portfolio123 (501 clicks)
Long only, value, research analyst, dividend investing
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In my previous post I have recommended investing in oil with a long term perspective. One of the main reasons for my recommendation was the impressive growth in the demand for crude oil from China. In order to find out if now is the time to invest in oil, it is important also to analyze the fundamental parameters of this important resource, production, consumption and reserves regarding China, the second biggest world economy.

According to the BP Statistical Review of World Energy 2012, released on June 26, 2012, the world's oil consumption increased 0.7% in 2011. In China alone, the growth was 5.5%. The report shows that China's oil consumption growth of 507,000 barrels/day last year was the world's highest. China's growth represents 85% of the total global oil consumption growth in 2011, which was 595,000 barrels/day. However, in terms of actual consumption, U.S. oil consumption was about twice as much as China. The U.S. consumed 18.835 million barrels/day in 2011, 21.4% of the total world consumption which was 88.034 million barrels/day in that year. China consumed 9.758 million barrels/day, 11.1% of world consumption. Analysts attribute the higher growth in oil consumption to the development of China's economic conditions and economic structure.

China's Oil Production

China's oil production rose from 227,000 barrels per day in 1965 to 4.09 million barrels per day in 2011, Compound Annual Growth Rate - CAGR: 6.49%. This production data includes crude oil, shale oil, oil sands and NGLs, and excludes liquid fuels from other sources, such as biomass and coal derivatives.

Data: BP Statistical Review of World Energy 2012

China's Oil Consumption

China's oil consumption rose from 216,000 barrels per day in 1965 to 9.758 million barrels per day in 2011, Compound Annual Growth Rate - CAGR: 8.64%. This consumption data includes inland demand plus international aviation and marine bunkers and refinery fuel and loss. Consumption of fuel ethanol and biodiesel is also included.

We can see that in the long term China's oil consumption is rising at a much higher rate than its production. The difference between consumption and production, which must be fulfilled by import, rose from a surplus of 11,000 barrels per day in 1965 to a deficit of 5.668 million barrels per day in 2011.

Data: BP Statistical Review of World Energy 2012

Data: BP Statistical Review of World Energy 2012

China's Proved Oil Reserves

Total China's proved oil reserves rose from 13.35 billion barrels in 1980 to 14.71 billion barrels in 2011, Compound Annual Growth Rate - CAGR : 0.31%. China's proved reserves ranked 15th in the world and are equivalent to 4.1 years of China's consumption in 2011 rate.

Data: BP Statistical Review of World Energy 2012

China Oil Demand in 2012

According to the International Energy Agency, Oil Market Report, released on June 13, 2012:

Demand growth in the world's fastest growing market - China - has clearly slowed. Preliminary estimates of apparent Chinese demand, i.e. net product imports plus refinery output, depicted 9.5 mb/d of oil products being consumed in April, a drop of 55 kb/d (or 0.6%) on the corresponding month a year.

Chinese demand growth is expected to resume in the second half of 2012, supported by a fresh acceleration in industrial output and the widely held belief that the Chinese government will enact measures to shore up the economy. Early‐June has already seen a surprise interest rate cut and a lowering of reserve requirements at banks, thus easing monetary policy with further such moves anticipated. An infrastructure spending program, albeit not on the scale of the 2008 stimulus, is also underway.

Conclusion

Since Chinese oil demand growth is expected to resume in the second half of 2012, and considering that consumption of other developing countries like, India, South Korea, Brazil and others, is growing at a very high rate, all that could cause shortages and a higher price of oil.

Some Liquid ETFS for Oil:

United States Oil Fund LP (USO)

ProShares Ultra DJ-AIG Crude Oil ETF (UCO)

iPath S&P GSCI Crude Oil Total Return (OIL)

PowerShares DB Oil Fund (DBO)

United States Brent Oil (BNO)

Source: China's Big Appetite For Oil