Black Friday For China In Oil

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Includes: BNO, CEO, CHIE, HAL, OIL, ROC, SHI, USO
by: Kevin George

Summary

Falling oil boosts China's strategic interests.

National oil companies could build on assets.

Lower oil should be a GDP booster for China.

Falling oil boosts China's strategic interests

While consumers were busy scouring online retailers for bargains, or slugging it out in stores, the oil market provided a further Black Friday boost for oil consumers - particularly China.

OPEC's decision to hold production steady - in the face of tumbling oil prices - led to another rush-to-the-exit for bullish players hoping to catch the bottom of the move, with near-month crude oil futures falling as low as $63.72 per barrel in Monday trading.

While falling prices are putting a squeeze on producers, China is stockpiling oil at bargain prices as its national oil firms take advantage by expanding their global holdings. These moves will see China's influence continue to grow on the global energy scene.

Growing strategic reserves will boost China's market influence

China increased its oil imports by 460,000 barrels a day in the first nine months of this year, according to customs data.

Oil at five-month lows provides another boon for China: an opportunity to boost its strategic petroleum reserves.

China's SPR strategy, announced in 2007, was intended to boost the country's oil reserves capacity to 90 days by 2020. With oil prices currently depressed, it's possible that this time scale will be brought forward, leading to the emergence of a reserves base that would boost China's influence on the global market and the ability to dictate prices in the future.

A recent purchase of 18 million barrels of crude oil was said to be heading for the SPR stores.

National oil companies could build on assets

With oil producing nations and exploration firms tightening their belts to weather the recent price volatility, China's national oil companies continue to build on their assets in the global marketplace.

During the last three years China's NOCs have built their operations up to control around 7% of crude oil output in 40 countries, taking on risky operations in - politically and/or economically - unstable countries such as South Sudan, Nigeria and Venezuela. With oil prices now at five-year lows, we could see significant M&A activity from Chinese players in the near future, which could rival CNOOC's (NYSE:CEO) bold move to acquire Unocal in 2005, a move which was frowned on by U.S. authorities. If oil prices don't recover quickly, any pressure on the junk-bond-funded shale industry for example could see China's majors joining the bidding.

The Chinese firm Fosun International recently completed the acquisition of a 92.6% stake of Australia's Roc Oil Company Limited for US$383 million, which highlights the desire to diversify into trustworthy belts and basins.

This year also saw a joint venture between Halliburton (NYSE:HAL) and China's SPT energy, which mirrored a recent partnership between Weatherford and Sinopec (NYSE:SHI).

Lower oil should be a GDP booster for China

One of the drivers for lower oil prices has been China itself, as the country's powerhouse GDP growth has slowed considerably in the last year. China is now on course to miss its GDP growth target for the first time since 1998.

Despite its struggles this year, the plunge in crude oil during the second half of 2014 should provide some needed respite for China. With input costs falling for raw materials, the nation's manufacturers should see a revival in 2015.

Bank of America estimated that each 10% fall in the price of oil would translate to a boost in GDP of around 0.15% points. As China depends on oil for 60% of domestic use, lower prices will have led to significant savings on its foreign transactions.

Final thoughts

With oil falling 40% since the June peak, China is well placed to be one of the main benefactors of the move. With producing nations fretting over national budgets and production firms undergoing cost-cutting exercises to offset price falls, China is steadily growing its influence on the global oil market and could put a floor under prices with strategic demand for crude.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.