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How China and India Are Set to Slam the Price of Crude OilBy
Friday, March 4, 2011
I hope you kissed $70 per barrel goodbye on its way out the door. We're not going to see oil prices that low for a long time.
Let me explain...
During the 1973 Arab Oil Embargo, when oil from the Middle East stopped flowing to the West, the price of oil doubled, practically overnight. In response, the U.S. government began a 30-year odyssey to create and fill a "strategic petroleum reserve." We converted some huge salt caverns into giant swimming pools filled with petroleum. Call it our "rainy day oil fund."
We can use that oil to offset imports in case of another oil shock... like the one we're experiencing right now.
Over the years, U.S. taxpayers shelled out $20 billion for that 726.5 million barrel cushion, which equals about three months of our imports. That's a bargain compared to what that oil would cost today: about $70 billion.
This is the kind of cost two oil-consuming juggernauts, China and India (aka "Chindia") are facing today. You see, they are planning huge strategic reserves of their own. And their demand is going to put a floor under oil prices... which means huge revenues for a select group of companies.
The turmoil in Libya is showing the world just how tight the oil market is. Libya supplies just 5% of the world's oil exports. But when it went offline, oil prices spiked 21% in two weeks. Even before things broke down in Libya, oil prices had already climbed well off their September 2010 price of $72 a barrel.
Now, China and India are faced with the same dilemma the U.S. faced in 1973. Neither country has enough petroleum to keep its citizens rolling for long. Both are exposed to a dangerous, economy-killing oil shock. And both are starting to build and fill strategic petroleum reserves of their own. They have no choice but to buy oil like crazy at these levels.
China has about 102 million barrels already in reserve. It plans to add another 168 million barrels of storage starting this year. It will finish its planned 500 million barrel reserve – equal to three months of imports – by 2020. To hit that mark, China will need about 122,000 extra barrels of oil per day.
India has just 9.8 million barrels of crude oil stashed so far. It plans to put 40 million barrels into a strategic storage by next year. That will amount to 80,000 extra barrels of oil purchased per day.
So China and India together need to buy about 200,000 extra barrels per day. That would consume an additional 1.1% of world exports. And remember, Libya's oil used to account for 5% of world exports. This oil could be offline for years.
So right now, the world oil market is down a net 6.1%... And we don't have enough spare capacity to meet that much demand. Through the first three quarters of 2010, demand exceeded supply by 420,000 barrels per day.
In other words, an already tight oil market is facing plenty of extra buying pressure ahead.
So who stands to benefit here?
Well, most of the world's oil is in the hands of national oil companies (think Mexico's Pemex, Venezuela's PDVSA, and Saudi Arabia's Saudi Aramco). A lot of these companies are empty shells, run by the dictator's brother-in-law. But the bounty of high crude prices will spur them all to produce more oil...
This will be a continued windfall for giant oil-services companies. Companies like Halliburton and Schlumberger make oilfields work. They operate oil and gas fields worldwide for all sorts of companies. Their services will be more in demand than ever now...
And so will shares of companies producing in Canada's oil sands, one of the only giant oil deposits left that the dictator's brother-in-law doesn't own.
Good investing,
Matt Badiali
Further Reading:
China and India have a lot of room to grow before catching up to developed countries like Japan and the U.S. But "if Chindia gets anywhere close to this club," Brian Hunt told readers, "it's going to consume an astounding amount of oil..." Check out this can't-miss chart showing Chindia's consumption potential here.
With the turmoil in the Middle East, Matt says it's a great opportunity to buy "oil insurance." This investment idea actually performs better when times get tough. Learn more here: A Unique Insurance Policy That Soars During Chaotic Times.
Market NotesTHE CANADIAN "PRIZE" VERSUS GOLD: NO CONTEST One of the allures of owning gold is the idea that gold soars in times of crisis and economic instability.
That's often the case... but we couldn't resist showing you how much one of our ultimate "crisis hedge" recommendations is beating the pants off gold. In today's chart, we present the gains registered by gold (black line) versus Canadian oil sands poster child Suncor Energy (blue line).
As we've repeated many times, Canada's oil sands are the world's safest store of crude oil. They're a premier "trophy" asset. Spiking oil prices translate into much higher profit margins for oil sands producers. And every bit of bad Middle East news pushes the value of this prize higher. Our chart today demonstrates the power of this idea...
As you can see, since the Middle East and North Africa erupted in revolution, Suncor has outperformed gold by 30 percentage points... 45% vs. 15%. Don't get us wrong... we aren't abandoning our longtime recommendation of gold bullion as a crisis hedge. Make sure to own some gold, store it in a safe place, and never sell the stuff. We're simply pointing out the Canadian oil sands are another, more leveraged, way to own "crisis insurance."
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