Can Thirsty Asian Markets Keep Oil Afloat?
It it's not too late to declare the socio-political-economic BRICS model of development dead in the water, it shouldn't be much longer now. The Brazil-Russia-India-China-South Africa paradigm of industrialization has fallen flat on its face as three of the five nations face severe recessions. The remaining two, China and India, represent something of a question mark. China's economy remains growing at a positive clip, but only at its lowest rate in the past three decades. India's election of the Modi Administration may signal economic relief for a gridlock-riddled nation, but there's still ample room to grow. The eastern Asian economies still need huge quantities of energy in order to provide the lifeblood of economic growth; as the United States and EU slim down their demand for energy, it's up to these BRICS survivors to balance the scale of petroleum and natural gas.
Pump Up Or Shut Up
Asia finally tipped the scales of energy consumption at the conclusion of 2014 when the world's largest continent by size and population sucked down 32.4 million barrels per day, outperforming North and South America's daily consumption of 31.1 million barrels (the US accounts for 18 of those 31 millions alone). While G8 nations have accelerated their investments in renewable energy at the expense of oil, Asian markets have stayed true to fossil fuels. Only 2% of China's energy needs come from renewable sources, while Asia writ large will account for some two-thirds of all the world's oil demand growth. While China pumps significant quantities of oil and digs a lot of coal out from under its soil, India needs to import a full 40% of its energy, including 70% of their petroleum. As only China and Japan import more crude than India overall, it's clear that the east Asian market will dictate oil prices even if they produce too little oil to achieve their own economic needs.
The shrewd move by the Kingdom of Saudi Arabia to keep the taps pumping oil even when the commodity dropped to a ten-year low last year. Their economic high ground, propped up by billions of dollars in cash reserves, allowed the world's second-largest petroleum producers to ride out the storm while a slew of their competitors went out of business thanks to oil sitting below $50 per barrel. Now that they've risen from the ashes, the Saudi phoenix has taken steps to maintain their market hold in the decades to come. Saudi Arabia has invested huge amounts of money, manpower, and infrastructure in Asian markets. A new Saudi oil refinery in China's Fuijan province and the tentative agreement to provide South Korea with a new refinery puts the Saudis in the driver's seat for Asian fuel needs. The Saudis have slashed their price differential no less than ten times in the last eighteen months at the same time that rival nations like Russian and Mexico find themselves unable to drop their price tag on crude. Aramco, the Saudi national oil concern, hasn't been shy about foreign investment. Khalid Al-Falih, Aramco's CEO, announced their long-term growth strategy relied on sinking new refineries into their big customers across east Asia, where their holdings like South Korea's Ulsan refinery (63% ownership) and Japan's Showa Shell refinery (15% ownership) have provided fantastic returns. One such new project in the Binh Dinh province of Vietnam will refine half a million barrels of crude per day in order to provide the rapidly-growing nation -- no nation had better GDP growth in 2014 than Vietnam's 6.2% -- with valuable crude. With Saudi Arabia exporting no less than ten billion barrels of crude per day, their highest output in twenty years, it's Asian economies reaping the outflow.
The 20% growth in benchmark Brent oil during Q2 has put Asian energy into contango, meaning that the futures price has risen above the spot price, making it critical to buy and burn through existing stock as soon as possible due to the price of replacement. Singapore and Malaysia have harnessed the imbalance in prices (around $1.20 per barrel) to profit as quickly as possible by stockpiling: oil purchased today and sold a month from now can cover the expenses of transportation and holding. That's made these Asian tigers into fierce gasoline storage spots, where it's easy to ship and refine oil thanks to far less red tape than in the final consumers of India, China, Japan, and South Korea. So long as crude continues to trade well below the one-year contract -- currently about ten dollars per barrel cheaper -- it means that Singapore and Malaysia oil terminals will receive a bevy of orders for spot storage. Even if they're not using a fraction of the amount of oil as their big neighbors, these two nations will be a crucial lynchpin in the eastern Asian crude trade.
Stabilizing East and West
It's far too early to say that oil sits on the verge of recovery, given that prices of sweet crude sit just ten dollars per barrel higher than the commodity's nadir in January. What's clear, however, is that the slowdown of consumption in the US and the EU shouldn't faze the commodity's recovery. Asian markets are aggressively sucking down oil at a higher pace than at any time in history, ramping up demand for energy and keeping prices afloat. Investing in particular Asian energy stocks allows you to double your portfolio's gains: CNOOC Limited (0883 on the Hong Kong Stock Exchange, trading for $11.72 a share) and Inpex Corporation (IPHXY on the Tokyo Stock Exchange, trading for $12.02 a share) represent strong opportunities for value in a market where both demand and customer bases appear set for consistent growth. One thing is clear above all else: passing up the opportunity to invest in oil at its current low point today means passing up on the world's most valuable resource at one of its lowest points in economic history.