China To Bolster Black Gold

Last month, China superseded the United States as the world’s largest energy consumer and the nation’s expected appetite for black gold is likely to provide positive price support to crude oil and the US Oil Fund (USO), PowerShares DB Oil Fund (DBO) and the iShares Dow Jones US Energy (IYE).

Over the last year, China’s consumption of crude has risen more than 18 percent to an average of 8.71 million barrels per day, driven by its double-digit growth rates and increased per-capita wealth.  Of this total consumption more than half comes from foreign supply, as that imports of crude oil to China have risen by more than 30 percent over the last year to an average of 4.77 million barrels per day.  As for the near-term future, this growth is expected to sustain.

In addition to massive infrastructure spending, which fuels demand for energy, China is witnessing a surge in automobile sales.  In fact, automobile sales jumped 48 percent year over year in the first half of 2010 and is expected to continue trending upward.  In fact, one study indicates that the Asian nation will add as many as 20 million vehicles in 2011 alone, which will likely result in a significant increase in demand for crude.  To further boost demand for automobiles, vehicle financing, which began in China’s affluent big cities, has been expanding slowly into smaller ones and rural areas as wealth trickles down.

Furthermore, as the Chinese economy as well as its middle class continues to expand, so will the use of other forms of transportation like trucking and aviation which will further boost demand for crude.  History dictates that as per-capita incomes rise and the middle class widens the desires of a Western lifestyle follow, which include the use of enhanced transportation services and more energy consumption. 

As for supply of crude oil, a global supply shock could result as a result of a lack of oil reserves.   Although the reserves are present, the majority of them are located in risky areas of the world such as Saudi Arabia, Iran, Iraq and Venezuela, which are known to have unfriendly governments which could hinder supply.

At the end of the day, the Chinese consumer, increases in per-capita wealth and desires for Western lifestyle will likely fuel demand for black gold and provide positive price support for the previously mentioned ETFs.

  • US Oil Fund (USO), which tracks the market for West Texas Intermediate light sweet crude oil, a popular futures contract, and more specifically, it per-share price, mimics the prices of futures on the New York Mercantile Exchange.
  • PowerShares DB Oil Fund (DBO), which is tracks the performance of West Texas Intermediate light sweet crude oil through futures contracts as well
  • iShares Dow Jones US Energy (IYE), which enables one to gain exposure to companies that are involved in exploration and production of crude oil like Exxon Mobil (XOM), Chevron Corp (CVX) and ConocoPhillips (COP).

Disclosure: No Positions

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