As the weeks progress, the chance that crude oil will drop below $70 is becoming more likely. While prices that low will be short lived, the entire energy-investing complex is changing.
You see, low prices have opened up the market. Countries that once had to submit to OPEC’s prices can now look for other suppliers. So they’re rising up and turning their back on the oil kings. As a result, the ruling oil exporters in the Middle East are desperately clinging to the throne…
A Force to Be Reckoned With
China has been at the mercy of OPEC for the past two decades. The economic giant imports close to seven million barrels of oil per day, closely following the United States, which imports almost eight million.
As the Chinese economy continues to expand and its population demands more oil-related items (from cars to plastics), we can expect China’s crude imports to rise even further. And with the United States becoming more self-reliant thanks to shale discoveries, China has become much more important to OPEC.
Indeed, OPEC has a monopoly on the market. China’s oil purchases from OPEC countries cost around 10% more than the market price for oil, even though delivery is easy and there are no supply issues. But OPEC’s current strategy of charging Asian customers more for oil (compared to those in the West) is predicated on the cartel’s position as the world’s largest supplier.
And as oil prices plunge, many other countries – even those 14,000 miles away from the Middle East – will vie to undercut that monopoly. With the current price environment, China now feels like it can pursue oil contracts with countries outside of OPEC, such as Colombia, Venezuela, Brazil, and several countries in Africa.
As a result, OPEC is slowly losing its second-biggest customer.
Building a New Kingdom
In fact, China is already importing from other sources. China bought twice as much oil from Colombia this year as it did last year. And China Petroleum and Chemical Corp. (NYSE:SNP) processed oil from Brazil’s Ostra field for the first time in September.
At the same time, shipments to China from OPEC fell by 11%. And the average cost per barrel was almost 10% lower. Plus, the Western sanctions on Russia have led China to increase its purchases from its Communist brethren by almost 60% in September. There’s little doubt that China will purchase even more crude from Russia as the West deepens their economic sanctions.
From an investment perspective, China’s oil production and oil-refining companies stand to benefit from the changing import sources. They’re already bumping up their refining capacity and shooting for a 20% increase in the next five years.
China Petroleum and PetroChina (NYSE:PTR) are the majors who will lead the way.