Playing Chinese Oil

June 04, 2009

A look at three of the biggest Chinese companies in the oil industry.

  • Chinese oil consumption up
  • Chinese oil companies benefit
  • Which company is best positioned?


China oil consumption grew - yes grew - 4% during the month of April, according to a report by Platts. The amazing thing isn't the size of the growth, but that it occurred at all. After all, oil demand in China dropped 6% during the first quarter of the year.

Given all the hopes that are resting on a China-led global economic recovery, a 4% increase is quite good news - especially when everyone else is looking at consumption dropping. The U.S. Energy Information Administration has forecast global consumption to drop by 1.8 million barrels per day in 2009, and the International Energy Agency said in its latest monthly report that global oil consumption is at its lowest levels in two decades.

What's behind the increase?

For one, China has been buying up commodities - including oil - in order to increase stockpiles and inventory while prices are low. On Tuesday, it was reported that China's total oil stocks ended at 38.6 million tonnes - up 1 million tonnes from March to April, even though consumption increased during the same period. (There are roughly 7 barrels of oil per ton, which puts China's oil stocks at 270.2 million barrels.)

At the same time, there has been real domestic demand as well. All in all, it points to a rosy picture for companies operating in the Chinese oil patch.

So how do you, as an investor, play that news? Does investing in oil in general give direct enough exposure to the increases happening in China? Or do you need to take a look into companies closer to the source - perhaps PetroChina, China's largest oil producer (and one of the biggest companies by market cap in the world); or Sinopec, China's No. 1 producer of refined oil products.


Oil In China

The problem with investing in oil futures as a way to capture what happens in China is self-evident - changes in oil prices result from a combination of forces. Optimism, economic data, OPEC decisions, supply-and-demand shocks from all over the world all push and pull at the price of crude. So if you want to ride the wave in China, you've got to invest in China.

Detailing the numerous Chinese companies that are involved in the oil industry is beyond the scope of this little article, so we're going to look at just a few of the biggest.

On the oil production side, that means giant PetroChina [NYSE Arca: PTR] and CNOOC [NYSE Arca: CEO], the China National Offshore Oil Corp. On the refining side we have Sinopec, aka Shanghai Petrochemical Co. [NYSE Arca: SHI]. All three of the companies have ADRs on the New York Stock Exchange.


PTR/CEO/SHI (March 16 - May 26, 2009)


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