Much has been written on investing in the US energy sector, but I'd like to focus today on three investment opportunities outside of the US. All three are Chinese stocks with U.S. ADRs and, I believe, well positioned to take advantage of China's growth story and developments in the country's oil and gas market.
Oil in 2010
Banks and other international organizations have, over the course of the year, gradually increased their 2010 global growth expectations, with forecasts now ranging from 3.0 per cent to 4.5 per cent, with developing nations leading the way. Less discussed is that with better-than-anticipated global growth forecasts comes higher expected energy consumption.
In that vein, last month, Bank of America/Merrill Lynch revised its 2010 global oil consumption forecast to 2.0 million barrels per day from just 1.4 million previously, quite a substantial difference. The bank believes that strong global GDP growth in 2010, aided by accommodative monetary policy and fiscal stimulus, will be the primary driver of higher oil consumption, especially in emerging markets. It's hard to argue with this thesis considering what appear to be improving (albeit in some cases gradually) fundamentals across the globe.
Looking ahead, oil prices are to a large degree at the mercy of the value of the U.S. dollar. I have a generally bearish long-term view of the greenback, but do expect a period of sharp appreciation as soon as it becomes clear that Fed rate hikes are imminent over the short term, after which the dollar should return to its long-term bearish trend. One of the key indicators that the Fed is about to begin a tightening cycle will be the removal of the phrase 'extended period' from the FOMC statement. Additionally, any surprises in economic indicators, such as employment and inflation, that could have a strong impact on the Fed's bias could cause significant volatility in the FX market and, thereby, commodity prices. That said, I expect WTI prices to average around $83.0 a barrel in the year ahead, potentially coming under some pressure just prior to a Fed rate hike in the latter part of the year.
Three Chinese Energy Stocks
The first stock I think worth a look is PetroChina . PTR is China's largest oil and gas producer and is set to significantly grow its natural gas business, which should benefit from upcoming pricing reforms in China. Chinese gas prices have not been modified since November 2007 and a widely expected upcoming reform could increase gas prices by up to 20 per cent on an annual basis. In the near term, I expect PTR to trade in line the WTI.
Second, Sinopec -- the company I believe to be best positioned in the Chinese energy market -- is also expanding its natural gas business and stands to benefit from the same pricing reforms. I believe the market has priced less upside potential into SNP than PTR, so there's potential there.
Third, I want to draw your attention to CNOOC, which, while the least enticing of these three Chinese energy positions, still has upside potential, in my view. CEO is an upstream play and its performance will likely mirror that of oil prices, however, substantial capex may be required to sustain the company's growth and this could come at the expense of shareholders. In addition, CEO's offshore natural gas contracts are not regulated by the NDRC, so they do not stand to directly benefit from onshore pricing reforms. Still, higher onshore gas prices would likely lead to higher prices for its offshore equivalent.