Black gold isn’t going away... this is why

By Brian Tycangco

Oil, like money, still makes the world go around.

Oil powers 99 percent of the world's vehicles. Without it, one-third of everything that uses electricity would go dead. There wouldn't be any airplanes in the sky. You might think that Priuses and solar panels are taking over - but they've actually hardly scratched the surface.

Today, we - humankind - use just under 100 million barrels per day (bpd) of oil. That's enough to fill the storage hulls of nearly 50 very large crude carriers - the biggest type of oil cargo vessel in the world, one of which spans the length of three football fields.

At the current price of crude oil of US$67 a barrel, the global oil market is now worth US$2.4 trillion per year - 14 times more than the market for gold, 21 times larger than iron ore and 344 times bigger than rare earths. The oil market is nearly four times more than all other natural resource markets combined.

Asia is driving oil consumption

Despite being commercially exploited for nearly a century, oil consumption - despite all the hybrids you see on the highway - is still rising. It's up by 24 percent over the past 15 years. But that growth isn't coming from developed countries.

During this time, U.S. oil consumption actually declined slightly from 20 million bpd to 19.9 million bpd. In Europe, it's up by 3.4 percent, to 15 million bpd.

And it's a different story in Asia.

China has more than doubled its consumption of oil over the past 15 years, from 5.8 million bpd to 12.8 million bpd.

India saw its oil consumption skyrocket from just 2.3 million bpd to 4.7 million bpd as of last year.

The news isn't all that surprising when you consider that Asia is home to the fastest growing economies in the world - all of which depend on oil to run their industries, fuel their power plants, and gas up their fleets of automobiles.

Indeed, Asia is the world's largest and fastest growing market for automobilies. Last year, Asia accounted for 47 out of every 100 cars sold globally. And by 2024, sales in the region are expected to grow another 18 percent to 59 million - taking up a 52 percent share of the global market.

Moreover, while new cars sold in developed countries like the U.S., Canada or the United Kingdom are mostly just replacing old ones, Asia is different. Car penetration here is still a fraction that of developed economies. So most of the new automobiles bought are adding to the existing car population - adding to oil demand.

The world aviation's centre of gravity is also shifting to Asia, with China and India set to be among the world's top three air-travel markets by 2020. The Asia Pacific region is projected to have 3.5 billion passengers by 2036. That's twice the combined increase expected for the North American and European markets during the same period, according to estimates by the International Air Transport Association.

That's going to light a fire underneath jet fuel demand, which is already up 23 percent over the last five years.

Demand now outstrips supply

With Asia's increased consumption, global oil demand increased 6.9 percent from 2014-2017, according to the International Energy Agency (IEA). Supply, meanwhile, rose 6.7 percent per year. In the fourth quarter of 2017, there was a daily production shortage of 350,000 barrels, also according to the IEA. That same quarter, oil prices jumped 16.8 percent.

Going forward, the IEA expects global demand to rise to 104.7 million bpd by 2023 - a 7 percent increase from present levels. And half of that increase will be driven by China and India, two major economies that are consuming far more oil than they produce at home, driving up their imports to record levels.

From just a little over 8 million bpd last year, China's oil imports are projected to hit 10 million bpd by 2023. China's increase in oil imports alone will account for 30 percent of the increase in global demand over the next six years.

India, meanwhile, is expected to surpass the U.S. to become the world's second largest oil importer by 2023, at nearly 5 million bpd.

What about supply? During this time, global production capacity is expected to grow to 107 million bpd from its current 100.6 million bpd. So there's plenty of supply to meet the expected growth in demand.

With the average global breakeven cost of production (according to a Bernstein Research survey of the 50 largest listed global oil and gas companies) at just US$45 per barrel, today's price of US$67 per barrel means oil producers are making lots of money.

Six of the world's oil majors - including Chevron, ExxonMobil, ConocoPhillips, BP and Royal Dutch Shell - have all reported record profits during the second quarter of 2018.

As long as oil prices don't fall sharply, rising oil consumption should be a boon for major oil exploration and production (E&P) companies. These are the companies with proven track records and global reach that exposes them to soaring Asian oil imports, particularly from China and India.

Exchange-traded funds like the SPDR S&P Oil & Gas Exploration & Production ETF (Exchange: New York; ticker: XOP), the Vanguard Energy ETF Exchange: New York; ticker: VDE) and the Energy Select Sector SPDR Fund (Exchange: New York; ticker: XLE) offer investors exposure to a wide range of oil and energy-related companies.

XOP seeks to provide investment results that correspond to the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It's the most diversified of the three.

The evolution of the oil market reflects the powerful influence that Asia's economic might wields on global markets once dominated by western nations… as well as for big western-listed energy companies that few investors associate with Asia.

 

Brian Tycangco
Brian Tycangco is an Editor and Investment Analyst with Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. He's been working in the financial world since 1995 and has carved out a reputation as "Master Stock Picker". He's seen just about everything there is to see in these markets, met with the leading CEOs of every industry in Asia, and knows the ins and outs of doing business and making money there. Brian has been a stock broker at a large Asian trading house, an equities analyst for a major European investment bank, as well as editor and chief investment strategist for one of the longest-running Asian investment newsletters in the world. Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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