India, China, And Oil: Unintended Consequences
by Dr. Joe Duarte
|Wednesday, December 29, 2004
Today's Analysis: India, China, And The Oil Markets
The Chinese are flexing their muscles in the oil markets. But their methods, the high costs and the ill will being engendered could lead to consequences that could hamper the country's growth and their global standing.
China's frantic search for oil may have played a major role in the Darfur disaster. According to The Sudan Tribune.com: "one of the biggest obstacles to achieving peace in Darfur is the government of China. Sudan, a relatively poor country, is currently indebted to the International Monetary Fund (IMF) for nearly 2 billion dollars. In order to obtain the military equipment needed to continue its genocidal rampage, the government of Sudan has looked to investors in Beijing."
China's investment in Sudan is estimated to be at least $2 billion, and includes the building and maintenance of a 1000 mile pipeline in Sudan, which links the oil fields with the Red Sea. The Sudan Tribune reported: "For several years Beijing, along with its state-owned China National Petroleum Corporation and subsidiary PetroChina has invested over $2 billion on oil infrastructure in Sudan and owns 40 percent of Sudan's Greater Nile Petroleum Operating Company Projects (GNOP), which produces an estimated 150,000 barrels of oil a day."
According to the Washington Post: "China's largest energy company is pumping crude oil, sending it 1,000 miles upcountry through a Chinese-made pipeline to the Red Sea, where tankers wait to ferry it to China's industrial cities. Chinese laborers based in a camp of prefabricated sheds work the wells and lay highways across the flats to make way for heavy machinery."
The flip side of this vision of idyllic industrialism, is that "only seven miles south, the rebel army that controls much of southern Sudan marches troops through this sun-baked town of mud huts. For years, the rebels have attacked oil installations, seeking to deprive the Sudan government of the wherewithal to pursue a civil war that has killed more than 2 million people and displaced 4 million from their homes over the past two decades. But the Chinese laborers are protected: They work under the vigilant gaze of Sudanese government troops armed largely with Chinese-made weapons; a partnership of the world's fastest-growing oil consumer with a pariah state accused of fostering genocide in its western Darfur region."
The Sudan Tribune fills in the gaps: "Investment has allowed the government of Sudan to fill its coffers and use its oil revenues to purchase the latest military equipment. Recent reports by human rights organizations marks China as Khartoum's main military supplier. At a time when the violence in Darfur continues and an arms embargo against Khartoum is justified, the Sudanese government instead is allowed to update its military. Amnesty International recently reported, [" The Government of Sudan has used increases in oil revenues to fund a military capacity that has in turn been used to conduct war in Darfur, including carrying out violations of international human rights and humanitarian law."]"
Is anything likely to change in the near future? Not if business is the dominant motivation. According to the Washington Times: "While the Bush administration is seeking via the United Nations Security Council strong action against the genocide in Darfur, Sudan and Iran for its nuclear programs, the reality is that China will most likely veto any U.S. initiative, as it currently receives 14 percent of its energy exports from Sudan and an additional 8 percent from Iran."
Here are some sobering details about the depth of China's involvement with "rogue" nations, according to the Washington Post: 1) "Sudan is China's largest overseas oil project. China is Sudan's largest supplier of arms, according to a former Sudan government minister. Chinese-made tanks, fighter planes, bombers, helicopters, machine guns and rocket-propelled grenades have intensified Sudan's 2-decade-old north-south civil war. A cease-fire is in effect, and a peace agreement is scheduled to be signed. However, fighting in Sudan's Darfur region rages on, as government-backed Arab militias push African tribes off their land." And 2) "China in October signed a $70 billion oil deal with Iran, and the evolving ties between those two countries could complicate U.S. efforts to isolate Iran diplomatically or pressure it to give up its ambitions for nuclear weapons. China is also pursuing oil in Angola."
The problem for China is multifold. As we have noted here before, it is paying too high a price in most cases for less than top notch oil properties. Aside from the politics of the Security Council, and the U.S., during the process of setting up its ventures, China is ruffling the feathers of its competitors, and in many cases its neighbors, as it has ongoing disputes with Japan and Vietnam with regards to offshore drilling.
According to Hong Kong's The Standard: China recently "rejected Vietnam's request to halt exploration in Beibu Bay, straddling its border with Vietnam," and "is also at loggerheads with Japan over exploration in the Xihu Trough in the East China Sea, just west of the line Japan claims as the boundary of its exclusive economic zone. The trough, 400 kilometers east of Shanghai, contains large gas deposits."
China is also not managing its properties well, as it is not extracting as much as it has expected from its projects. The Standard reported that according to the International Energy Agency "China's offshore production is not as prolific as five years ago because the discoveries in recent years have lagged earlier expectations."
The Standard sums it up in grim fashion: "It is increasingly difficult for Chinese oil companies to find good assets overseas as the good ones are already taken by western companies, says a source from China Petroleum Economics and Information Research Centre, a subsidiary of China National Petroleum Corp (CNPC)."
The dark side of China's rapid growth and industrialization is becoming increasingly apparent, and the rubber band between its yin and its yang may be getting thin enough to have developed a crack or two.
By going to fringe nations, paying too high a price for oil, and by railroading anyone who gets in its way, Beijing is building a large Karma debt.
In other words, when an entity, in this case China, can manage to upset the United States, Amnesty International, the governments of Japan and Vietnam nearly simultaneously, the situation is not just a blip.
At some point, Beijing's heavy handed oil drilling is going to go one well too far. And the consequences will almost certainly not be benign.
Oil Markets : Supply Data Looms
Oil traders will be looking for clues from the release of oil supply data midmorning. As usual, there is no way to predict what will happen, but volatility is likely.
Crude prices are on the verge of a major technical break down, with the $40 area holding the key.
Estimates were varied as usual. According to CBS MarketWatch: "In its latest estimate, Fimat USA forecasts the nation's crude supplies fell 600,000 barrels last week, along with a drop of 1.1 barrels in distillates and a contraction of about 1 million barrels in motor gasoline. Distillates include heating oil. For its part, energy information provider Platts sees a weekly decline closer to 1.25 million barrels for crude as well as a 1.3 million-barrel decrease for distillates. Platts also anticipates motor gasoline inventories rising by 800,000 barrels."
Crude futures were trading near $42 in pre U.S. trading on 12-29. The chart for February crude has been making lower lows and lower highs since the October top. Support is now near the $40 area. But the 200 day moving average, near $40 has yet to be broken. It is at this chart point that the real battle will be fought.
The Philadelphia Oil Service Index (OSX) is still testing the 125 area, but remained above the 20 and 50 day moving averages. 128 is tough resistance. Volatility will likely increase here in the next few days. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) moved back inside the 686-720, pivot band, but also remained above the 50 day moving average, suggesting that prices are getting ready to attempt a move up. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
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