The game is called "Let's Make a Deal," the grand prize is an uninterruptible supply of oil, and China is moving aggressively to make sure that it's the winner.
The United States, the U.S. dollar, and U.S. consumers all stand to be the "biggest loser."
But don't worry: In a future that will almost certainly be defined by high oil prices, there's still a way for you to win.
In fact, this game of global-commodities brinkmanship may actually afford savvy U.S. investors with one of the most significant profit opportunities that they will see in their lifetimes, says Money MorningChief Investment Strategist Keith Fitz-Gerald, who has been following China's global commodities gambit for more than a decade.
"Unless something changes - unless U.S. leaders and U.S.-headquartered companies see the light and change their ways - the outcome of this game has already been determined," says Fitz-Gerald, a well-known Asia-investing expert and author of a best-selling book on the topic. "The only remaining question is the timing."
The Saudi connection
When Bloomberg Newsrecently reported that China and Saudi Arabia were cozying up in what appears to be a long-term oil-supply relationship, the financial news service was actually reporting what Money Morninghas been telling its subscribers would happen for nearly three years.
And that report didn't even tell the entire story.
China's newfound friendship with Saudi Arabia is just the latest illustration of an unprecedented worldwide shopping spree that has seen China work with nearly every major commodity supplier on the planet to lock up supplies of virtually every class of natural-resource commodity.
But one particular commodity dominates the others in importance. And that's crude oil - "black gold."
Portrait of a winner
China is succeeding where the United States is failing largely for several key reasons:
- Beijing has a solid energy-security policy.
- As China's foray into Africa and Latin America has demonstrated, it isn't putting heavy-handed political conditions on its deal making.
- And, as its recent foray into Canada underscores, Beijing can move decisively to take advantage of available opportunities.
These are lessons the current - and future - administrations in Washington would do well to learn, Fitz-Gerald says.
"While Washington evidently thinks it still rules the roost, changes like this suggest to me that there is an entirely new market dynamic at work - one in which the U.S. is getting leapfrogged by two key parties - those who have the world's supply and those who are likely to be its biggest consumers in the future," Fitz-Gerald says. "At face value, this appears to be just another realignment of supply contracts but I think there's a lot more to it. In fact, given the growth of China's futures markets and the simultaneous emergence of new relationships between the Middle East, South America and China, I'll bet ... that it's not long before oil's primary pricing inputs are not drawn from the CME or NYMEX, but from China's exchanges, instead."
Beijing understands that China must lock up oil supplies at a time when the Western world can't seemingly be bothered to understand that this is a zero-sum game. In other words, China views the global financial crisis as an opportunity to be exploited for economic gain and the security of its people, not as a problem to be solved.
The bottom line: It appears that China understands the big picture while the United States - and some other top Western nations - do not. In fact, if Washington continues along its current path with respect to commodities - especially with oil - Fitz-Gerald sees three key outcomes:
- The yuan will dethrone the dollar as the currency of record in global finance; as Goldman Sachs Group Inc. (NYSE: GS, Stock Forum) has already subscribed to.
- Oil prices - at least "have-not" markets - will soar.
- And the United States will see its global influence slip in a major way.
It will take time for these predictions to play out. But Fitz-Gerald and a number of other sector experts say that the catalysts are already in place.
"What China fears most is that there will not be enough oil to go around in the very near future and that a U.S.-dominated supply chain could effectively ‘strangle' China's growth," Fitz-Gerald says. "So Beijing has done what the United States and other great powers have done at other times in history: It has launched a global buying spree from Darfur to Peru that's turned heads and ruffled feathers all across the world."
Even if the U.S. government fails to adjust to the realities of the so-called "commodities new-world order," U.S. investors needn't be left behind.
In fact, Fitz-Gerald says there are several energy plays that should be part and parcel of any investment portfolio.
Four ways to play high oil prices
For risk-averse investors who also don't want to risk getting left behind, Fitz-Gerald recommends an exchange-traded fund (ETF): The United States Oil Fund LP (NYSE: USO, Stock Forum). U.S. Oil is a domestic exchange-traded security designed to track the movements of West Texas Intermediate (light, sweet crude oil). The basic investment directive of this ETF is for its net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil.
In this new reality, anytime an investor searches for a stock to invest in, make sure to study the underlying company carefully - and not just for such stalwarts as sales, earnings growth, debt and the other usual metrics. Fitz-Gerald says it's almost always preferable to grab the company with the greatest global exposure - especially if part of that global exposure involves China and other parts of emerging Asia.
For that reason, for an oil play with a mid-level risk profile, Fitz-Gerald likes Statoil ASA (NYSE: STO, Stock Forum). The Stavanger, Norway-based Statoil (formerly StatoilHydro ASA) is an integrated energy company with operations in about 40 countries throughout the world.
As of Dec. 31, Statoil had proven reserves of 2.17 billion barrels of oil and 18.1 trillion cubic feet of natural gas. Statoil operates in four business areas: Domestic (Norway) exploration and production, international exploration and production (INT), natural gas and manufacturing and marketing.
The Barents Sea border deal reached by Russia and Norway late last month will give Statoil an opportunity to search for oil and gas in a new region. Said a Statoil official: "It's obviously very positive that this has now been agreed and that the jurisdiction now seems to have been resolved."
The deal appears to have even-broader implications for Statoil. In fact, speaking at a closed business forum in Oslo, Russian President Dmitriy Medvedev expressed hope that Statoil will take part in developing the Prirazlomnoye hydrocarbon field in the Pechora Sea - and in other projects, too, Oil & Gas Eurasia reported.
One final point that's worth noting: At current prices, Statoil shares feature a hefty 4.24% dividend yield.
A riskier - but still-related - play might include a look at Petroleo Brasileiro SA (NYSE: PBR, Stock Forum), the state-run Brazilian energy giant more commonly known as Petrobras. Petrobras has made headlines with the massive discoveries made off its coast in recent years. While deep-water fields like these are costly to develop, investors will value the stocks of controlling companies accordingly if oil prices make another run past the $100-a-barrel level.
In the near term, Petrobras shares have dropped a bit after the company said it would move forward with a share offering that could take place by the end of July. The share offering - which is expected to be among the largest ever - could reach $60 billion. As part of a government infusion, Petrobras would receive the exploration-and-production rights to five billion barrels of crude oil. The company would pay the government fair-market value for the oil in new shares, and minority shareholders will be allowed to accompany the share offer, according to recent reports.
Although the stock offering puts pressure on Petrobras' shares in the near term, over the long haul this deal actually adds to the company's vast potential. The share offering will help fund the company's development of the so-called "pre-salt oil patch" that is situated off of Brazil's coast. The oil lies under more than 2,000 meters of water - as well as an additional 5,000 meters under sand, rock and a shifting layer of salt.
Petrobras has a broad investment portfolio, especially with the pre-salt "reservoirs" that are situated beneath the Espírito Santo, Santos and Campos basins in deep and ultra-deep water. The oil reserves in these regions - estimated at 9.5 to 14 billion barrels of oil equivalent (BOE) - are generally viewed as being "the most important oil find in recent years," according to Zacks Investment Research, which says the Brazilian firm is "poised to maintain an impressive production growth profile for years to come."
Interestingly, there's also a Statoil connection here - which actually isn't a surprise. As the world's largest offshore oil operator, Statoil is one of the few companies on earth with a deep-water drilling expertise that could be highly useful as such hard-to-reach reserves become exploration targets.
Back in March, Petrobras bought a 30% stake in an offshore oil block from Statoil and Spain's Repsol YPF SA (NYSE: YPF, Stock Forum). The offshore block, known as BM-C-33 block, is located in the Campos Basin off the Brazilian coast. Repsol and Statoil each hold a 50% interest in the block. The companies have each agreed to sell a 15% stake to Petrobras. Additionally, Petrobras also agreed to purchase a 20% stake in the BM-S-51 block from Repsol.
Our last oil play brings us full circle, for it takes us to China - the portion of the portfolio investors truly can't afford to ignore. For that part of the portfolio, Fitz-Gerald recommends that investors take a close look at the Hong Kong-based CNOOC Ltd. (NYSE: CEO, Stock Forum).
CNOOC has four production areas off the coast of China, and is also an offshore-oil producer in Indonesia. The firm also has upstream assets in Nigeria, Australia and some other countries. As of Dec. 31, CNOOC owned proved reserves of approximately 2.66 billion barrels of oil equivalent and its average daily net production was 623,896 BOE.
CNOOC's proximity to Mainland China and other emerging economies ensures that its oil doesn't stay in the barrel very long, Fitz-Gerald says.
"You see, all it takes is a stroll down the street in China to see that demand for oil and gasoline is going to increase far faster than most U.S.-based analysts would ever believe - or understand," he said. "What's really unfortunate for U.S. consumers is that most Washington insiders either don't see - or aren't willing to admit, even to themselves - just what's happening here."
Concludes Fitz-Gerald: "For U.S. lawmakers and the rest of the inside-the-beltway crowd, this changing of the guard - and the fallout that's certain to result - will lead to some challenging times. With China now in the game, there's even a very real chance Washington will discover that it's been maneuvered to the sidelines, and perhaps even out of the game. But the good news is this: U.S. investors don't have to let the same thing happen to them. There's plenty of opportunity here - you just have to acknowledge it."