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Don’t Count On All That East China Sea Oil

18 October 2012 in Trading Ideas

For people bullishly investing in oil and gas stocks, the continued strong demand for energy resources by China is a significant part of the equation.

As the US Energy Information Administration has pointed out, China is the world’s largest energy consumer and the second largest importer of oil after the US. Now, it’s become a net importer of natural gas, too, and the EIA expects continued growth in both natural gas and oil consumption, making new supplies a necessity.

Similarly, Japan is the world’s third-largest net importer of crude oil and the world’s largest importer of liquefied natural gas. The country’s heavy reliance on imports to meet future consumption needs also is expected to continue.

As fortune would have it, both countries have a nearby resource – and a potentially huge one – in the East China Sea, the body of water between the two Asian countries. The EIA has estimated that the sea contains 60 million to 100 million barrels of oil in proven and probable reserves, and 1-2 trillion cubic feet of proven and probable natural gas. In addition, projections of undiscovered resources, also show significant potential.

And wouldn’t you know, the two countries are currently in the middle of territorial disputes that are making exploration and development difficult.

Specifically, the countries have two disputes: Where to demarcate the sea boundary between each country and how to determine the sovereignty over a group of islands located there. The EIA says the countries have held talks – and have even considered joint development of resources – but have yet to agree.

Even if the disputes are resolved, the EIA doesn’t expect the East China Sea to be a significant supplier of oil for a number of years.

Oil prices have slipped in the past month to about $92 a barrel, but are still well above lows of the past summer, as a “new normal” of oil hovering around $100 a barrel – as production lags demand — seems to gain credibility. The Black Gold motif is up 2.1% in the past month, compared to a 0.1% decline in the S&P 500. For the past three months, the motif is up 10.5%, ahead of the S&P’s 6.5%.

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