The Commodity Investor: Benefiting from Increasing Energy Trade Between Asia and the Middle East

Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. 

The decision sent shockwaves through London’s oil industry: BP (LSE:BP,NYSE:BP), the quintessential British oil company, had been excluded from participating in the development of Abu Dhabi’s onshore oil fields for the first time in over 75 years. BP, which helped discover oil in the Emirate of Abu Dhabi and in the United Arab Emirates, has been a fixture of the Abu Dhabi oil scene for decades. It helped provide the technology, equipment, human resources and know-how that allowed the emirate to develop its oil industry as quickly as it did. The fact that BP was excluded from future concessions rattled many industry insiders.

What’s extremely relevant is that this event was not isolated. Instead, it points to a growing trend in the Middle East’s oil industry: the slow removal of western oil companies from crucial activities in the world’s most prolific oil region. For several years now, western oil companies have seen their influence decline in the Middle East, and in many cases have been replaced by more aggressive and politically-backed Asian oil companies.

One of the main reasons this is happening is simple supply and demand. Increasingly, Middle Eastern producers are selling their oil not to western markets, but to eastern consumers. Let’s take a look at Abu Dhabi, for example. Abu Dhabi is one of the top producers and exporters in the Organization of the Petroleum Exporting Countries (OPEC), producing over 2.7 million barrels per day (mbpd). Can you guess how much of that oil goes to western markets? If you guessed half, then you’re wrong; if you guessed all of it, then you’re also wrong. If you guessed none, then you are right! Out of those 2.7 mbpd, none are purchased by any western economy. Instead, all of that oil is exported to Asian countries such as Japan, China and South Korea.

Go east

Asian oil companies are heavily courting oil producers in the Arabian Gulf, and this trend will likely continue to the detriment of traditional oil players in the region. For the first time in decades, Saudi Arabia — the largest producer and exporter in the world — is exporting more oil to China than to the United States. For years, Saudi Arabia was one of the top suppliers of oil to the United States. Today however, Saudi Arabia trails countries such as Canada, Mexico and even Venezuela in supplying crude to the US. Instead, most of the growth in Saudi exports has come from eastern markets, specifically China. Today the Saudis sell over 1 million barrels per day to the Chinese. The Saudis are building major refineries with capacities of 200,000 barrels per day and are investing heavily to supply eastern customers.

While this trend started in the 2005 to 2007 period, it accelerated in 2008 after the financial crisis hit. The financial crisis had a deep effect on western energy consumption, which saw a marked decline and a slow recovery. By contrast, Asian consumers didn’t suffer as much from the crisis and were able to weather the storm better than their western counterparts. When markets did pick up, Middle Eastern producers found that Asian markets were more reactive, which only solidified the Arabian-Asian oil trade dynamic.

These circumstances opened the door for Asian companies to participate in developments and concessions in the Middle East, which was traditionally dominated by Western companies. China is now building a 400,000-barrel-per-day refinery in Yanbu, Saudi Arabia. Abu Dhabi also announced that it will supply at least 200,000 barrels per day to China in a strategic cooperation deal. In addition, when Abu Dhabi wanted to build a pipeline connecting its fields to the port city of Fujairah it turned to Asian companies instead of western companies. The pipeline, inaugurated in the summer of 2012, was built by the construction arm of China National Petroleum Company in a $3.3 billion project that spans over 360 kilometers.

In a sign of ever-growing ties between the two regions, cooperation isn’t only limited to oil deals. When Abu Dhabi embarked on building the first fully-disclosed civilian nuclear program in the Middle East (the nuclear programs in Iran and Israel are not fully disclosed), it chose the South Koreans over French and US companies in a massive $20-billion deal.

What’s an investor to do?

It’s clear that energy trade links between Asia and the Middle East are increasing and are here to stay. The question is, how do you benefit from this trend as an investor? The Commodity Investor recommends investing in top-tier Asian companies that are active internationally and in the Middle East. One such company is China Petroleum & Chemical (NYSE:SNP). SNP, known in the marketplace as SINOPEC, is one of China’s largest companies. With over $387 billion in revenues, it is active in many of the world’s key petroleum regions, including the Middle East. It is backed by the government, which gives it an advantage over rival privately-held companies in the west.

Another company worth taking a look at is Japan Petroleum Exploration Company (TSE:1662). With a market cap sitting of $180 billion, Japan Petroleum is sizeable enough that it’s able to compete with Big Oil anywhere in the world. The company is active in Japan, North America and now increasingly the Middle East. It has a reputation for being technologically savvy and transparent in its business dealings overseas. It is a good company for those looking to gain access to the increasing ties between Asia and the Middle East.

Securities Disclosure: the author doesn’t have any positions in the stocks mentioned.