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POSITION: Long Oil via the etf USO

China is aggressively  lining up its energy needs, with an announced $10 Billion minority stake in Kazakhstan’s state-owned oil company to be finalized during Kazakh President Nazarbayev’s visit to Beijing on April 15th. Russia stands to lose on the deal, both strategically as a former satellite leaves its orbit and competitively as Chinese capital helps increase Kazakh production.

Back in mid February we pointed out the importance of the $25 Billion China lent two of Russia’s main oil companies in exchange for 20 years of supply.  China may now benefit from multiple oil supply lines and the ability to play Russia and Kazakhstan off one another for price if the deal is consummated. Politically Putin & Co. will be reminded that China is wearing the pants.

With $1.95 Trillion in currency reserves, China has the cash to do the deal and may even get it done at a considerable discount due to the price destruction of crude since last summer. Further, the Kazakh economy is desperately in need of international support for its crumbling economy. Kazakhstan’s government has taken control of the country’s largest bank, BTA Bank, and the global recession has eroded demand for Kazakh oil. Should the deal get done, China is setting itself up well for greater control over its energy needs. 

One of our major themes for 2009 is owning what THE client (China) needs. As China ramps up its infrastructure expansion, countries that can supply China with the commodities it needs to grow will benefit, and we have position our portfolio accordingly. 

Matthew Hedrick

Andrew Barber