China's Giant New Energy Source

In yesterday's essay, I told you about China's monstrous "Junggar" Shale Basin.

The Junggar could become one of the largest hydrocarbon deposits ever found. Even better, China has gone "oil crazy."

With around 1.3 billion citizens, China is the most populous country in the world. It owns the world's largest cash hoard… and has the world's fastest-growing large economy. This makes it desperate for deposits like the Junggar.

According to the International Energy Agency, China will be the world's largest consumer of energy by the end of this year. In one week alone last year, China spent $41 billion securing oil supplies from all over the world. All told, it imported more than $240 million worth of oil per day. And demand is only growing. A big reason is cars…

Last year, the Chinese bought 13 million new cars – more than a 50% increase over 2008 sales. This total makes it the largest car market in the world. These cars will consume lots of oil and gas.

Also consider the thousands of power-hungry factories churning out tons of steel, concrete, and glass for China's booming cities, infrastructure projects, and 10%-plus GDP growth.

Energy consumption mirrors economic growth. From 1997 to 2007, China's total energy consumption doubled from 38 quadrillion British thermal units (Btu) to 76 quadrillion Btu. That's like adding the energy consumption of California every two years.

Securing sufficient, reliable energy sources is probably the single greatest factor in determining whether China continues its great rise.

This makes reliable energy sources – like coal, oil, and natural gas – the most important assets in the world… assets China will spend whatever it takes to get.

Today, China's energy budget is skewed toward coal. That fuel darkens the skies with soot and poisons China's people with real toxins. In 2008, natural gas made up just 4% of China's total energy supply. China plans to double its natural gas production at home to 5.6 trillion cubic feet in the next five years. That's an ambitious plan and will require enormous investment in the energy sector… especially in shales.

Enter this massive new shale discovery – the Junggar Basin – right within China's borders.

Yesterday, I told you the Junggar Basin was much larger than America's massive Piceance Basin. Below is a graphic of just how much larger, in square miles, the Junggar is than the Piceance:

You need to understand two things about the shale in the Junggar Basin and China in general. First, these shale plays are in their infant stages. We know there's potential, but they aren't developed.

China has historically ignored oil and gas from shale and focused on conventional sources. But its national oil companies have turned their attention to it now. PetroChina estimates the country has more than 1.6 quadrillion cubic feet of natural gas in its shales – more than Russia's proven reserves in 2008. That gas will likely contribute 25% of the country's natural gas production by 2030… but that's 20 years from now.

Second, you need to know that because China has focused on conventional oil sources, it has none of the technological expertise that enabled America to massively expand its natural gas production.

China's lag in technical innovation is a particular problem when it comes to tapping shale basins like Junggar. Extracting gas from these rock formations is a high-tech proposition. It's nothing like sticking a straw in the ground in Texas and watching oil shoot out.

How much will China spend to meet its energy needs – in particular, how much will it spend on shale basins like the Junggar? We can't know for sure. It's too early in the game. But I can say that China is desperate to find more energy resources. I can say it will spend whatever it takes to get them.

Over the long term, this trend is super bullish for companies that supply technological expertise, like Halliburton (HAL), Schlumberger (SLB), or the companies in the PowerShares Oil Services Fund (PXJ). As China's energy needs grow, so will contracts for companies with the expertise the country lacks.

THE "BIG MONEY" IS ALWAYS MADE HERE

The past 12 months of trading in crude oil is why we urge all readers to become connoisseurs of extremes...

Back in December 2008, we noticed a little-known indicator had turned bullish on crude oil. This indicator is the "gold/oil ratio."

Gold and oil are both widely traded commodities... and they respond similarly to inflationary pressures and investor sentiment. But occasionally, gold and crude get extremely out of whack. These extremes present trading opportunities. We highlighted such an "extreme" opportunity last Christmas, when oil became incredibly cheap relative to gold.

Right after, crude staged a huge rally from $38 per barrel to $73. Then, in late June, we noticed the crude rally had returned the gold/oil ratio to a normal level. We even said "the easy, early money" had been made in oil.

Today's chart shows this prediction was right on. Since reaching the mid-$70 area in June, crude has drifted sideways. It staged a small breakout in October, only to fall back down toward $70. It's a perfect example of how you make the easiest, biggest money at the extremes. From there, it's a hard dollar, baby.

Iraq oil minister: We're going to pump 6 million barrels per day

Iraq is getting serious about pumping oil. The country's oil minister recently told interviewers he expects Iraq to produce 6 million barrels of oil per day once oil companies complete development work.

Iraq pumps just 2.45 million barrels per day now, and it's slowly awarding development contracts to giant oil firms like Chinas National Petroleum Corp, Italys Eni, and U.S.-based ExxonMobil. Iraq has never been fully explored with modern technology, but once it is, the country could contain more oil than Saudi Arabia.

Crude oil heads for $80

Oil reached $79.05 in electronic trading on the New York Mercantile Exchange [this morning]. That is almost certainly not the end of its rise and for a number of reasons $90 crude is likely on the way before year’s end.

Oil has, so far, traded higher primarily because of weakness in the dollar and the perception that demand will rise as the global economy recovers. It is likely that signs of the recovery will increase, at least temporarily.

A COMMODITY AND ITS BREAKOUT

After four months of chopping sideways, crude oil is enjoying what traders call a "breakout."

Breakouts are one of the pillars of common-sense chart analysis. A breakout is simply when an asset makes a new high for a given time period. It can be a short period, like two weeks... or longer period, like six months. The "Turtle Trading" method is famous for making billions of dollars with breakouts (read our friend Michael Covel's site for a lot of great info on the subject).

After watching oil suffer a huge decline in 2008, we noted how the fuel built a "floor" around $38 in February. We then noted its bullish breakout in March... a breakout that resulted in huge gains for many oil stocks. And this week, we must note that oil just broke out to a new yearly high above $75.

We can't know how far this breakout will take oil. It could run to $80... $100... or, as Jim Rogers says, $200 per barrel. But we can note that oil "wants" to go higher right now. We can also brush up on oil-service names, Canadian oil sands producers, and energy-focused denizens of the Canadian Venture Index. A $20 move in oil will result in major gains here.

A SECTOR YOU NEED TO GET TO KNOW IMMEDIATELY

Major news in the commodity markets this week: Crude oil just hit a fresh 2009 high. It's more fuel for the fire under small resource stocks.

Longtime DailyWealth readers know we keep a close eye on the universe of small companies that explore for and produce resources like crude oil, uranium, copper, gold, and platinum. They're among the most explosive assets in the world. Rising commodity prices cause huge increases in their asset values and earnings power. Plus, investors love this "story" and often pile into this small sector with lots of money.

We track small resource companies with the Canadian Venture Index. We wrote them up as a sector with major rebound potential right at the index's bottom in mid-December. As scripted, the Venture is climbing along with the reflating of gold and energy prices... and just reached a new high this week.

We've stated it once and we will state it again: As precious metals and energy prices remain robust, this sector will crank out triple-digit winners like Detroit, er, Japan cranks out cars. Traders must be "up" on this market!

The craziest, most ridiculous thing we've ever heard from the Middle East

There are plenty of needy countries at the U.N. climate talks in Bangkok that make the case they need financial assistance to adapt to the impacts of global warming. Then there are the Saudis.

Saudi Arabia has led a quiet campaign during these and other negotiations -- demanding behind closed doors that oil-producing nations get special financial assistance if a new climate pact calls for substantial reductions in the use of fossil fuels.

China angling for absolutely huge amount of African oil

The Chinese state-owned oil company CNOOC is in talks to buy huge stakes in several of Nigeria's biggest oil deposits. The areas are already partly or wholly controlled and operated by Western oil companies, but many are coming up for licensing renewal - and China is hoping to grab a piece of the action.

In all, the company is trying to buy 6 billion barrels of proven reserves, over 1/6 of Nigeria's total supply of crude oil, for an estimated $30 to $50 billion.

A letter to the company from Nigeria's president said the inital offer was "unacceptable," but that a more "favourable" revised offer would be considered.

The details of the potential deal are a little unclear, but you can bet Western oil companies will be on the losing end.

The 2 biggest oil producing countries you've never heard of...

When it comes to crude oil, Nigeria and Angola aren't exactly household names like, say, Saudi Arabia. Yet these two West African countries are currently the fifth and sixth top exporters of crude oil to the U.S., exporting 668,000 bpd and 504,000 bpd, respectively.

But Americans aren't the only ones buying up African crude. Guess who else wants to poach our sources?

China, of course.

China's thirst for oil is on the rise; the International Energy Agency forecasts Chinese crude oil demand to grow to 8.3 million bpd for this year, only to increase to 8.6 million bpd in 2010. With domestic production basically flat, China must import almost two-thirds of the oil it needs, even as demand just keeps going up. Thus, the emerging giant has turned its eye toward Africa.

China makes another HUGE energy investment

China has made aggressive investments in oil production facilities and fields in Venezuela, Brazil, and several places in the Middle East. Almost all its multi-billion dollar deals are aimed at locking up supply to accomodate its ravenous need for energy which fuels is rapidly expanding economy. Many of its recent transaction guarantee crude at market prices.

The most substantial China investment to date is a plan to buy one-sixth of the reserves of Nigeria which is a poor nation with abundant supplies of crude.

According to the FT, “The overall value of the Chinese offer is not disclosed, although some details suggest a figure of about $30bn. Some oil sector executives said the total on the table was $50bn.”

Arctic Circle may hold up to 200 billion new barrels of oil

BP claims that there may be 200 billion barrels of oil and oil equivalents under the region above the Arctic Circle. Norway is exploring the area of its northern coast in the belief that a large portion of these fields belong to it.

The BP estimate could be confirmed within the next year or so, but the British company’s number has been disputed by the US government which puts the total size of the field under the top of the world at 90 billion barrels.

Peak Oil theory blasted: Record oil finds this year

So much for Peak Oil...

The oil industry has been on a tear this year, reporting over 200 new discoveries on five continents, including what si likely the biggest oil discovery ever in the Gulf of Mexico.

The industry is just now beginning to see rewards from large investments in research and new technology made earlier in the decade, when oil prices began to rise. "That's the wonderful thing about price signals in a free market -- it puts people in a better position to take more exploration risk," said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

Nearly 10 billion barrels of oil were discovered in just the first half of this year, a record-breaking pace likely to result in the most discoveries since 2000.

Energy guru predicts huge crude oil plunge

Philip Verleger is one of the most respected energy analysts in the world. In addition to being a professor at the University of Calgary, he's also the principal of energy consultancy PKVerleger LLC.

Given Verleger's standing, it's always worth noting when he makes a bold claim… like that he's now "fairly certain" crude oil prices will decline below $40 per barrel this year.