No immunity

In the past, the central government has instituted moderate fuel price hikes while still giving out sizable government grants to Sinopec to keep both drivers and refiners happy.

Analysts said they expected the steep decline in crude, which echoed the recent global financial woes, could now go further.

"The current rendition could be even more severe, as the economic woes have originated in the United States and show signs of spreading among OECD (Organization for Economic Co-operation and Development) members," said a Sun Hung Kai Financial report.

China and Asia would not be immune to a slowing global economy, and its demand would also waiver sooner or later, it said. The report pointed out that the only visible medium to long-term support for crude prices was production cuts from Organization of the Petroleum Exporting Countries.

"Although OPEC wants to put the floor for crude oil at US$100 a barrel, we believe upside potential will be limited by continued declines in demand in the following months," it said.

The situation was also evidenced by China's import data. According to Customs, the mainland imported 13.7 million tons of crude in July, marking the second straight month of decline and an on-year drop of 7 percent, as crude inventories prepared for the Olympics were now being slowly depleted.

While the latest crude tumble depicted an earnings downside for global energy stocks, it would mean earnings upsides for Sinopec and PetroChina, which have major exposure to the refining sector that's subject to central government's price control, according to Hong Kong-based brokerage CLSA.

The biggest question for the earnings of Sinopec and PetroChina now is how the central government is prepared to adjust its subsidy policies with lower crude prices.

In an effort to keep the market well supplied amid soaring crude prices, the central government has given PetroChina and Sinopec, Asia's No.1 refiner, a 75-percent rebate on the value-added tax they pay on crude imports during the second quarter.

Sinopec Chairman Su Shulin has reportedly said the company still enjoys the VAT rebate in the current quarter, albeit smaller.

Policies for the fourth quarter are still not clear.

"The refining business at Sinopec and PetroChina is getting back in the black, but our concern is that the central government may lower fuel prices if crude keeps falling and this would be the biggest negative to the two companies," Wang Weigang, an analyst at Northeast Securities, wrote in a note.

(Shanghai Daily September 18, 2008)