Since Brent and gold prices are highly correlated, moves in one necessitate moves in the other. I expect gold to be especially volatile in the coming months as the tug of war between physical demand and the fragile futures markets intensifies. This will do nothing to help the volatility of oil prices – and commodity prices in general. So, China’s liberalizing the fuel-pricing system could not have come at a better time for both China Petroleum & Chemical Corp (ADR) (NYSE:SNP) and PetroChina Company Limited (ADR) (NYSE:PTR).
Meanwhile, besides the expected turnaround of its refining business, there are some positives coming out of Sinopec’s shale-gas operations as well, located at Fuling in Sichuan province. Several successful tests have been conducted and the company is anticipating touching its target of producing 35.1 billion cubic feet (1 billion cubic meters) of gas by 2015. The flexible fuel price policy is also coming at a good time since it will increase China Petroleum & Chemical Corp (ADR) (NYSE:SNP)’s profitability allowing it to focus on the extraordinary expensive task of drilling for shale gas.
Optimism
Now that the controlled-price mechanism is (mostly) out, there is reason to be optimistic about both of these firms, but Sinopec in particular. This change to the pricing structure along with the proposed changes to the tax laws, which will see both PetroChina Company Limited (ADR) (NYSE:PTR) and Sinopec turnover a larger proportion of their profits to the Chinese government, are developments pulling the firms in opposite directions from an investor’s perspective.
Sinopec’s commitment to broadening its base of operations I think are the right moves long term. The price of Brent will be a political football in the West for the rest of 2013 as keeping its price under control is important to continue the narrative of slow but steady recovery in the U.S. while a strengthening Euro will help struggling European economies to recover with low food-and-energy imports.
For Sinopec and PetroChina Company Limited (ADR) (NYSE:PTR), given that the long-term picture in China involves a huge increase in the demand for oil, this pricing system change will allow both firms to more rationally prepare for that and re-balance the way in which the Chinese economy grows in the next decade. Like the removal of the huge diesel and cooking gas subsidies in India, this bodes well for purging the excesses of the past.
The article Chinese Refiners Are Free to Make a Profit originally appeared on Fool.com and is written by Peter Pham.
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