China & Oil: Talking Down The Price (SNP, BHP, POT, CEO, BP)

What is the easiest way to drive down a price without stopping orders?  Telling suppliers that you may have to cut orders in the months ahead.  There are many things that affect the price of oil and there are many things impacting that price today.  Lower global share prices, lower U.S. housing and manufacturing data, and more woes from Europe are all contributing.  The standout story that may just not be accurate is slowing oil demand in China.  Sure, there was a drop in imports.  But it was also based upon biting into supplies as the country had record purchases.

China Petroleum & Chemical Corp. (NYSE: SNP) reported earnings and was quoted as noting that China’s crude oil imports could slow later this year but will remain at healthy levels based upon construction and consumption.  The construction is an issue because the country in many regions is way overbuilt, but at the same much of the nation needs significant building and infrastructure projects.  The consumption part of the equation is where this is getting tricky.  It is hard to believe what China says here, and it may just be as simple of an explanation that China is just talking down its real interest to keep prices low.  Sinopec is having margin issues due to government price controls.

In case you had not noticed, China has been on an asset grab where it has tried (and succeeded) over and over to secure more natural resources.  Oil is one of those assets.  Even if the Chinese really do have a 100 year vision, it is not likely that China is still out securing energy assets if it knows it will have lower demand in the near future that will lower the price of oil.  Why overpay when you are the top bidder?

One other issue is all of the reports that China may step in and trump BHP Billiton plc (NYSE: BHP) in the Potash Corp. of Saskatchewan (NYSE: POT) acquisition.  Whether that happens or not is yet to be seen.  Potash and fertilizer is not at all the same as oil, but the correlation needs to be made.  It is not very far out that China has to increase its potash and fertilizer use.  Ditto for India.  For the country to secure source after source will give it its own market at a steep discount if you factor in the time value.  Will China suddenly have major demand spikes from its agriculture market that is not coupled with oil demand?  Anything possible, but I fall in the camp that China will have a correlation there.

CNOOC Ltd. (NYSE: CEO) has also been rumored, along with Sinopec, to be interested in new oil assets in Brazil and even in a BP plc (NYSE: BP) gas project stake in Vietnam.  Whether any of those rumors are true is another issue.  Still, it is hard to imagine another wave of deal activity if China is really interested in these giant asset grabs that it can strategically make.

Talking your own trading book is the oldest trick in the book.  If China is expecting a slowing of growth, there has yet to be the true double-dip recession.  A true double-dip recession would drop China’s oil demand.  But for China to actually hit a recession, that would take a similar economic return in the U.S. to a base-line average of what conditions were throughout 2008 and 2009 without the extreme panic.

These state run companies are believed by at least some of us to be mouthpieces of the nation.  If you were China and just passed Japan to be the number two economy in the world, would you want to give that title back?  It might not matter at all whether China holds the #2 position in 2010 versus 2011, but there has to be at least some pride factor to consider.

There would be more to fear right now if this recent weak data was coming out in October rather than August.  This seems an instance where China might just be talking down oil rather than truly killing oil by lowering actual demand ahead for any extended time.

JON C. OGG