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Bloomberg: China May Resist Raising Fuel Price on Inflation, JPMorgan Says

By Ying Lou

July 6 (Bloomberg) — China is likely to resist increasing fuel prices this year as a response to gains in crude oil costs because of concern this would add to inflation, JPMorgan Chase & Co. said.

Inflation is above the central bank’s 3 percent target and this situation precludes a price increase, Hong Kong-based analyst Brynjar Eirik Bustnes wrote in a research note on PetroChina Co. yesterday. The situation places an “artificial cap” on earnings at the nation’s biggest oil company, he said.

The government controls how much PetroChina and rival China Petroleum & Chemical Corp. can charge for diesel and gasoline to curb inflation in the world’s most populous nation. Three quarters of PetroChina’s refined oil products are subject to state price curbs, limiting the company’s ability to gain from energy demand in the fastest-growing major economy, Bustnes said.

“The main issues in increasing product prices are inflation, affordability of certain consumer groups and refining profitability,” Bustnes said. “There are no compelling reasons currently for a price increase.”

The government raised oil-product prices twice last year as crude climbed on international markets. A retreat from those gains at the beginning of this year prompted China to cut the prices of gasoline and jet fuel in January. Benchmark crude oil in New York has risen 27 percent since March 19.

China’s consumer price index rose 3.4 percent in May, the biggest increase in 27 months and a breach of the People’s Bank of China’s target for 2007, after pork prices soared partly because of grain costs.

Exxon, Shell

A 41 percent jump in PetroChina’s Hong Kong-listed stock has pushed the company ahead of Royal Dutch Shell Plc as the world’s second-largest oil producer by market value. Those gains may be overdone, said Bustnes, whose target price for the stock is 40 percent below yesterday’s record close of HK$12.14.

PetroChina shares trade at almost 15 times estimated 2007 earnings, compared with an average of 11.6 times among global peers such as Exxon Mobil Corp. and BP Plc, the analyst said.

“Considering PetroChina’s lack of crude production growth and operating environment, we believe PetroChina should not trade at a premium to the European and U.S. peers,” he said. The stock rose 0.7 percent to HK$12.22 by 2:49 p.m.

To contact the reporter on this story: Ying Lou in Hong Kong at [email protected] .

Last Updated: July 6, 2007 02:53 EDT

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atWwGgDJMjbk

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