By S R Nunnally
I can’t begin today’s column without standing agape and in awe of PetroChina’s (PTR:NYSE) (601857:Shanghai) Shanghai debut.

In a stunning IPO on the Shanghai Stock Exchange, PetroChina raised enough money to become the first stock ever valued at over $1 trillion. Yes, that’s trillion with a “t”. Its closest market cap competitor is Big Oil’s Exxon Mobil (XOM:NYSE) with a market cap of a “paltry” $480 billion.

In other words, in one giant leap, PetroChina raised enough money to buy Exxon Mobil outright, and have a little left over to throw a party.

Now, I’m just comparing numbers here… I don’t actually think PetroChina’s looking to make an offer for Exxon Mobil.

(Though CNOOC, Ltd. did prove that it’s more than prepared to make offers for American oil companies back in its battle with Chevron over Unocal.)

Over the past four weeks, Warren Buffett’s Berkshire Hathaway (BRK-A:NYSE) sold its stake in PetroChina for between HK$11.67 and HK$13.89. Makes me wonder if Buffett’s kicking himself for not holding on just a bit longer. PetroChina’s Hong Kong listing topped out at over HK$20.

Of course, his take is nothing to be upset about. I’d take a $3.5 billion profit in four years any day of the week.

The question for investors now is if PetroChina’s gonna collapse after this swift run-up. It’s already in correction mode. The ADS was down 10% in early morning trading, and Asian markets as a whole traded down today.

There are two things in favor of a sustained rise in PetroChina’s share price: Chinese SPRs and a hike in Chinese fuel prices.

I’ve mentioned here before that China’s building a massive strategic petroleum reserve in western China. It will hold 51 million barrels of oil and cost about $864 million. There are already four eastern SPR sites currently being filled or are under construction.

China had been advised to build and diversify its SPR, and the nation could expand its SPR to 336 million barrels. That’s enough for 14 days of consumption.

The U.S. has just under 21 days of oil stored in its reserve, and some analysts are saying U.S. markets are incredibly tight, with that figure near two-year lows.

Now, PetroChina is one of the few major oil companies in the world to have found a major discovery in recent years: the Bohai Bay in northern China. It’s been growing its reserves by 5% a year, and a new discovery could boost those reserves even more.

In late October, the company announced a possible find in the Tarim Basin. This basin is in the Xinjiang region, just where China wants to build that western China SPR.

PetroChina also holds a 67% interest in PetroKazakhstan, and the two have joint ventured on a pipeline project that has shipped 30 million barrels of oil since mid-2006. There’s a second-phase deal that was signed in August to double that capacity by 2010.

Speaking of imports, China imported 3.35 million barrels of crude a day in September. That’s 1.5% more than in September 2006, though lower than August 2007’s import numbers.

But there’s a bit of a tug of war going on with Chinese imports and exports. China’s been keeping more oil for itself. Chinese crude exports increased in September because higher oil prices mean higher profits, but exports are down for January through September.

At the same time, rising oil prices (and rising costs of importing, like rail and aviation fees) have placed a large strain on refineries, as refiners are forced to sell their products at absurdly low prices.

The result of this tug of war has been an abrupt hike in fuel prices.

On November 1, China raised gas and diesel prices by nearly 10%. This bump up equates to about a 5-cent jump per liter for gasoline consumers and a 6-cent jump for diesel consumers.

The Chinese government, which holds significant stakes in PetroChina and Sinopec, “asked” these companies to try to bump up production and imports. It’s nearly becoming a life-and-death issue, with diesel and gasoline shortages in some cities causing long lines at filling stations.

One man was beaten to death in Xinyang for cutting in line.

Sinopec has already imported 900,000 tons of diesel to meet demand and 600,000 tons of gasoline.

Over the last 10 years, China’s domestic oil production has only increased by 1.7% a year, while demand has increased by 7% annually. But China National Petroleum Corporation, PetroChina’s parent company, is already increasing its production. In the first seven months of 2007, CNPC produced 828 million barrels of oil and gas, or 4.3% more than the same time last year.

There are already deals in the works to help PetroChina produce even more oil. One deal I talk specifically about in this month’s Material Profits. In fact, November’s MP issue is all about China, so you’ll find some juicy tips as soon as it’s released.

If you’re interested in geting a copy of November’s Material Profits, sign up for Material Profits here.

But the long and short of PetroChina’s story is this: Long-term prospects are sure to treat investors well, but expect this sharp dip after the Shanghai IPO to continue, perhaps down to below $200 (on the NYSE listing) over the next two months.

If you’re interested in PetroChina, you’ll probably be able to get a better deal in December or January.

PTR’s been averaging a gain of 132.5% a year since the first week in November 2003. After the dip, I expect a return to similar price movement.

S.R. Nunnally is Editor, Commodities & Resources Report, Taipan Financial News

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