Currently trading at 65.7, decline in crude oil price accelerates in European morning, consistent with sharp falls in stock markets. Investors take profit after prices had rallied for almost 2 weeks and recent rises look excessive.

In Asia, the MSCI Asia Pacific Index slid -1.1% although Japan's Nikkei 225 Index added +0.26% to 10113. In China the Shanghai Composite Index tumbled -5% as led by plunges in oil and base material shares.

In European morning, stocks seem to be unaffected by slumps in US and Asia. US' FTSE 100 Index gains almost +1% while Germany's DAX and France's CAC 40 adds +1.9% and +1.8%, respectively.

Gold for August extends weakness to as low as 935 before recovery as USD rebounds. The greenback rises to 1.413 against the euro after plunging to 7-week low at 1.43 yesterday. Unless special news about the economy, inflation or fundamental change in precious metals, gold's movement will continue to be driven by USD.

In China, the National Development and Reform Commission (NDRC) announced to cut ex-refinery prices for gasoline and diesel by RMB220/ton, -3.5% and -3.6%, to RMB4510/ton and RMB5770/ton respectively. At the same time, jet fuel price will be reduced by RMB 280/ton, -6%. It's said that the new price levels were based on a reference crude oil price of $64/bbl.

Although the price cut surprised the market and posed threat to refinery margins of oil companies in China, it indicated the government's price reform has been working. The new pricing policy states that price adjustment is warranted should there be a 4% change in crude prices over the past 22 working days. During the period under consideration, crude oil price dropped -6% and therefore the reduction is justified.

The price cut has several implications. First, it helps prevent stockpiling of oil products in anticipation of price hikes. Second, decline in crude oil price may not necessarily mean higher refinery margins as decline in crude oil price gives reason for the government to cut fuel prices. According Xinhua news, China's fuel prices hike on June 30 'sparked widespread debate as consumers grumbled that the record domestic price were even higher than those in the US'. Unfortunately, it does not mean that refiners in China are making windfall profits. In China, domestic product prices include fuel consumption tax and 17% VAT. However, prices in the US and Singapore are either at low tax or tax-free. Therefore, it's misconception to believe Chinese refiners are earning higher margins than those in other countries. Rather, profits in Chinese refiners have been squeezed by the government's price control for years.

Sinopec (0386.HK), Petrochina (0857.HK) and CNOOC (0883.HK), the 3 large national oil companies, plunged -5.04%, -3.9% and -4.05%, respectively, both on broad-based decline in stock markets and the NDRC news. Among the big 3. Sinopec has the biggest exposure in refinery business. Due to the normal one month lag due to inventory move, we believe refinery margins for August should be negatively affected by the price cut.

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