China Petroleum & Chemical Corp. (SNP), better known as Sinopec, reported its 2009 annual earnings this morning and the results are much better than a year ago. EPS more than doubled to $0.10 although revenues fell by nearly $200 billion compared with 2008.

Sinopec’s recovery was due primarily to two factors. First, the Chinese government’s economic stimulus package put more money in the pockets of Chinese consumers and those consumers did what they were supposed to do — spend the money.

Second, the government pulled back on its tight price controls on crude oil. In the past, the government set the price of gasoline and other refined products at a point where refiners like Sinopec could not make a profit. In 2009, the government adjusted the refined product pricing several times during the year to reflect changes in the price for crude.

China’s GDP grew by 8.7% in 2009, and the country encountered very low inflation due primarily to the renminbi’s peg to the US dollar. Coupled with the $586 billion economic stimulsus package, Chinese consumers felt they could spend more.

This is not unlike what we’re seeing today in the oil market. Crude oil is up about $2.50/barrel, mostly due to continuing dollar weakness. The weak dollar is holding US wages flat, but the deflationary effects are making people feel richer, and thus they spend more. If that continues equity prices will rise, demand for goods will increase, and demand for energy to make those goods will also rise.

The outlook for the US economy for 2010 is definitely mixed. That could be due to the trailing off of the effects of the US government’s stimulus package. By the second half of the year, stimulus effects are expected to be marginal and the current rise in equity prices is expected to reverse itself.

A survey of institutional investors at a recent conference indicated that the average estimate of the S&P 500’s level at the end of 2010 is 1189, not that far from today’s level at around 1172. That also means that we should commodity prices fall a bit, then rise again. Crude oil prices should also continue to rise slowly.

In China, the economy is expected to grow around 9% in 2010. Demand for energy will increase, and add to the demand for and price of crude. US efforts to get China to loosen its peg to the dollar are almost sure to fail unless the US declares that the Chinese are currency manipulators and slaps new import duties on Chinese goods.

Chinese demand for crude, more than any other single thing, drives the rising price of crude. Re-valuing the renminbi would reduce pressure on the dollar, allowing it to gain some strength and to moderate oil price rises somewhat. Can the US government gather the courage to push back?

Tell us what you think here.

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