China oil price shake-up a closer link to world market

China will start a more flexible system for pricing domestic fuel from March 27, the first major revamp for four years, to help avoid shortages and tame consumption.
The new scheme should reverse years of losses for China’s oil refiners, analysts said, by increasing the link with world oil crude prices and scrapping a rigid formula for altering prices for oil products such as gasoline and diesel fuel.
“This is a big milestone for the energy industry and big win for the refiners as the new scheme should lead to more market-driven prices which will lead to improved profitability in the sector,” said Gordon Kwan, head of energy research at Mirae Aseet Securities in Hong Kong.
State oil companies like Sinopec Corp. and PetroChina have suffered losses at their refining segments as domestic fuel prices often lagged the gains in costs of crude oil.
Top refiner Sinopec should benefit most from the reform and should see the operating margin from refining improve to US$1.60-1.92 per barrel, from US$1.12 in 2012, according to a Bernstein Research note.
The government also wants to use the more market-linked plan to curb wasteful fuel consumption, as China, the world’s second-largest oil user, is set to double its fuel use by 2030.
“After the adjustments the mechanism has taken a further step towards market liberalization, and will more flexibly reflect changes in the international market and help guarantee domestic market supplies,” China’s top economic planner, the National Development and Planning Commission, said on its website.
Under the new plan, prices will be changed every 10 working days versus the previous window of 22, it added. An automatic change to fuel prices if crude prices move more than 4% will also be scrapped.
The basket of reference crude oils would also be altered, the agency said, without elaborating.
The commission, however, gave scenarios under which the government may withhold or delay price adjustments — such as high domestic inflation or spikes in global oil prices over a short time frame. Also prices will not be changed if the resulting fuel price moves are less than US$8.016 per ton.
Farmers, public transport, taxis and other vulnerable users would continue to receive subsidies to cope with big price increases.
Gasoline prices will be cut by US$49.70 per ton, while diesel fuel prices will fall by US$48.10 per ton, or about 3.2% and 3.4%, respectively, from the last price change on February 25, 2013.
(March 26, 2013)