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Analysts warn fuel price cut means more refining losses for China NOCs

Increase font size  Decrease font size Date:2011-10-18   Views:547
Beijing's decision to lower pump prices for gasoline and diesel by Yuan 300 ($47.19)/mt, or between 3% and 4%, is expected to widen refining losses for China's national oil companies, analysts said Monday.

China's top economic planning agency, the National Development and Reform Commission, announced Saturday that the retail price of gasoline would be cut by Yuan 0.22/liter (13 cents/gallon) and diesel by Yuan 0.26/liter from Sunday.

The price cut is the first since June 1, 2010, taking prices off the record highs seen in April, the last time the government adjusted pump prices.

"While not welcome to refiners facing lower margins on a year-to-date basis, the move was broadly expected given the decline in global crude oil prices in recent weeks," said Soozhana Choi, head of commodities research in Asia at Deutsche Bank.

"Softening prices of commodities, not just energy but also agriculture, will help bring down inflation, which is a key goal of the Chinese government," Choi said.

"The [Chinese oil majors] are being asked to perform national service by offering cheap fuels to ward off the domestic inflation scare," Gordan Kwan, head of regional energy research at Mirae Asset Securities, said in a research note published Monday.

Since 2009, Beijing has adopted a pricing system in which it would adjust prices of refined products whenever the rolling 22-day average of a crude basket rises or falls by at least 4%.

The NDRC refers to the average price of a basket of crudes -- Brent, Dubai and Cinta -- when adjusting domestic refined product prices.

The central government announces the maximum retail product prices for gasoline and diesel in all provinces, and the provincial departments have the authority to determine the maximum wholesale prices for the refined products.

But China's policymakers often delayed price adjustments because of other social and economic factors such as inflation.

Retail prices in China have only been raised twice this year, and even after the hikes, the domestic retail prices have not kept pace with the rapid rise in global crude oil prices.

In late August, PetroChina reported a loss of Yuan 23.36 billion from its refining segment for the first half of 2011, which the company attributed to persistently high international crude oil prices and to domestic refined product prices not being fully adjusted upward to reflect the changes.

Similarly, Sinopec posted a Yuan 12.2 billion loss from its refining business for the first six months of the year.

Data published by the NDRC in late September showed that Chinese refineries recorded a loss of Yuan 4.8 billion in July alone due to a sharp increase in crude oil prices and sales costs.

The decision to reduce prices came one month later than expected, and this was done to help refiners recoup some of the losses, Zhang Liutong, an analyst with Facts Global Energy in Singapore, said.

Even with the delay, Chinese "refiners are not making money from their refining business," he added.

The NDRC said that it has asked oil companies this year to adjust their earnings from upstream and downstream sectors to "balance the interest of good relations between all sectors, and to ensure stable supply of refined products locally.

"After the price adjustment [on Saturday], the relevant departments have made clear instructions to PetroChina, Sinopec and CNOOC to continue to adjust interests between upstream and downstream sectors" to ensure adequate supply, the NDRC said in a separate statement following the initial announcement of the price cut.

"We estimate that they will lose an average of $6.50 for every barrel of imported [crude] oil processed into gasoline/diesel," Kwan said.

The latest 3% fuel price cut could contribute to further squeeze on domestic refining margins, Kwan added.



 
 
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