China to Increase Domestic Diesel, Gasoline Prices First Time in 10 Months

Author: Spencer Ogden
Date posted08/Feb/2012
Author: Spencer Ogden

China, the world’s second-biggest oil consumer, raised domestic fuel prices for the first time in 10 months to spur production by refiners including China Petroleum& Chemical Corp. and PetroChina Co.

Retail gasoline and diesel cost 300 yuan ($47.58) a metric ton more starting today, the National Development and Reform Commission said on its website yesterday. The increase is equivalent to 0.22 yuan a liter on average nationwide for gasoline and 0.26 yuan a liter for diesel, China’s top economic planning agency said.

China Petroleum, known as Sinopec, and PetroChina, the country’s biggest refiners, have urged the government to increase prices after international crude costs rose. The government controls fuel prices to curb inflation, which cooled to a 15-month low of 4.1 percent in December.

“Sinopec benefits the most as it is more leveraged to refining, and our estimates show it may be nearly breaking even with gross refining margins at around minus $1 a barrel,”Sophie Tan and Brynjar Eirik Bustnes, Hong Kong-based analysts at JPMorgan Securities Asia Pacific Ltd., said in a note today. PetroChina’s margins are minus $3 to $4 a barrel, they said.

Sinopec rose 1.8 percent to HK$9.45 in Hong Kong trading today, while PetroChina climbed 2.2 percent to HK$11.86. The benchmark Hang Seng index gained 1.5 percent.

Ensuring Supply

PetroChina’s losses from refining were 41.5 billion yuan in the first nine months of 2011 and Sinopec’s were 23.1 billion yuan. PetroChina said Oct. 21 its refining loss may widen to 50 billion yuan for all of 2011, from 23.4 billion in the first half. Sinopec’s six-month refining loss was 12.2 billion yuan.

“Increasing fuel prices according to the pricing mechanism will encourage production by the refiners and ensure supply to the domestic market,” the NDRC said in a separate report. “It will also rationalize consumption and promote energy conservation and emissions reduction.”

China introduced a pricing system in December 2008 that allows the NDRC to adjust retail fuel prices when the moving average of a basket of three crude varieties changes more than 4 percent over 22 working days.

The moving average of Brent, Dubai and Indonesia’s Cinta, the three crude types in the pricing basket, climbed 4.2 percent over the past 22 working days as of Feb. 6, according to Shanghai-based commodity researcher C1 Energy.

C1 reported the price increase yesterday, before the government announcement.

Introducing Changes

Brent crude rose 0.2 percent to $116.51 a barrel in London trading as of 4:59 p.m. Singapore time. The futures contract has gained 9 percent this year.

China must introduce changes to the current pricing method to “rationalize” fuel prices, the NDRC said. The government is studying possible alterations to the pricing system and will seek public opinion after ironing out details, it said.

Changes will involve shortening the pricing cycle, improving the execution of changes and changing the crude grades assessed, it said. The government reduced fuel price increments and delayed some adjustments last year to cushion the impact ofrising costs, the NDRC said.

Gasoline and diesel tariffs increased by as much as 550 yuan a ton in 2011, when they should have risen by 1,500 yuan in accordance to the current pricing method, it said.

The NDRC last adjusted fuel prices in October, when rates were cut by 300 yuan a ton. The last increase was in April.

Energy Security

The price increase can “perhaps be taken as a sign that this year the government may allow for more regular price adjustments in line with the international crude oil price changes, unlike last year, in light of the downward inflation trend,” Soozhana Choi, the Singapore-based head of Asian commodities research at Deutsche Bank AG, said in a note today.

China may raise retail gasoline and diesel prices by 15 percent in five separate increases to about $4.10 a gallon this year, Gordon Kwan, head of energy research at Mirae Asset Securities Ltd. in Hong Kong, said in a December report.

“The current political and economic situation in the world is relatively complicated, and we cannot ignore the risk of shocks in the oil markets because of the Iranian nuclear crisis,” the NDRC said yesterday. “We face severe challenges in petroleum supply security.”

The U.S. and allies including the U.K. and the European Union have imposed sanctions on Iran to pressure it to allow inspections of its nuclear program, which Western nations say may be aimed at creating nuclear weapons. Iran, which says it needs nuclear power for civilian purposes, has threatened to block the Strait of Hormuz if its economy is targeted.

The risk premium in oil prices should be two to three times higher than it is now, based on the risk of military conflict in Iran and a potential lack of spare output capacity globally, according to Steen Jakobsen, chief economist of Saxo Bank A/S.