China's top policy planner sees 2006 world oil price staying high

Hong Kong (Platts)--25Apr2006

China's top economic and social policy planning body, the National
Development and Reform Commission, sees oil prices staying high through 2006,
driven by faster than forecast world economic growth and consequent buoyant
demand for oil, and limited surplus oil production capacity.
Efforts by countries to build up strategic oil stockpiles and continuing
strong economic growth in China itself and in India will also create
incremental demand, the Commission's Department of National Economy said in a
report released late last week.
Uncertainty regarding oil supplies from key producers such as Iran, Iraq
and Nigeria has also been a factor in the current price strenght, the report
said, adding that the weaker US dollar and capital outflows from stock markets
to commodities would continue to add a speculative premium to already high oil
prices, the report said.
To cushion the impact of rising oil prices on China's economy, the report
suggested the government should pay closer attention to its internal crude
pricing policy, which had been based on oil products prices in the Rotterdam,
Singapore and New York markets but which are increasingly being calculated on
the basis of refiners' crude prodcurement costs. It also recommended the
promotion of energy conservation, the active development of alternative
energy, further investment in hydrocarbon assets outside the country, and
speeding up the establishment of a national oil stockpile.
Chinese and foreign media in early March quoted Ma Kai, head of the NDRC,
saying China would start filling its first strategic oil reserve facilities by
the end of this year. Construction of the first-phase 5.2 million cubic meters
(32.8 million barrels) Zhenhai storage terminal has already been completed in
eastern Zhenhai province. There has been some talk suggesting that the central
government is considering financing the strategic stockpile with part of its
huge foreign exchange reserves-- which stood at $853.7 billion at the end of
February--although Beijing has yet to release any concrete implementation
details of the national oil reserves program.
In 2005, China imported about 127.08 million mt of crude, up just 3.5%
over the 122.8 million mt imported in 2004. Senior NDRC officials have said
that the government intends to cap the country's crude imports in 2006 under
the 2005 level.
Starting in late March, the government rolled out a series of
measures to reform its oil products pricing mechanism designed to balance the
interests of various sectors of society. It raised retail oil product prices
for the domestic market by Yuan 200-300/mt ($25-37) on March 26, the first
time since July 2005. Officials with state-controlled refiner Sinopec Corp
said Beijing had also started calculating oil products prices based on
refiners' crude procurement costs instead of setting them at an artificially
low level. Domestic products prices are therefore expected to keep rising in
the future under this new pricing mechanism until they reach a level that will
cover the production cost of Chinese refiners.
At the same time, Beijing also started charging domestic oil producers a
special income levy for the crude they produce in China. Revenues collected
will be used to subsidize industries worst affected by a hike in domestic oil
product prices, such as agriculture and public transportation.

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