China's price move signals discomfort with oil plunge

Singapore (Platts)--17 Dec 2015 1035 pm EST/335 GMT

The Chinese government Tuesday refrained from adjusting retail oil product prices in line with global crude oil fluctuations for the first time in nearly three years, sending a strong signal to the market that it believes prices may have fallen too far too fast.

While the decision is widely expected to help state-run refiners to boost their margins, it is also expected to curb any rise in oil consumption at a time when Beijing is stepping up efforts to curb pollution by promoting the use of alternative fuels.

"The move will help to ensure positive refining margins," senior analyst at Platts China Oil Analytics James Lu said.

The government suspended its regular oil products pricing adjustment due to the volatility in international crude prices.

This was the first time Beijing has decided not to align the prices since introducing the current pricing system in March 2013.

Market observers in China, Asia's top oil consumer, said that a price of lower than $40/b was not in line with pricing authority's expectations.

The current pricing mechanism was set when the international oil price hovered above $100/b and there were expectations that it would rise further or at least remain around those levels in the near to medium term.

"The price of $40/b is below the cost of China's domestic crude oil production. Some domestic production will be shut unless the price cut is suspended," said Zhou Dadi, an energy expert at a government-backed consultancy. His commentary on China's latest policy move was released by the National Development and Reform Commission Wednesday.

Bernstein said in a research note that "The announcement is not positive for oil demand.

It also sends a signal to OPEC that its largest customer, China believes that oil prices are too cheap. In our view, this effectively puts a floor at current prices of $38/b," Bernstein added.

A price monitor close to NDRC also said he believed oil prices would rebound to over $40/b soon.

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The Chinese authorities have taken some major steps this year toward liberalizing the oil sector after decades of government control. Earlier this year, they allowed private refineries to import crude oil -- an area previously the sole domain of the state-owned sector.

Pricing researchers from Sinopec and CNPC's institute said that NDRC could take advantage of low oil prices to reform the pricing mechanism soon. Several discussions on the issue have taken place with the planning body.

The statements echoed the views of NDRC, which said that through the latest policy decision, it would seek to make improvements to the pricing mechanism given the new market environment.

Under the oil product pricing mechanism, the NDRC sets retail gasoline and gasoil ceiling prices every 10 working days in line with international crude price fluctuations, unless the resulting price change is less than Yuan 50/mt or in exceptional. circumstances.

NDRC can suspend or delay oil product pricing adjustments if inflation increases dramatically, if an emergency occurs, or when international oil prices are hugely volatile over a short period.

In such instances, the adjustment is rolled over and included in the next price change.

During the last monitoring window or the last 10 working days, front-month ICE Brent crude futures dropped $6.52 or 15%, to $37.92/b on Monday from $44.44/b on December 1.

Domestic oil-product guidance prices were last adjusted on December 1, with gasoline falling by Yuan 145/mt and gasoil down by Yuan 140/mt.

It had been widely expected that the guidance prices for gasoil and gasoline would be cut by around Yuan 170-200/mt, based on the NDRC's published pricing mechanism.

On October 12, the State Council announced a plan to set up market-oriented price mechanisms for all commodities by 2020, with liberalization of gasoline and gasoil prices at a suitable moment.

--Oceana Zhou, oceana.zhou@platts.com
--Edited by Sambit Mohanty, sambit.mohanty@platts.com,and Jonathan Dart, jonathan.dart@platts.com

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