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
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
"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
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
A price monitor close to NDRC also said he believed oil prices would
rebound to over $40/b soon.
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.
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
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.
--Edited by Sambit Mohanty,
© 2015 Platts, The McGraw-Hill Companies Inc. All rights reserved.
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