• Tue
  • Sep 2, 2014
  • Updated: 1:16pm

Beijing bids for balance with fuel price rise

PUBLISHED : Wednesday, 27 October, 2010, 12:00am
UPDATED : Wednesday, 27 October, 2010, 12:00am

Oil refiner shares gained yesterday after Beijing lifted fuel prices for the first time in six months, as it sought to balance the need to keep refiners profitable and keep inflation in check amid rising crude oil prices.

China Petroleum & Chemical (Sinopec), Asia's largest oil refiner, rose 3.1 per cent to HK$7.65 while rival PetroChina edged up 0.9 per cent to HK$10.02, against a 0.1 per cent decline in the Hang Seng Index.

Analysts said the price increase showed Beijing was honouring its promise to keep refiners profitable unless crude prices surged.

'[Yesterday's price increase] indicates the government is continuing to abide by the pricing mechanism in the current oil price environment,' Citi analyst Graham Cunningham said. 'We continue to believe the government's plan should not result in refining loss unless oil prices rise to well over US$100.'

Under the pricing system launched in late 2008, domestic fuel prices 'can be adjusted' when the moving average of global crude oil prices over a 22-day period changes by more than 4 per cent from the previous price adjustment date.

When the crude price exceeds US$80 a barrel, price controls will ensue and margins will be squeezed. Negative margins will be realised when the crude price hits US$130.

UOB Kay Hian Securities analyst Wang Aochao estimated the two oil majors were either breaking even or making slight losses in refining.

After the price increase, the profit margins would be US$2 to US$3 a barrel, he said. This compared with around US$8 a barrel in last year's second and third quarter and similar margins of US$2 to US$3 a barrel in this year's first nine months.

Xinhua on Monday quoted an unnamed source at the commission as saying that it aimed to launch a new refined oil pricing system within the year to 'enhance its transparency'. It did not elaborate.

The current system has been criticised by refiners as being 'too transparent', allowing speculators to hoard inventory ahead of expected price changes and profit from them.

'We believe this may indicate that the hurdle for price changes may be lowered from the current 4 per cent move in the 22-day moving average of international oil price,' Cunningham said, noting that media reports had speculated the 4 per cent threshold might be halved to 2 per cent and the 22-day period might be cut to 10 days.

This would increase the frequency of price changes and reduce speculation, he said.

The retail price of petrol was raised by 230 yuan per tonne nationwide, while diesel went up by 220 yuan a tonne. Prices varied between regions. Beijing petrol prices were increased by 2.74 per cent to 8,620 yuan per tonne, and diesel prices gained 2.85 per cent to 7,950 yuan.

Keeping control

When the crude price exceeds US$80 a barrel, price controls will ensue

Negative margins will be realised when the crude price hits, in US dollars: $130

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