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Berkshire Hathaway

Beijing's fuel price cut hits oil equities

PUBLISHED : Tuesday, 11 October, 2011, 12:00am
UPDATED : Tuesday, 11 October, 2011, 12:00am

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Mainland oil stocks declined yesterday as Beijing cut fuel prices for the first time in 16 months to help stem inflation.

Petrol and diesel prices, controlled by the National Development and Reform Commission (NDRC), were cut by 300 yuan (HK$365) per tonne, or between 3.5 per cent and 3.9 per cent, from October 9.

This was the first price cut since June last year. The last adjustment was on April 7, when the regulator increased prices by 310 yuan per tonne.

Royal Bank of Scotland (RBS) said the lower fuel prices would hurt Sinopec and PetroChina as refining margins would be squeezed.

The price cut implied that Beijing would not allow Sinopec to earn 'abnormal' profits from refinery products to compensate for losses in the last two quarters, Merrill Lynch said yesterday. The Chinese firms incur a loss of 70 US cents per barrel, compared with a profit of US$5.10 per barrel that international refineries make.

Sinopec shares fell 4.7 per cent to HK$7.14 yesterday, while PetroChina shares closed at HK$9.78, down 1.4 per cent.

Mainland fuel prices are adjusted according to a formula based on a basket of international crude oil prices. Fuel prices are adjusted when the 22-day moving average of the crude oil basket crosses the 4 per cent threshold. Some confusion in the market is expected after the fuel adjustment, a Citigroup report on Sunday said.

To curb rising general consumer prices, Beijing has limited the price increase of oil products in previous adjustments to less than that of global oil prices, RBS said.

Responding to criticism that the pricing lacked transparency, the NDRC said it was studying ways to optimise the system by adjusting prices more frequently, improving their execution and adjusting the crude oil types for benchmarking.