Another fuel price cut gives refiners hope

The central government has cut fuel prices for the third time in as many months to reflect lower crude costs, while analysts expect a long-awaited pricing reform to be rolled out later this year that would benefit loss-making oil refiners.

The petrol retail price was to be cut by 420 yuan (HK$515) a tonne from midnight last night and that of diesel pared by 400 yuan a tonne across the nation, the National Development and Reform Commission said in a statement.

Fuel prices vary by cities. For Beijing, the reduction represents a 4.4 per cent cut to petrol and 4.6 per cent on diesel.

Under the pricing system which began in 2008, domestic fuel prices 'can be adjusted' when the moving average of global crude oil prices over a 22-day period changes by over 4 per cent from the previous price-adjustment date. When the crude price exceeds US$80 a barrel, price controls ensue and margins are squeezed.

State-backed refiners China Petroleum & Chemical (Sinopec) and PetroChina, which account for most of the mainland's refining volume, made a combined operating refining loss of almost 20 billion yuan in the first quarter due to price controls to tame inflation and prevent social unrest. Refining losses were partly offset by higher oil production profits.

CLSA head of Asia oil and gas research Simon Powell noted the average of the three global benchmark crude prices is down 8 per cent since the last price cut, more than the fuel price fall, implying refining margins have improved. The actual margins can only be estimated, since the refiners carry four to six weeks of crude inventory that were bought at higher prices. Powell expects the oil giants' refining operations to be close to breaking even after the latest cut.

Speculation was rife early this year that Beijing was ready to tweak the pricing system to better reflect global crude prices, which would benefit refiners. With inflation above 3 per cent it was not rolled out, but it fell to 2.2 per cent in June and crude prices are at the lowest since early last year, so reform is expected before year-end.

420 yuan

The petrol retail price per tonne will be lowered by this much, in yuan

- Diesel will be 400 yuan cheaper per tonne