China Petroleum & Chemical Corp (Sinopec), the world's third-largest oil refiner, has warned of fuel shortages if Beijing does not raise fuel prices to stem refining losses.
Even though Beijing is trying to fight inflation, which soared to a 32-month high of 5.4 per cent in March, some analysts say that unless crude oil prices spike dramatically Beijing will lift fuel prices to prevent a repeat of the widespread shortages of 2008.
Several mainland media outlets yesterday quoted Sinopec chairman Fu Chengyu as saying on Sunday that at the current international crude oil price of about US$110 a barrel, his company was losing US$20 a barrel. Fu's comments came at a briefing to announce the sacking of, Lu Guangyu, the head of Sinopec's Guangdong branch, for mis-using company funds to buy expensive alcohol and trying to cover up the practice.
The US$110 oil price Fu quoted is in line with the current West Texas Intermediate benchmark price. The Brent benchmark, which analysts said was more relevant to Sinopec's import costs, is fetching just over US$120 a barrel. Sinopec imported 78 per cent of its crude needs last year.
Some analysts said the present refining losses could be less than Fu indicated. It takes six to eight weeks for crude prices to be reflected in refiners' operating costs since they carry about that much in crude inventory.
'I estimate the refining break-even point of Sinopec is roughly just under US$100 a barrel after the fuel price hike early this month,' a European analyst who asked not to be named said. 'That explains the loss of US$20 a barrel, though it is not happening now but more like mid next month and June. The current loss is more like US$15 a barrel or less.'
BOC International analyst Lawrence Lau said Sinopec's first-quarter refining performance might not be 'very bad' since Brent crude prices only rose above US$100 a barrel at the start of the year. He said Beijing would likely lift fuel prices further. Brent hovered at around US$115 a barrel for most of March and traded at US$120 to US$125 for most of this month.
Fu warned that if the losses were sustained, small refiners controlled by local governments and private enterprises would be forced to shut down. He said the combined processing capacity of these small refiners accounted for a quarter of the industry; however an analyst said their utilisation was much lower than that of Sinopec, which is running its refineries at full capacity. This indicates that small operators contribute about 16 per cent of industry output.
Under existing guidelines, retail prices are adjusted whenever average the international crude price rises or falls more than 4 per cent over 22 consecutive working days on a moving-average basis. The next adjustment could take place in two weeks.