China’s latest fuel price hikes are giving its oil majors a little breathing room.
The National Development and Reform Commission said Monday it would raise domestic retail fuel prices starting Tuesday by 600 yuan ($95) a metric ton following the surge in global energy prices this year. The move, expected for some time, is a sign that Chinese policymakers are less worried about inflation, and also cuts the oil companies some slack on the refining losses they’ve been making given their selling price lags market reality.
Retail fuel prices are set by the government in China, which means the companies pay market prices for oil and gas but often sell it at a loss. Sinopec, with its comparatively larger downstream and refining bias compared to its peers China National Offshore Oil Corp. (Cnooc) and Petrochina Co. Ltd., has borne the brunt of this fuel price regime. But Barclays Capital says a further price hike of 400 yuan per ton for gasoline and diesel prices is needed to reach profitability, especially as oil prices continue to climb.
As Dow Jones Newswires reports, Sinopec lost 23.1 billion yuan ($3.65 billion) and PetroChina lost 41.5 billion yuan ($6.57 billion) from refining in the first three quarters of 2011.
China currently adjusts its prices according to what the moving average of a basket of international crude prices are over a period of 22 working days, known as the adjustment window. If prices move more than 4% over this period fuel prices are adjusted. Barclays Capital argues that whether this time gap narrows – thereby making fuel prices gradually more reflective of market movements – remains the key question. However, if inflation starts to rear its ugly head again and exceed the government’s 4% target, changing this mechanism would be highly unlikely as it would help keep prices artificially lower. As a reference, Brent crude has risen 17% since December.
According to Citigroup, that moving average actually reached the 4% threshold around Feb. 28, but the price hike was delayed because of the National People’s Congress. Because of this delay, Citigroup remains bearish on Sinopec in the near-term and expects it to post its largest refining loss in the first quarter of the year since the third quarter of 2008.
Sinopec is off 0.9% on Tuesday morning in Hong Kong, after adding 1.2% over the last two sessions. PetroChina is down 0.7% and Cnooc flat, erasing earlier gains in the session.
