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March 26, 2013

China Oil Price Overhaul is More Market Driven

by Reuters

China will start a more flexible system for pricing domestic fuel from Wednesday - the first major revamp in four years - to help avoid shortages and tame consumption.

The new scheme should reverse years of losses for China's oil refiners, analysts said, by increasing the link with world crude prices and scrapping a rigid formula for altering prices for oil products, such as gasoline and diesel.

"This is a big milestone for the energy industry and big win for the refiners as the new scheme should lead to more market-driven prices, which will lead to improved profitability in the sector,'' said Gordon Kwan, head of energy research at Mirae Aseet Securities in Hong Kong.

State oil companies like Sinopec Corp and PetroChina have suffered losses at their refining segments as domestic fuel prices often lagged the gains in costs of crude oil.

Refiners get lift

Top refiner Sinopec should benefit most from the reform, and should see the operating margin for its refining improve to 10-12 yuan ($1.6-$1.9) per barrel from 7 yuan in 2012, according to a Bernstein Research note.

The government also wants to use the more market-linked scheme to curb wasteful fuel consumption, as China, the world's second-largest oil user, is set to double its fuel use by 2030.

"After the adjustments the mechanism has taken a further step towards market liberalization, and will more flexibly reflect changes in the international market and help guarantee domestic market supplies," China's top economic planner, the National Development & Planning Commission, said on its website.

Under the new scheme, prices will be changed every 10 working days versus the previous window of 22, it added. Also, it will scrap an automatic change to fuel prices if crude prices move more than 4 percent.

Crude oil

The basket of reference crude oils also would be altered, the agency said, without elaborating.

The commission, however, gave scenarios under which the government may withhold or delay price adjustments - such as high domestic inflation or spikes in global oil prices over a short time frame. Additionally, prices will not be changed if the resulting fuel price moves are less than 50 yuan per ton.

Farmers, public transport, taxis and other vulnerable users would continue to receive subsidies to cope with big price increases.

China will cut its retail ceiling for prices of diesel and gasoline. Gasoline prices will be cut by 310 yuan [$49.91] per ton, while diesel prices will fall by 300 yuan per ton, or about 3.2 percent and 3.4 percent, respectively, from the last price change on February 25.