Smaller fuel price cut may help refiners
THE National Development and Reform Commission's cutting gasoline and diesel prices last week was in line with expectations and the stated formula. The size of the cut was, however, less than the recent drop in oil prices, leading us to believe that refiners could be moving towards profitability as we move into the third quarter of 2012 at US$100/barrel crude oil prices.
Average benchmark retail prices for gasoline and diesel were lowered by 530 yuan (US$84) per ton and 510 per ton to 9,160 yuan per ton and 8,350 yuan per ton, respectively. The 22-day moving average of the Chinese crude oil basket of prices fell close to minus 9 percent, while the price cuts were less than 6 percent of the previous retail benchmarks set on May 9.
Benchmark gasoline and diesel prices fell by nearly 3 percent year on year. Lower year-on-year prices would be good for public sentiment and put less pressure on the NDRC to stick to the cut suggested by the pricing mechanism in an easing inflationary environment.
The price cut could have been around 770 yuan per ton for gasoline and 700 yuan per ton for diesel. A reduction below these levels is positive, although refiners are likely to be processing more expensive crude oil imported during April/May in June. Hence lower-priced crude oil imported from June onwards may help improve gross refinery margins in the third quarter.
If the price cut had been too steep, it might increase the probability of fuel shortages in late third quarter after existing inventories are drawn down. Chinese refiners would not be incentivized to raise throughput if refining margins continue to be negative, while agricultural oil demand picks up again in September and October.
Independent refiners with nearly 20 percent of Chinese refining capacity have lowered their utilization rates to below 30 percent because of high inventories and poor demand from mid-40 percent a month ago.
There are very high inventories for both crude oil and oil products according to industry sources, which probably affect refinery run rates in the third quarter. A combination of anticipated domestic fuel price cuts as a result of falling crude oil prices and weak demand made private wholesalers unwilling to hold inventories in the second quarter, creating high inventories at the refinery level.
And it is likely that oil demand could remain weak with lower Purchasing Managers' Index data and year on year growth for the export sector.
As peak refinery maintenance ends in July, we may see more gasoline exports from China, and less diesel imports if there isn't significant power shortages and droughts despite higher temperatures in the summer months. This could be negative for Asian refining margins.
By Sophie Tan
14 June 2012