March 27 (Bloomberg) -- China, the world’s second-biggest oil consumer, changed its system for setting gasoline and diesel prices to more closely track refiners’ crude costs. Shares in China Petroleum & Chemical Corp. and PetroChina Co. rose.
China will review fuel prices every 10 working days based on the average cost of a basket of crudes, down from 22 days previously, and a threshold for triggering a revision will be abolished, the National Development and Reform Commission said in a statement on its website yesterday. The NDRC also cut gasoline and diesel prices for the first time in four months, effective today.
The new mechanism will mean more-frequent fuel-price revisions that better reflect movements in the global crude market and reduce speculation, the NDRC said in the statement. It may also curb processing losses at the nation’s oil companies, according to Sanford C. Bernstein & Co. China Petroleum, or Sinopec, the nation’s biggest refiner, recorded an operating loss for 2012 at its processing unit of 11.9 billion yuan ($1.9 billion), it said March 24. PetroChina, the second-largest, lost 43.5 billion yuan, it said March 21.
“This is a very significant policy toward bringing about more stable refining margins and making refining in China a profitable business,” Neil Beveridge, a senior analyst for Asia-Pacific oil and gas at Bernstein in Hong Kong, said by phone yesterday. “We’ll see Chinese diesel and gasoline prices moving more in line with international pricing. This is significant for the Chinese refiners, Sinopec in particular.”
Sinopec gained as much as 2.9 percent and closed 2 percent higher at HK$9.10 in Hong Kong. PetroChina rose as much as 2 percent and ended the session up 0.6 percent at HK$10.24. The benchmark Hang Seng Index climbed 0.7 percent.
Sinopec’s operating margins at its refining unit may increase to as much as 12 yuan a barrel, compared with a loss of 7 yuan a barrel last year, Bernstein said in a report e-mailed yesterday.
China may still hold off from a fuel-price adjustment if gasoline or diesel is due to rise or fall by less than 50 yuan a metric ton, or when the country is facing “significant” circumstances such as high inflation or steep increases in international crude prices, said the NDRC, the nation’s top economic planner.
The government also changed the composition of the basket of crude grades it monitors, the NDRC said in the statement, without elaborating. Under the previous mechanism, introduced in December 2008, the NDRC tracked the 22-working-day moving average of a mix of Brent, Dubai and Indonesia’s Cinta grades. It considered a price adjustment if the average moved more than 4 percent from the previous change. That threshold has been abolished, yesterday’s statement showed.
“This is a big milestone for the energy industry and a big win for the refiners,” said Gordon Kwan, the head of energy research at Mirae Asset Securities Ltd. in Hong Kong. “The new scheme should lead to more market-driven prices, which will lead to improved profitability.”
Under the price reductions announced yesterday, the maximum tariff for gasoline falls by 310 yuan a ton and diesel by 300 yuan a ton. The pump price of 90-RON, China III gasoline in Beijing will decline 3 percent to 9,720 yuan a ton, or $4.47 a U.S. gallon, NDRC data show. That compares with an average cost of $3.68 a gallon for regular retail gasoline in the U.S. in the week ended March 25, according to figures from the Energy Department. The China III specification is similar to the Euro III fuel standard.
China last cut fuel prices on Nov. 16 and raised them on Feb. 25. Brent crude, the benchmark price for more than half the world’s oil, has dropped about 4.7 percent since the Feb. 25 revision.
“They’ve had this controlled-price system, and those systems can be horribly expensive,” John Vautrain, the owner of Vautrain & Co., an energy consultant in Singapore, said by phone. “If you have a free price at which you are acquiring supplies and a fixed price at which you are selling them, there’s always a possibility that things will get out of whack. So this ought to make life easier for the traders.”
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