THE dive in international crude oil prices has strengthened market expectations that China will lower fuel prices any time soon. Industry experts say low crude costs provide a good opportunity for the government to fine-tune its pricing mechanism.
Benchmark New York crude futures have more than halved from July's record high of over US$147 a barrel amid concerns the global economic slowdown will cut demand, and analysts have lowered their price forecasts despite the decision to cut production by the Organization of Petroleum Exporting Countries.
This means domestic gasoline and diesel prices are already higher than international levels after an 18-percent rise in June, according to Shenyin Wanguo Securities analyst Zheng Zhiguo.
In China, where fuel prices are set by the state and cannot reflect crude costs in a timely manner, expectation has been intensifying that the government will lower fuel prices. In a fresh note from officialdom, Xie Zhenhua, a vice director of the National Development and Reform Commission, told a news conference on Wednesday that China would adjust fuel prices with the falling crude but he did not give a time frame.
"An adjustment in prices is just unavoidable. The government will probably take some action when the turmoil in global financial sector stabilizes, and we actually have seen signs of stabilizing," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University.
While a fuel price reduction would provide relief to the nation's drivers, experts said reform of the pricing system is more crucial for the nation's healthy development in a long run.
Over a long period of time when crude rates soared, China has trod a middle ground in energy pricing, instituting mild fuel price hikes, intended to counter inflation and shield low income groups, while giving subsidies to state refiners. Even so, such non-market-oriented mechanisms have led to shortages repeatedly as many small private refiners cut back on production.
Lin said the low crude prices provide a very good opportunity for the government to conduct reform, but any decision to trigger a reform would be extremely hard because "if the crude could halve from US$147, it could someday rebound to that high."
"Because of this, the government may still be adjusting fuel prices under the current mode for a while," Lin said.
The market does change quickly. Crude jumped to beyond US$70 a barrel in New York yesterday after the United States and China cut interest rates, which may spur a global economic recovery. Yesterday's gain brought the two-day increase to about 10 percent, rebounding from the recent low level of near US$60 a barrel.
In the June adjustment, the guidance prices for gasoline and diesel were raised by 1,000 yuan (US$146) a ton to 6,980 yuan and 6,520 yuan respectively, in the sharpest ever increase.
May continue
At present, domestic fuel prices are already about 1,800 yuan a ton higher than international levels, Shenyin Wanguo's Zheng wrote in a report. China may lower prices by 1,000 yuan a ton next month, and cuts may continue next year, he said.
Li Yu, chief analyst at industry portal Oilboss, said it would be acceptable if the government lowered prices by 500 yuan a ton, a margin which would allow for a profit of 0.3 to 0.4 yuan on a per-liter basis.
The easing of the refining situation has also been reflected by results of Sinopec Corp, which reported a better-than-expected quarterly earnings late Wednesday. Its third-quarter net profit of 8.17 billion yuan was about four times that of the second quarter as refining losses narrowed.
Dai Houliang, Sinopec's chief financial officer, said yesterday that the firm's long money-losing refining segment has already reversed from losses based on current crude prices and domestic fuel rates, thanks to lower crude prices, the June fuel price hike and government handouts.