BEIJING (Commodity Online): With inflation on a downward trend, China raised fuel prices for the first time since April 2011, as expected. The move should be welcomed by refiners and perhaps taken as a sign that this year the government may allow for more frequent price adjustments in line with crude prices, unlike last year.
While the recent price hike is in line with the current pricing system, the move is also likely an effort to incentivize refiners to maintain high runs and ensure ample fuel supplies as China moves into the Q2 seasonally strong demand period.
According to indicative calculation, the price increases provide only a modest gain for margins, bringing them YTD for January-February up just 1.3% YoY, as feedstock gains outpaced that of the recently announced price hikes. However, the move is likely welcomed by refiners and perhaps taken as a sign that this year the government may allow for more regular price adjustments in line with international crude oil price changes – unlike last year – in light of the downward inflation trend. In 2011, margins were on average 50% lower YoY.
The recent fuel price increase is likely an effort to incentivize refiners to maintain high runs and ensure adequate fuel supplies following the Chinese New Year Holidays and as China moves into its seasonally strongest oil demand period of Q2. China’s total oil demand on average peaks in Q2 led by seasonally strong gasoil demand in the period. Though fuel oil demand is also strong in the Q2 period, it is gasoil that dominates the barrel. Gasoil represents more than one-third of China’s total oil demand while fuel oil’s share is less than 10%.
Source: Deutsche Bank Global Markets Research report
