China hiked fuel prices by as much as 4 percent this week to help refiners to offset rising oil prices, but the increase was too small to stop the bleeding in most refineries and would leave in question No. 2 consumer of the world intact. Wednesday is widely expected to rise 3 percent to 4 percent higher pump prices back to the record for the last price drop seen on Oct 9. The selling price of the widely used 93-ron petrol in Beijing rose to 7.85 yuan ($ 1.25) per liter, the highest in the country.
While users complain about higher fuel costs, since the prices are still far from causing demand destruction, analysts, adding that only an increase in gas prices to double digits would cut use by ordinary consumers to help.
The timing of the hike, following the Lunar New Year holiday in January and rising inflation in China to 4.5 percent, shows Beijing faces a tough juggling act in curbing inflation and safeguarding the financial health of the refineries.
Analysts said the hike left Beijing is moving to ensure the fast growing economy will not be caught short by a lack of fuel as world oil prices rise on growing geopolitical risks.
The increase probably aims to encourage high refinery runs to maintain and ensure adequate fuel, said Soozhana Choi, head of commodities research at Deutsche Bank Asia.
“The need to have more than enough supplies on hand can be more acute this year in light of the multitude of possible supply disruption risks in the Middle East and Africa,” Choi said in a research note.
But several sources at state enterprises and private refineries said the 300-yuan per ton, or four cents per liter increase would only help cut losses.
“It might be good for a number of oil purchased in december processing and sale of fuel at the latest price, but the international oil prices climbed in January and increased further this month,” said an official with a refinery in southern China .
“It’s not a good sign for the refineries.”
Chinese refineries are struggling to make ends meet as global oil prices have surpassed state-set retail prices.
The government said in November that the Chinese refining sector lost 1.17 billion yuan in the first 9 months of last year, even though losses reported by two of the nation’s largest refinery, Sinopec and PetroChina Co. Ltd. were considerably higher.
Simon Powell, a petrochemical analyst at CLSA, said refiners needed another 10 percent increase in fuel prices or a decrease in crude, with no reduction in sales prices, to return to profit.
But, Powell said a change in fuel price mechanism, expected in 2012, would be an important catalyst for refineries reduce differences in refining margins to help and return to profit.
ECONOMY dictates DEMAND
Despite the softening economy, analysts recent fuel price increase was small, and no one changed their forecasts for China’s 2012 crude oil consumption.
“A small price increase will not add much to costs, only a series can do so,” said Qiu Xiaofeng oil analyst from Galaxy Securities.
Instead, the pace of the economic slowdown in China are the most important factor in the demand and the markets to see whether Beijing can fend off Europe’s debt crisis and successfully steer its economy to a soft landing.
China strives for economic growth of 7.5 percent this year, but analysts believe that the world No.2 economy will eventually more than 8 percent will grow as the central bank’s monetary policy is facilitated.
“The demand for oil will not contract unless the economy really in trouble,” said a Shanghai-based analyst with a foreign securities company who asked not to be identified.
To be sure, is China’s crude oil import growth expected to slow down to a 6-year low as economic malaise in Europe affects the growth of exports, shuttering factories or sheets of production.
Implicit China’s crude oil demand will rise 5 percent in 2012 to 9,900,000 barrels, with a net import growth seen an increase of 5.9 percent, the research arm of the top state energy company CNPC predict.
However, an expected rebound in sales of cars in the top of the world market, along with doubled Stockpiling, would help offset weakness elsewhere.
A Reuters survey showed the demand would be supported by a ramp-up in refining as a wave of new plants come onstream this year process about 500,000 bpd more crude oil.
Only double-digit fuel prices will undermine some analysts said.
source:reuters
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