China May Let Oil Refiners Set Fuel Prices, Sinopec Says

China will let oil companies set fuel prices according to government-guided rates, the official Xinhua News Agency reported, citing a vice chairman at the nation's top economic planner.

Certain companies will be allowed to adjust gasoline and diesel prices based on a pricing mechanism, which sets government-guidance rates, Peng Sen, a vice chairman of National Development and Reform Commission, told Xinhua today. Government pricing bureaus will supervise the tariff adjustment, Peng said.

China has delayed increases under a rule that allows fuel tariffs to be adjusted when the 22-day moving average of three crude grades changes more than 4 percent from the last price move. The government raised prices on March 20 by as much as 8 percent after the average climbed more than 10 percent. Rates advanced as much as 550 yuan a metric ton in 2011, while the formula indicated they should have gained 1,500 yuan, NDRC said on Feb. 7.

"Chinese oil refiners will benefit from the pricing power," Qiu Xiaofeng, an oil analyst with China Galaxy Securities Co. (CGSZ), said by telephone from Shanghai. "Their refining margins will be largely improved as they will be able to pass on rising crude costs to consumers in a timely manner."

China plans to introduce the new oil-product pricing later this year when crude costs stabilize or decline, Peng was quoted as saying.

Liu Tienan, the head of China's National Energy Administration, has suggested that oil companies set the retail price of gasoline and diesel based on an existing mechanism for determining tariffs, China Petrochemical Corp. (SINZ), the nation's top economic planner, said in a statement on its online newsletter today. No government approval should be needed for the adjustments, Liu was quoted as saying.

Refining Losses

Domestic refining losses this month will be about $7.10 a barrel, compared with $7 a barrel in February, Cheng Khoo, an analyst at BNP Paribas SA in Hong Kong, said in a research note on March 20 after the fuel-price increase. Brent crude prices have climbed 16 percent this year to $124.90 a barrel today amid concern Western sanctions on Iran will curb Middle East crude supplies.

NDRC said last month that it plans to revise the current system to let domestic fuel rates more closely track crude costs. The proposal has been submitted to the State Council, Sinopec Group said in today's statement, citing NDRC's Peng Sen.

Shorter Cycle

The new system may shorten the pricing cycle to 10 days from 22 days and replace Indonesia's Cinta with New York-traded West Texas Intermediate oil in the crude basket, according to Sinopec statement, which didn't cite anyone. The other two grades are Brent and Dubai. Oil companies will be able to set fuel prices based on guidelines from an independent institution, it said.

The mechanism is "very likely" to be introduced in the second half, said Qiu.

China plans to expand the trial of natural gas pricing to nationwide in two to three years, Peng was quoted by Xinhua.

China in December implemented a pricing ceiling for natural gas sold in southern provinces of Guangdong and Guangxi on a trial basis. The price ceilings are derived through a formula that sets a benchmark gas level in Shanghai by calculating the costs of imported fuel oil and liquefied petroleum gas in the city.