APPEC: China unlikely to adjust fuel pricing mechanism despite soaring crude freight costs

China is unlikely to adjust its oil product pricing mechanism despite higher freight and insurance costs for crude cargoes, which are discouraging refining activity, two sources at think tanks close to the matter told Platts on the sidelines of APPEC Sept. 8-10.

"With China's transportation fuel demand having peaked and the country accelerating its electrification drive, the oil product pricing mechanism was merely rolled over into the 15th Five-Year Plan unchanged from previous Five-Year Plans, suggesting it is not among policymakers' priorities," said a source at a national think tank.

Under China's current oil product pricing mechanism, introduced in 2013, the government adjusts retail ceiling prices for gasoline and gasoil every 10 working days based on a basket of benchmark crude prices, reportedly including ICE Brent, NYMEX WTI, and DME Oman, weighted according to China's crude import profile.

Market sources said freight and insurance are minor, fixed elements in the formula, with no further details provided.

Surging freight

Freight plus insurance premium currently amounts to about $30/b for shipping a VLCC cargo from the Gulf region to China, a Singapore-based shipping source said Sept. 10.

Platts, part of S&P Global Energy, assessed dirty freight for a VLCC vessel (270,000 mt) to ship crude from the Gulf region to China at a record high of $162.16/mt Sept. 10, up 4% from the previous day and exceeding the previous high of $124.14/mt March 4.

Sinopec Shanghai Petrochemical said its freight and insurance costs averaged about $4/b in the year's first half and $7/b in the second quarter, compared with around $2/b in H1 2025, and at times surging to as high as $20/b, Platts reported earlier.

Six refining sources from the state-run sector said surging freight and insurance premiums are eating into their refining margins.

Limit product price increases

China's domestic refined products market is relatively independent from international markets, and refiners do not always have the ability to fully pass higher feedstock costs on to end users, said Liu Qingwei, general manager of Rongsheng Petrochemical (Singapore) Pte. Ltd., during a panel discussion at APPEC.

On Sept. 11, the Chinese government limited domestic gasoline and gasoil price increases to 260 Yuan/mt and 250 Yuan/mt, respectively, versus hikes of 435 Yuan/mt and 420 Yuan/mt indicated by the pricing mechanism, citing a surge in international crude prices following renewed escalation of the US-Iran conflict, according to a release by the National Development & Reform Commission.

According to the current oil product pricing mechanism, the government limits retail price adjustments for oil products to ease inflation when reference crude prices exceed $80/b during the monitoring window. And when crude prices cross $130/b, the top economy planner will freeze the fuel price adjustment.

As a result, China's refining margins may decline when crude prices are above $80/b.