China caps fuel price surge to shield consumers amid Middle East conflict

In a rare move not seen in over a decade, China's top economic planner has stepped in to cap domestic fuel price increases, absorbing a significant portion of the surge triggered by the Middle East war.

The National Development and Reform Commission announced March 23 that effective midnight, the maximum retail prices for gasoline and diesel would rise by Yuan 1,160/metric ton and Yuan 1,115/mt, respectively.

Under the country's existing pricing mechanism, which links domestic fuel prices to a basket of international crude benchmarks, the scheduled increases would have been Yuan 2,205/mt for gasoline and Yuan 2,120/mt for diesel.

The intervention means the government is absorbing more than Yuan 1,000/mt of the cost increase -- effectively halving the price hike for consumers. On a per-liter basis, the cap translates to an average reduction of about Yuan 0.85 for both gasoline and diesel nationwide.

The NDRC attributed the rise in international crude prices to the conflict in the Middle East, which has pushed global oil benchmarks to multiyear highs. The commission said the measure aims to cushion downstream users, ease inflationary pressure and maintain economic stability.

Pricing mechanism

Under China's oil product pricing mechanism, the NDRC sets retail gasoline and gasoil ceiling prices every 10 working days in line with a basket of benchmark crude prices, when the weighted average of the basket during the window is in a range of $40-$80/b.

It will not adjust the ceiling prices when the crude price change is less than Yuan 50/mt ($7.47/mt), or $1/b for gasoil and 88 cents/b for gasoline, or under exceptional circumstances.

The government does not release the formula and the basket of crudes. But Beijing-based sources said the basket of international crudes comprises ICE Brent, NYMEX WTI and DME Oman, weighted as per China's crude import slate.

However, when the reference crude prices surpass $80/b during the monitoring window, NDRC narrows the retail price adjustments for the oil products to ease inflation. And when crude prices cross $130/b, it will freeze the fuel price adjustment.

As a result, China's refining margins may decline when crude prices are above $80/b and, theoretically, these refiners may incur losses when prices are over $130/b.