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China's green energy plan set to block retail fuel price cut proposals

Highlights

Floor price cut may be proposed to support consumers

Support for oil against Beijing's green energy push

Domestic refining margins likely to remain healthy

Singapore — China is unlikely to remove the current retail fuel price floor mechanism when the country's top decision makers meet at two political events next week, as such a move could jeopardize Beijing's push for green energy consumption.

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The status quo will also keep domestic refining margins healthy for the time being.

It has been widely expected that some politicians may propose to remove or lower the floor prices set for various oil products during the annual "two sessions" starting from May 22 in order to lower consumer cost burden during the global economic slowdown, according to industry officials and market sources.

The "two sessions" are the plenary session of the National People's Congress, or NPC, and the annual session of the National Committee of the Chinese People's Political Consultative Conference, or CPPCC.

China's economic development targets, financial stimulus measures and the annual military budget for 2020 amid coronavirus epidemic will be among the hot issues during the important political events next week.

"We will see some proposals about the floor price mechanism, but cutting retail fuel prices will encourage more oil consumption, which is not in line with China's long term green energy development target," a Beijing-based senior government official said this week.

Lower fuel prices would also hurt electronic vehicle development, which is a part of China's industry upgrade plan, the government official added.

"I don't think lowering the floor price is a good option, because lower price will boost China's consumption which will speed up international crude price recovery. Neither Chinese consumers nor the energy industry can benefit much from rapid rebound in international oil prices," a Beijing-based oil-pricing policy adviser said.

The adviser also highlighted that any discussions on the deregulation of the retail price mechanism could wait until after the economic recovery as the government's priority is to control jobless rate and sustain the industry and financial value chain during the global coronavirus pandemic.

HEALTHY DOMESTIC MARGINS

Both state-run and independent refiners would breathe a sigh of relief if the decision makers keep the price floor mechanism next week as the fuel producers have been reaping the benefits of healthy domestic refining margins in recent months.

Under China's current oil product pricing mechanism, Beijing sets retail gasoline and gasoil ceiling retail prices every 10 working days in line with international crude prices, when they are in a range of $40-$130/b.

If crude prices fall below $40/b, the government keeps the oil product retail price ceiling at the level corresponding to $40/b, without further cuts.

Market sources said the basket of international crudes comprise Brent, Oman and WTI. All these benchmark crude prices have been consolidating under the $40/b mark since March 9.

Therefore, China has kept its retail ceiling prices unchanged since March 18.

In Guangdong province, where products import/export was active, 10 ppm 92 RON gasoline retail ceiling price has been set at Yuan 6,900/mt or $65.5/b before taxes and fees, according to the top planner National Development and Reform Commission.

Wholesale price for the grade was Yuan 4,770/mt or $34.26/b before taxes and fees in the province on Thursday, according to a PetroChina trader.

In contrast, S&P Global Platts assessed the Mean of Platts Singapore 10 ppm 92 RON gasoline at $27.44/b on Wednesday.

Meanwhile, retail 10 ppm gasoil has been priced at Yuan 5,965/mt and wholesale price was at Yuan 5,250/mt or $60.33/b before taxes on Thursday, compared to MOPS 10 ppm gasoil assessment of $31.98/b on Wednesday.

Oil product producers are required to pay the additional earnings from the higher oil product prices into the government's Price Adjustment Risk Fund quarterly, which is used as subsidies to encourage energy segments, such as EV and shale gas production.

FOCUS ON DOMESTIC SALES

But even with the fund payment, Chinese refiners would prefer to focus on domestic sales over exports as international oil product crack spreads dropped into negative territory.

"Refineries do prefer to sell oil products in domestic market. Exports incur losses," the source with PetroChina said.

Moreover, some independent refineries and blending firms sell gasoline and gasoil by labeling them as chemical products to avoid making the compulsory payments to the government's Price Adjustment Risk Fund in order to maximize their profits. This has led to a sharp increase in imports of blending materials for the fuels.

As a result, China's light cycle oil imports -- an alternative of diesel -- more than doubled to 815,000 mt in March from 349,000 mt in the same month of last year, data from General Administration of Customs showed. The volume was expected to surge higher in April and May.

Gasoline blending demand has also supported CFR prices for petrochemical gasoline blending components such as mixed xylenes and toluene over March-May.

Asian isomer-MX prices became the highest globally in early March, mainly due to demand from China, also leading to arbitrage shipments coming from the US and Europe into the Asian market.

Gasoline blending materials looked for a home in China, with Medium Range tankers being placed on subjects to be loaded with reformate in the Amsterdam-Rotterdam-Antwerp hub at the end of April for a voyage to China voyage, according to shipping sources.