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China's crude oil price hike in line with reform

SINGAPORE: China's latest hike in domestic crude oil prices was a prelude to future rises that would squeeze mainland refiners' profits, but was necessary for market reform, oil traders and Chinese sources said on Monday.

Beijing sources told Reuters that state planners were likely to raise domestic crude oil prices again before the year ended due to higher costs of oilfield maintenance and operations.

"Beijing raised oil prices back in May 1, 1994. They have to increase again because costs in oilfield maintenance and international oil prices have gone up over the years," a Beijing-based Chinese oil trader said.

"Domestic prices will be hiked in three stages. This is the second one. The third will be towards the end of the year. We cannot afford a one-time price hike, our domestic market cannot take it," the trader said.

In mid-April, China's State Council decided to increase domestic crude oil prices by an average of 60 yuan ($7.20) per tonne, according to the Economic Information Daily.

The domestic price of first-grade oil was increased by 100 yuan per tonne (US$1.70 per barrel) while that of second grade oil was cut by 50 yuan per tonne (US$0.85 per barrel).

While domestic crude prices are a state secret, mainland sources have said average unplanned prices were around 800-900 yuan per tonne (US$13.60-$15.30 per barrel), up from about 600-700 yuan per tonne ($10.00-$11.90 per barrel).

"If we are to reflect international levels, prices would have to be raised by about $7-$8 per barrel. That's too sharp and will have detrimental impact on society," the Beijing-based trader said.

China's domestic crude prices are divided into two-tiers -- planned and unplanned -- to keep prices low to protect domestic oil refiners.

However, Chinese planners lamented that the artificially low prices had strained national coffers and led to blind development of Chinese downstream refining business.

"What we are doing now is part of the national reform, to gradually reflect international prices to achieve a more accurate picture of demand and supply," a source at the State Planning Commission said.

"The higher prices will undoubtedly affect domestic refiners' margins, but this is a short-term problem in a long-term policy," he said.

Chinese traders said price jumps painted a tougher picture for domestic refiners, which have higher overhead costs compared with their more cost-efficient Western counterparts.

They feared domestic prices of refined oil products would have to eventually rise because of higher crude feedstock cost.

"International oil product prices would be more competitive then. With the news, I see domestic oil products prices well supported at 2000 yuan per tonne. (They) can't go below," a Chinese trader with a foreign company said.

Western traders' opinions were mixed over the implications of the latest hike. Some feared stiffer competition from international supplies might force Beijing to tighten import policies, others said that was unlikely as such a move would be contrary to Beijing's bid to join the World Trade Organisation.

Prices of domestic diesel prices in the south have risen to over 2,150 yuan from 1,900 yuan recently. However, Chinese traders said the increase was not attributable to the crude price hike but tight stock levels due to a drop in smuggling activity.-Reuter