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China’s new oil pricing mechanism sets minimum level at USD 40 per barrel

China's new oil pricing mechanism sets minimum level at USD 40 per barrel

China’s new pricing mechanism for refined oil products, which guarantees a minimum level of USD 40 per barrel, will likely be neutral for Chinese oil refiners’ profits, according to Fitch Ratings, one of the largest credit rating agencies with headquarters in New York City and London.

The new mechanism, which was unveiled by the National Development and Reform Commission (NDRC) on January 13 and became effective immediately, sets the crude oil price of USD 40 per barrel as the minimum level that China’s oil refiners use to price their refined petroleum products. The government’s move is viewed positively by the market as global crude oil prices are forecast to dip below USD 20 per barrel in the near future.

The thinking behind the government policy is that overly low fuel prices would boost gasoline and diesel fuel demand unnecessarily, which could worsen the country’s pollution problem. The policy is in line with the NDRC’s previous practice of allowing refiners to charge higher prices on their fuel after upgrading their facilities to produce higher quality fuels.

However, the incremental profit margin resulting from when global crude oil prices dip below USD 40 per barrel, will have to be remitted by oil refiners to a special risk reserve. Funds in this reserve may be used for energy conservation, emission reduction, refined oil products upgrade and security of oil supply (i.e., oil reserves).

The NDRC announcement did not clearly state how the risk reserve would be distributed nor who the beneficiaries of these disbursements would be. However, it is likely that national oil companies (NOCs) will be among the chief beneficiaries of this fund, given the large investments they undertake in the areas identified in the announcement.

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