The recent rapid drop in global crude prices has left Chinese refiners grappling with negative margins as they struggle to process crude purchased at a higher price a few months ago and concurrently selling oil products at lower prices.
Sources said many refineries were suffering significant losses from declining crude prices.
“Most of the crude imports that arrived this month are priced against the average price of loading period in the previous month. When those crudes are processed into oil products, the price of those oil products will be much lower if the crude price continues to drop,” a source at the West Pacific Petrochemical Corp. refinery in Dalian said on Friday.
Global crude prices have fallen steadily from around $115/barrel in mid-June mainly due to oversupply on the back of booming oil production from North America. Prices have dived more rapidly in the last month or so, with Dated Brent tumbling by 16% since September 1. It closed at $85.09/b on Friday after dipping to $83.42/b on Thursday.
AUTOMATIC ADJUSTMENT OF GASOLINE, DIESEL PRICES
The Chinese refiners’ current grousing is quite different from prior to 2013, when they complained of heavy losses because of high crude prices at over $100/b for much of 2011 and the first half of 2012, while the government was slow to raise oil product prices on inflation fears.
Today the central government’s oil product price setting mechanism involves the automatic adjustment of regulated gasoline and diesel prices every 10 working days in response to crude volatility. However, this means refiners’ crude procurement costs from previous months are not reflected in current retail gasoline and gasoil prices.
The National Development and Reform Commission on Friday announced another price cut, reducing gasoline prices by Yuan 300/mt ($48.97/mt) and diesel prices by Yuan 290/mt.
This was the sixth consecutive reduction since June and prices for both fuels have fallen by about Yuan 1,000/mt in the period.
As a result, Chinese consumers at the pump are enjoying the lowest prices since October 2010. The benchmark retail gasoline price in the capital Beijing is now Yuan 8,860/mt, while the benchmark diesel price is Yuan 8,135/mt.
TEMPORARY NEGATIVE MARGINS
“Refiners will continue to suffer, at least for the next two to three months, as they work through their backlog of inventories,” said Grace Liu, analyst at Guotai Junan Securities, on Monday.
“But after that, they should be quite comfortable, particularly Sinopec,” she said, adding that Sinopec’s exposure to falling crude was relatively limited as it has significantly less upstream output compared with its rivals PetroChina and China National Petroleum Corp.
A number of refineries are reporting significant oil product inventories as domestic demand has been fairly stable in the last few months, trade sources said.
“Internal gasoline inventories are pretty high, so PetroChina cut the price of gasoline sold to its sales arm by about Yuan 700 [this month] from September,” said a source at PetroChina’s Daqing Refining and Petrochemical refinery.
State-owned refiners Sinopec, or China Petroleum and Chemical Corp., and PetroChina will likely see their refining margins decline in the second half of the year compared with H1, she said.
Both companies had seen their financial performance in refining improve significantly in H1 because of rangebound oil prices and the government’s timely oil product adjustments.
Sinopec reported an operating profit of Yuan 9.8 billion in its refining segment during H1, with its refining margin rising 43.3% year on year to an average Yuan 300.3/mt.
PetroChina’s overall refining operations returned to the black during H1 with an operating profit of Yuan 4.36 billion, versus a Yuan 7.77 billion loss sustained during the same period last year.