China's oil giants fail to prop up fuel prices in April

In mid-April, China's fuel market was abuzz that the central government would soon increase retail fuel prices.

It had appeared that the price of crude oil might have risen enough between March 25 and the middle of April to cause China's National Development and Reform Commission (NDRC) to again raise retail fuel prices. Under China's new fuel pricing system, the NDRC considers adjusting retail gasoline and diesel prices if the price of crude oil fluctuates by more than 4 percent over a 22-day period.

Domestic demand also seemed to be picking up. In March, gasoline and diesel consumption in Guangdong, China's biggest fuel market, exceeded that of the previous year, according to industry statistics. Both these factors led people to believe the rumors. However, the price hike never came.

Up to this point, China National Petroleum Corp. (CNPC) and China Petrochemical Corp. (Sinopec Group) had been making a concentrated effort to drive up wholesale fuel prices while pressuring their regional sales branches to sell fuel at higher prices. Global crude oil prices, however, which hovered around $50 per barrel at the middle of April, were not high enough to push up wholesale prices.

I said in my previous column that the efforts of state-owned oil companies to drive up wholesale fuel prices in the beginning of April had nothing to do with downstream demand, which remained weak. Their drive was primarily supported by speculation that the central government would soon raise retail fuel prices, and once the speculation died down, their efforts failed.

In the last weekend of April, wholesale diesel prices in Fujian Province fell sharply by RMB 100 ($14.66) per ton. I warned private traders at that time that a decrease in diesel prices in Fujian often precedes price drops in nearby Guangdong Province and the Yangtze River Delta as Fujian is the weakest of all the regional fuel markets in southern China.

Just as I warned, diesel prices in Guangdong fell by more than RMB 100 ($14.66) per ton from April 27 to April 30. And although prices did not fall in the Yangtze River Delta, they did not rise either.

In the last week in April, another rumor emerged that CNPC and Sinopec Group planned to cut wholesale diesel prices in May [from RMB 5,500 ($806.09) per ton] to below RMB 5,000 ($732.82) per ton. Few people now believe that wholesale prices will go up again. I have suggested to private traders that they step away from the market until demand truly picks up.

Looking ahead, the big news for China's fuel market in May has been China National Offshore Corp.'s (CNOOC) Huizhou Refinery starting full operation. The refinery has already released its output into the market, which makes CNOOC the third-largest fuel provider in China after CNPC and Sinopec Group. CNOOC's entrance into the domestic fuel market not only offers private traders a third supplier, but will probably also break the alliance between CNPC and Sinopec Group and make the state-owned oil giants much more competitive.