The proposed inclusion of the West Texas Intermediate crude benchmark in China's new oil products pricing mechanism will likely lower oil product prices and not help improve domestic refiners' margins, industry observers said Wednesday.
"I don't see any incentives for refiners with WTI and the only justification is that the government can set lower product prices, which means it is more inclined to follow the mechanism more closely, whether it is over a 22-day or 10-day period," said Grace Liu at Guotai Junan Securities in Shenzhen.
Separately, Laban Yu, an equities research analyst at Jefferies in Hong Kong said that "[what is reflected in the new mechanism] should be as close as possible to what Chinese refiners' import costs are. And unless they [the authorities] are trying to suppress the prices in China, introducing a new benchmark and still not lifting [oil product] prices makes no sense."
However, Sonia Song, the Asian head of oil, gas and chemicals research at Nomura Equity Research, said: "The two most highly traded crude types are WTI and Brent. And WTI is basically where the futures curve is... In that context picking Brent and WTI [for inclusion in the pricing mechanism] is most reasonable. That would be a true reflection of spot market prices." She added that removing Cinta would move "things close to the actual cost base of Chinese refiners".
"[The price of] Cinta is too volatile so that might be why it is being replaced," said a crude trader with a Chinese state firm. But he estimated that only about a fifth of China's crude imports are pegged to WTI.
Local newspaper, the Economic Information Daily, on March 9 quoted Peng Sen, the deputy chief of the National Development and Reform Commission as saying that the proposal for a new oil products pricing mechanism had been completed and submitted to the State Council, or Cabinet, for approval.
The newspaper also said the proposal called for WTI to replace the Indonesian Cinta benchmark in the basket of crudes used to assess refiners' crude procurement costs and thereby review and adjust oil product prices. The plan also recommended shortening the adjustment period for prices to 10 working days, from 22 days.
China has been looking to gradually deregulate its oil market by bringing domestic retail prices of oil products closer in line with international levels. The aim is to improve refiners' margins and encourage them to increase refinery utilization rates and produce more oil products for the domestic markets.
Since 2009, the NDRC has used a system under which it considers adjusting mandated retail prices of gasoline, diesel and kerosene whenever the rolling 22-day average of a basket of crudes -- currently widely believed to consist of Brent, Dubai and Cinta -- fluctuates by least 4%. However the government has not consistently stuck to the formula because of inflation concerns.
The proportion of each crude benchmark in the NDRC's formula is not known. The three benchmarks were chosen to reflect China's mix of crude supplies, including imports from Africa, the Middle East and domestic sources. Flagship Daqing crude, produced by China National Petroleum Corporation, is priced off both the Minas and Cinta grades.
A spokesman for PetroChina, a listed subsidiary of CNPC, Mao Zefeng said the company had given its own recommendations for the new plan and the consultation period is over. "Now the company is waiting for it to be approved and officially implemented. WTI was not excluded from consideration as one of the crudes in the basket," he said.
On February 8, China raised retail prices of gasoline and diesel by Yuan 300 ($47.60)/mt, or up to 4%, the first time prices had been raised in 10 months. The price hike, which was widely anticipated by the market, was due to growing pressure on Chinese refineries as increasing international crude oil prices drove up operating costs.
On Wednesday, CNPC's Chairman Jiang Jiemin reportedly said the government ought to raise gasoline and gasoil prices as the conditions for a price hike had been met. Speaking to reporters on the sidelines of the meetings of the National People's Congress, Jiang noted that 22 working days had passed since the last adjustment and crude prices have risen over 10%.
