the biggest jump in 33 months. The increase is the product of the continuing rise in global oil prices in the face of tensions with Iran, a significant oil supplier. The Chinese government, through China’s National Development and Reform Commission, sets the benchmark domestic retail fuel prices. Whenever the moving average of a select index of international crude prices rises by more than 4 percent over a period of 22 business days, the government may adjust prices upward. The index rose 11 percent in the last period ending Friday, prior to the announced increase.
Traffic In Beijing
The Chinese government has tried to keep fuel prices dampened for consumers so as to keep inflation down and not to put undue economic pressure on Chinese consumers. The main generator of inflation is food prices in China, although inflation overall has been moderating of late. The latest reading in February showed a 3.2 percent increase in the consumer price index, year-over-year, which is underneath the government’s target rate of under 4 percent. Inflation for January was 4.5 percent, while the highest figure reached was 6.5 percent last July. Gas prices have risen almost 50 percent in the last three years and nearly tripled in the last twelve. While there has been concern by consumers and even some unrest over the fuel increases, the government is expected to provide subsidies for workers in the transport, forestry and fishery industry, all of which feel the impact of the gas price hikes more. In addition, an increase in the minimum wage and some tax relief is expected. With the Chinese government talking about fuel price reforms, however, it looks as though more changes on the pricing front are in the works.
China’s (NYSE:FXI) major oil companies haven’t been able to pass along the increased global crude prices in a symmetrical way with their selling prices. China Petroleum & Chemical Corp. (NYSE:SNP), known as Sinopec, and PetroChina (NYSE:PTR), have been booking losses in their refining segments. These amounted to roughly $3.6 billion for PetroChina while Sinopec lost around $6.58 billion in the first nine months of 2011. Despite the allowed increase of retail prices for gasoline and diesel at the pump, the major oil companies are still expected to show losses from their refining segments in the near term.
PetroChina Gas Station in Sichuan Province
Demand And The Marketplace
China is the second largest consumer of oil in the world, and the amount of oil it consumes has been growing. According to China’s own statistics, even with China’s economic slowdown and consumption expected to rise by 5percent this year, China will still be consuming 9.9 million barrels of oil per day. The state energy group CNPC’s industry research section, the State Institute of Economics and Technology, forecasts imports of 5.3 million barrels per day of crude for this year, or 266 million tonnes, a nearly 6 percent increase for imported oil. Even at that, demand is expected to pick up in the second half of the year. China has been adding storage and refinery capacity for several years to increase throughput to satisfy the growing demand. This year it will add nearly three-quarters of a million barrels per day in refining capacity, bringing its total capacity to 11.6 million barrels per day. Also, liquefied natural gas (LNG), is expected to assume greater and greater importance in the Chinese energy picture going forward. The oil majors are also on an overseas asset acquisition strategy to add to their overall crude oil capacity.
How did investors react to the news of fuel price increases? Chinese stocks were driven down on the Shanghai Composite by 1.3 percent. Reports of profits of state owned enterprises falling by 11 percent despite revenue increases of nearly 10 percent also played into this. How much the Chinese government eventually allows retail fuel prices to rise will also affect the inflation and economic growth picture, but so far, the government feels it can manage the fuel price situation without fanning inflation or slowing down the economy significantly further. As an added note on China’s oil companies, despite their refining segments, or downstream operations, having their margins pressured, their upstream, or exploration and production operations, are still booking strong revenue. China has a difficult task managing all the various moving parts of the crude oil and fuel price situation, but it will attempt to find a solution that balances all these variables.
Related: United States Gasoline Fund LP (NYSE:UGA).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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