China oil prices: stress signals for local refiners will not end soon

China oil prices: stress signals for local refiners will not end soon

It is a hard time to be an oil refiner in China. As the cost of crude oil imports surges, Beijing caps domestic fuel prices. That means a squeeze on margins.

Some help has arrived. From Friday, retail gasoline prices were raised by 750 yuan ($118) a tonne, the biggest hike since the pricing system was introduced nearly a decade ago. That puts pump charges back at 2006 levels.

Tight restrictions are needed to control inflation. In Beijing, for example, retail gasoline reached a near-record high last week of around $1.40 per litre. Government policy typically delays price increases on retail gasoline and diesel when crude exceeds $80 a barrel. Beyond $130, retail fuel costs are effectively frozen.

As Brent approached $140 last week, it had been largely left to refiners to absorb excess costs. Teapots, as smaller independent refiners are referred to locally, have boosted purchases of cheaper Iranian oil. These independents have also used special cash transfers to pay for Russia’s Eastern Siberia blends, in an attempt to salvage margins.

Yet, as tanker rates, trucking costs and global oil benchmarks remain elevated, smaller refiners have had to cut back their operations. More than 40 teapots have been running at only around half