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Reforming fuel prices may help refining margins, Deutsche Bank says
By Soozhana Choi |
December 12, 2012, Wednesday
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Print Edition
Print Edition
Chinese oil demand this year was notable in that it marked the slowest growth rate since 2002, based on our apparent demand calculations.
Also notable was that gasoline demand growth rate significantly outpaced that of gasoil this year. An improvement in economic growth prospects for next year informs our view that we'll see an improving oil demand picture emerge in China.
According to our China economists, GDP growth should return to its potential rate of about 8.5 percent in the second half of next year bolstered by corporate investment and export acceleration.
They see a U-shaped recovery similar to the trajectory observed in 1998-2001 with a shorter duration of the adjustment period of just one-and-a-half years. On a full-year basis, this puts our economists' China GDP growth forecast for next year at 8.2 percent, up from 7.7 percent this year. We forecast China's oil demand will rise by 3.4 percent in 2013.
While the oil demand growth forecasts look modest relative to recent history, with the exclusion of 2012, it's worth noting that China will be the largest contributor to global oil demand on a growth basis, equal to 40 percent, according to our forecasts.
As we noted, China's gasoline demand growth outpaced that of gasoil this year.
Automobile demand is expected to remain robust next year amid the improving macro backdrop. Our China auto analyst forecasts car sales will on average rise by 12 percent in 2013.
Expectations for improving industrial activity next year inform our view that we will see an improving diesel demand picture. One key development to watch going forward will be steps to reform the fuel price, which will lead to a normalization of refinery margins. Our China economists believe that the new leadership in Beijing will move more swiftly on reforms.
They believe resource price reforms - which will include power, natural gas and water tariffs and refined fuel prices - are highly likely to be implemented over the course of the next few years. One potential reform could be to allow more frequent fuel price adjustments rather than the current 22-day period.
Wider band
Alternatively, the government could give oil companies the right to set prices within a wider price band.
The average profit that a US refiner earned between the first quarter and the third quarter of this year on a net income per barrel basis was nearly US$10 per barrel greater than that of China's refiners, implying that a 10 percent rise in fuel prices would make Chinese refiners' profitability on par with that of their US counterparts.
Policymakers are expected to target a reasonable margin for refiners in light of the losses the sector has been incurring.
The need to achieve the goals of energy saving and environmental protection is expected to pressure the new government to take concrete steps toward fuel pricing reform.
That the government's commitment to reforming fuel prices is a part of the 12th Five Year Plan, of which only three years remain, adds further urgency.
While this bodes well for refinery margins, which would imply higher run rates, we note that consumer response to higher prices also bears watching.
Soozhana Choi is Chief Oil Strategist and Head of Commodities Research with Deutsche Bank Asia.
Also notable was that gasoline demand growth rate significantly outpaced that of gasoil this year. An improvement in economic growth prospects for next year informs our view that we'll see an improving oil demand picture emerge in China.
According to our China economists, GDP growth should return to its potential rate of about 8.5 percent in the second half of next year bolstered by corporate investment and export acceleration.
They see a U-shaped recovery similar to the trajectory observed in 1998-2001 with a shorter duration of the adjustment period of just one-and-a-half years. On a full-year basis, this puts our economists' China GDP growth forecast for next year at 8.2 percent, up from 7.7 percent this year. We forecast China's oil demand will rise by 3.4 percent in 2013.
While the oil demand growth forecasts look modest relative to recent history, with the exclusion of 2012, it's worth noting that China will be the largest contributor to global oil demand on a growth basis, equal to 40 percent, according to our forecasts.
As we noted, China's gasoline demand growth outpaced that of gasoil this year.
Automobile demand is expected to remain robust next year amid the improving macro backdrop. Our China auto analyst forecasts car sales will on average rise by 12 percent in 2013.
Expectations for improving industrial activity next year inform our view that we will see an improving diesel demand picture. One key development to watch going forward will be steps to reform the fuel price, which will lead to a normalization of refinery margins. Our China economists believe that the new leadership in Beijing will move more swiftly on reforms.
They believe resource price reforms - which will include power, natural gas and water tariffs and refined fuel prices - are highly likely to be implemented over the course of the next few years. One potential reform could be to allow more frequent fuel price adjustments rather than the current 22-day period.
Wider band
Alternatively, the government could give oil companies the right to set prices within a wider price band.
The average profit that a US refiner earned between the first quarter and the third quarter of this year on a net income per barrel basis was nearly US$10 per barrel greater than that of China's refiners, implying that a 10 percent rise in fuel prices would make Chinese refiners' profitability on par with that of their US counterparts.
Policymakers are expected to target a reasonable margin for refiners in light of the losses the sector has been incurring.
The need to achieve the goals of energy saving and environmental protection is expected to pressure the new government to take concrete steps toward fuel pricing reform.
That the government's commitment to reforming fuel prices is a part of the 12th Five Year Plan, of which only three years remain, adds further urgency.
While this bodes well for refinery margins, which would imply higher run rates, we note that consumer response to higher prices also bears watching.
Soozhana Choi is Chief Oil Strategist and Head of Commodities Research with Deutsche Bank Asia.
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