CHINA'S major oil firms have appealed to the country's top planning body for a price rise in refined fuel products due to rising crude costs, but analysts say the high inflation figure could dampen their appeal.
The nation's two dominant oil refineries, Sinopec Corp and PetroChina Co, have asked the National Development and Reform Commission for approval to raise pump prices of petrol and diesel, according to China Business and other media reports.
The government last adjusted refined oil prices in January when it lowered gasoline wholesale price by around four percent as crude rates fell to about US$50 a barrel from last summer's record of US$78. It last increased fuel prices in May 2006.
China caps refined oil prices to keep inflation in check, but capping leaves refineries unprofitable when crude costs are high.
Crude oil for August delivery was quoted close to US$73 yesterday in benchmark New York trading, the highest since last August.
Zhang Hong, a PetroChina economic adviser, said the firm's refining business would remain in black if crude prices are below US$65 a barrel. A Sinopec refinery official said their breakeven line is US$60.
At a recent energy forum in Shanghai, Jiang Xinmin, of the Energy Research Institute under the NDRC, said that China has to raise fuel prices if crude costs stay above US$70 per barrel.
"Otherwise domestic refineries would suffer a huge loss," Jiang said.
Several media reports have speculated that the government could allow oil firms to raise fuel rates as early as October 1.
The Shanghai Securities News said details of a price increase may be announced as early as this month.
Industry officials and analysts said crude prices could hover at high levels for the rest of the year.
Analysts at CLSA Ltd, a Hong Kong-based brokerage, expect global oil prices to continue to trend higher through the summer months owing to lower-than-expected supply growth.
"The market could be staring at US$80 plus crude prices by year end," wrote Gordon Kwan, CLSA's head of China oil and gas research, in a report.
Imad Al-Atigi, a member of Kuwait's Supreme Petroleum Council, told Kuwait News Agency over the weekend that oil prices appear to be on a rising course and may soar to US$100 per barrel by 2009, citing unstable political conditions and a lack of major investment in oil infrastructure in crude-producing regions.
International crude oil prices have jumped this year with Brent oil prices averaging US$68 a barrel in the second quarter, against US$58 in the first quarter.
The gross refining margin for Sinopec, Asia's top oil refiner, was US$4 per barrel in the second quarter, falling from US$5.75 in the first quarter, according to Qiu Xiaofeng, petroleum and petrochemical analyst at China Merchants Securities Co.
This is already a slight profit although the appreciating Chinese yuan against the US dollar could help cut some of their international purchase costs.
Qiu said the government may allow oil firms to raise prices before October because crude prices are expected to fall from a peak after summer.
"If you choose to raise fuel prices at a time crude is actually falling, it's gonna be much more unacceptable," Qiu said.
However, China's high inflation is seen as a main hurdle for another fuel price rise. The government is cautious every time it raises oil prices as this could further lead to other goods being more expensive when the cost is passed on to manufacturing industries.
The nation's Consumer Price Index, an inflation gauge, will probably move above the central bank's target of three percent this year, backed by rising food prices, government reports have said.
The CPI, having risen 3.4 percent year on year in May, is expected to reach close to four percent in June.
"The current inflation figure doesn't augur well for a rise in fuel prices but the current crude prices mean it is a good time to raise," said Wang Jing, an Orient Securities Co analyst.
"Grain prices have been rising a lot, higher fuel prices could again push up other costs," Wang said. "But the final decision (to raise refined products prices) should still be crude prices" and should not depend on the inflation figure.