Fuel prices set for further cuts

An oil tanker gets ready to unload cargo at the port in Rizhao, Shandong province. An expert said China should take advantage of falling crude prices to build up its strategic oil reserves. [Chen weifeng / China Daily]

Global market weakness could lead to further reductions, say industry experts

Retail fuel prices are expected to be cut for a ninth consecutive time since July on Saturday as the government reacts to declining international crude prices, industry sources said on Thursday.

Retail gasoline prices will drop 190 yuan ($30) a metric ton and diesel prices will fall 210 yuan a ton, according to Shandong-based Longzhong Information Technology Co.

Under the nation's oil price adjustment mechanism, which calls for changes when international benchmark crude oil prices fluctuate by a certain range over a set period, the National Development and Reform Commission is scheduled to announce cuts late on Friday.

Ongoing crude oil price declines have had a "severe effect" on China's oil and petrochemical industries, said Li Yan, an oil analyst with Longzhong.

"Most domestic traders have nothing to do at the moment because of the extremely weak market," he said. "Some medium-sized and small companies may have to shut down."

One benchmark crude－Brent light, from the North Sea－has dropped from $115.06 a barrel in June to $78.50 a barrel this week, a decline of more than 30 percent.

The Organization of Petroleum Exporting Countries, which accounts for two-thirds of the world's oil reserves and output, and supplies more than 40 percent of global consumption, was scheduled to meet on Thursday in Vienna to discuss a production cut.

Li said that Saudi Arabia, the biggest producer in OPEC, is the key player in any possible output cut, but the country has not made its stance clear yet because it still can survive in the current low price climate.

The goal of OPEC is to maintain stability in world oil prices and ensure each member's market share, which means the organization will not cut production on a large scale, said Li.

"A large output reduction will cause a rebound in international crude prices, which in turn will stimulate shale output from the United States," he said. "Competition from the US against OPEC, including Saudi Arabia, is not what they want to see."

Liang Dan, a senior analyst at ICIS C1 Energy, a Shanghai-based energy consultancy, said that a small OPEC cut would not ease the glut in the world crude market.

For instance, cold weather has led to higher utilization of refinery capacity in the US, but that did not help the international oil market much, Liang said. The weak global economy is the primary cause for falling crude prices.

She forecast that China would cut retail prices yet again next month, for the 10th time in a row.

Lin Boqiang, director of the China Center for Energy Economic Research at Xiamen University, said China should take advantage of falling crude prices to build up its strategic oil reserves.

He said China's crude reserves are still far from the level of developed countries.

According to Longzhong's data, China can save about $20 billion to $30 billion a year on crude imports if international prices drop.