Chinese refineries shake off heavy losses caused by previous crude price increases and state-imposed caps on refined oil prices on declining international crude futures and laggard domestic wholesale prices of refined products, C1' survey found. In addition, refineries located in Northeast China which drinking Daqing crude harvested better margin than those based in southern China eating imported crude first ever, on lower feedstock purchase cost. In view of the rising refining margin, some marketers believed that government would cancel or cut the refund of crude import tariff and subsidizes on refining losses as from the third quarter.

Positive refining margin reappears
In October, Chinese refineries returned to positive margin territory again as international crude futures kept slumping while domestic oil products prices lagged behind. Northeast China-based refineries which take domestic Daqing crude as feedstock reaped circa Yuan 245/mt (equivalent to US$4.81/barral) of margin as of Oct 8, surging Yuan 637/mt from one month earlier. While refineries in southern China which drinking imported crude from Middle East recorded Yuan 25/mt (equivalent to minus US$2.49/barral) of refining margin, sharply up Yuan 616/mt, C1's data showed.

The above refining margin of Chinese refineries is calculated basing on ex-refinery prices of oil products. Basing on wholesale prices of oil products, the refineries both in Northeast and southern China mostly realized breakeven in early September, indicated C1's data.

The positive refining margin is expected to maintain in rest of this year, C1 forecasted. Refineries underlying Sinopec could make breakeven when crude feedstock prices were at US$95-100 per barrel and PetroChina subsidiaries could make profit when feedstock costs below US$90-95 per barrel. CPCIA forecasts in a report that global crude prices could stay around or below US$90 per barrel in the fourth quarter due to the flagging world economy.

Northeast refineries' margin overtops those in southern China
Refining margins of Northeast-based refineries surged on lower Daqing crude settlement price. PetroChina started adjusting formula of Daqing crude settlement price as from this April by adding Brent as one of the references. And it linked price of its light crude with Brent in September, while eliminating Tapis, according to C1's data.

PetroChina produced 4.345-mil bbl of crude and processed 4.252-mil bbl in the first half of this year, according to its 2008 interim result. Over 97.86% of the output was consumed by subsidiary refineries. On lower crude inner settlement prices, PetroChina subsidiary refineries, mainly located in Northeast China, saw their margin exceeded that of refineries underlying Sinopec, mostly in southern China since this June in terms of oil products ex-refinery prices.

Besides lower feedstock costs, narrowing spread of gasoil/gasoline wholesale prices between southern and northern China narrowed, which relatively supported refining margin of northern China-based refineries. The spread of zero pour point gasoil shrank to Yuan 75/mt and that for 90-Ron gasoline down to Yuan 150/mt, thinnest in 2008. A source with Sinopec South China Sales Company explained that gasoil/gasoline supply tightness in South China has been easing with more than 10.0-mil-mt/yr topping capacity coming on stream in recent years. Moreover, sluggish demand from industry sector in Pearl River Delta also depressed the wholesale prices of gasoil in South China, he added.

Subsidies on refining losses may canceled
Since the refining margins improved significantly, market players paid close attention to whether two state-owned oil giants could still reap subsidies for processing imported crude in the second half of this year. A source with one of PetroChina subsidiary refineries told C1 that PetroChina has not applied for subsidy for processing imported crude for the third quarter yet. He said market expected the government might cancel the refund of crude import tariff or slash it to 40% from 75% as from 1 Jul.

However, a source with Sinopec Shanghai Petrochemical believed that the refund of crude import tariff would maintain in the third quarter as domestic refineries suffered most severe refining losses in this July and August. Sinopec got Yuan 22.93-bil of subsidy for crude processing and Yuan 3.07-bil of refund for crude import tariff in the second quarter, according to its semiyearly report for 2008.