China official distillates price cap may be imposed on further crude price surges

SINGAPORE (ICIS)–An official distillates price cap may be imposed in China if global crude prices surge further to hit $130/bbl amid the escalating Russia-Ukraine conflict and strong global crude market fundamentals.

Global crude oil prices could hit $135/bbl in the coming months if the western sanctions imposed on Russia are expanded to exclude Russia from the SWIFT banking system or a ban on Russian oil and energy exports, according to the latest ICIS forecast.

Recently announced Western sanctions on Russia in the wake of its conflict with Ukraine have primarily focused on individuals and Russian banks, but while they will make oil trade more difficult, they are unlikely to severely dent Russia’s crude export in the short term.

Based on the existing government regulations, China’s top economic advisor the National Development and Reform Commission (NDRC) will impose a cap on the domestic retail distillates price ceilings when the 10-day moving average of a basket of global crude prices hit $130/bbl.

When the average crude basket prices are below $130/bbl, the price ceilings will be raised if fluctuations in the average crude basket prices translate to a theoretical increase of yuan (CNY) 50/tonne in the retail distillates prices, according to the existing regulations.

But the price ceilings will not be raised further when the average crude basket price hit $130/bbl to save the public from high costs and to avoid inflationary pressure.

The 10-day moving average of the crude basket prices were estimated at $96.07/bbl on 1 March, ICIS data showed.

ICIS forecasts an average dated BFOE crude price of $110.50/bbl in March.

As the focus moves away from the Russia-Ukraine conflict, ICIS forecasts a second-quarter average price of $94.50/bbl, while third-quarter prices are expected to reach $100/bbl due to an anticipated strong oil demand surge and continued tight oil inventories globally.

ICE Brent May futures rose by $5.95/bbl from $104.97/bbl to $110.92/bbl at 12:37 SGT (06:01 GMT) of 2 March.

China average wholesale prices for gasoil and 92-Ron gasoline were hovering at around CNY7,906/tonne and CNY9,484/tonne on 1 March, ICIS assessments showed.

Analysis by Yu Yunfeng, Jean Zou, Ajay Parmar

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