The forecast of soaring crude oil prices could boost handsome returns for China's oil producers in 2008, despite concerns of higher resource taxes.

 

Still, the nation's refineries, represented by China Petroleum & Chemical Corp, also known as Sinopec, may again suffer hefty losses in the oil processing business as state control of refined oil prices is not likely to be relaxed given the high and rising inflation rate.

 

Global investment banks are raising their oil price forecast because of surging demand in emerging markets even in the face of a slowdown in the United States, a shortage in oil and drilling services and a weakening US dollar.

 

Merrill Lynch has raised its forecast for the benchmark West Texas Intermediate crude to US$82 per barrel next year and US$70 in 2009, from US$73 and US$60 respectively, and raised its long-term oil price forecast by US$10 to US$70 a barrel.

 

The Wall Street bank said its forecast change was based on the assumption that non-Organization of Petroleum Exporting Countries will raise their supply and on OPEC's recent signal that current high oil prices do not necessarily warrant a supply increase.

 

Oil prices have soared over the past several months with crude futures traded in New York lately quoted around US$97 a barrel, up 60 percent from a year ago.

 

Hong Kong-based brokerage CLSA forecasts oil prices could spike above US$100 per barrel soon and with the downside limit to US$70 in 2008.

 

"On the average, the global upstream oil business will still enjoy fat margins despite rising production costs. We like PetroChina and CNOOC," CLSA's head of China energy research Gordon Kwan said in a note. "We prefer upstream and would underweight downstream."

 

In China, fuel prices are capped by the government to check inflation, leaving refineries unprofitable when oil prices go too high. The government has been subsidizing refineries, and it also has to shield low-income sectors like farming and fishing for any fuel price rise via subsidies.

 

PetroChina is China's largest oil and gas producer with the bulk of its revenue coming from the upstream sector, while Sinopec is Asia's largest oil refiner although it also has upstream operations. Both are dual listed in Shanghai and Hong Kong.

 

Hong Kong-listed CNOOC Ltd is China's dominant offshore oil producer, a pure upstream player.

 

If the government keeps tight control on refined oil prices next year, the rising crude costs would be neutral to PetroChina's earnings, negative to Sinopec's and positive for CNOOC's, said Liu Bo, an analyst at Sinolink Securities in Shanghai.

 

The government-set pricing mechanism has led to fuel shortages in the past. The latest nationwide diesel shortage in October and November was one example as refineries cut back processing volume to stem losses from soaring costs.

 

In one move, the National Development and Reform Commission had to raise gasoline and diesel prices by up to 10 percent at the start of November, the first increase in 17 months, to encourage more oil to be processed.

 

But the rise was still not enough to cover refining loss, and analysts said they have to be further raised next year if crude price remains high.

 

The government has been trying to improve the pricing system, with the Ministry of Finance recently saying the time is ripe to impose a long-debated fuel tax in China, which could help boost conservation.

 

The fuel tax is supposed to replace road toll and road maintenance fees and could significantly raise petrol costs for motorists. The current road maintenance charge is paid by all car owners.

 

"The lifting of fuel price controls may come together with the imposition of the fuel tax in 2008," said Liu.

 

But many analysts say they didn't expect the new mechanism to be launched shortly unless China's consumer prices decline. The nation's consumer price index rose to an 11-year high of 6.9 percent last month.

 

"A new price regime could hardly be introduced, given inflation pressure," said Wang Jing, an Orient Securities analyst.

 

The finance ministry has also proposed a price-based resource tax of 10 percent on oil production to replace an existing levy based on volume, a move that could lead to hefty cut in oil firms' revenues.

 

(Shanghai Daily December 29, 2007)