Yesterday China’s National Development and Reform Commission (NRDC) announced that it would be increasing retail gasoline and diesel prices by 3%. This would negate the ~3.00% cuts seen in June.
To understand the relative significance of this move, analysts at The Schork Reporttook the 93 RON (considered the most common gasoline type in China) and compared it to the Singapore Tapis crude oil spot price, which is used as an oil marker for Asia. Over the same period, we considered retail prices paid by the domestic consumer against the NYMEX WTI spot price.
Ever since December 2008, the NRDC has had a provision to revise retail prices when the price of crude (as measured by the moving average of a basket of international benchmarks) moves by more than 4.00% over 22 working days, while retail sellers are given a few more percentage points of breathing room to adjust for regional price discrepancies.
In aggregate, 2010 saw retail gasoline prices flat since November 2009. The first revision came in April, when prices were revised 3.90% higher. This was much below the 11.45% increase seen in Tapis over the same period. In comparison, the price of NYMEX WTI rose 11.48% between November and April, causing an 8.08% increase in prices at the pump.
Unfortunately, it seems the American consumer lost out on both directions—when Tapis declined by 8.94% between April and June, the NRDC decreased prices at the pump by 2.60%, leaving prices up just 1.20% since November. But despite a 12.21% decrease in WTI between April and June, retail prices in the U.S. remained 4.66% above November.
The Schork Reportcompared these numbers to demonstrate the relatively lenient nature of the latest increase, 3.00% higher prices at the pump seem benign compared to a 14.70% increase in Tapis.
The general consensus seems to be that China increased prices to curb inflationary pressure (already heavy due to the real estate bubble) on its economy. However, in relative terms, the NRDC passed on savings to consumers at a greater degree than it did price increases. Furthermore, given that Chinese car sales stood at 13.6 million in 2009 and are expected to rise to more than 18m units according to JD Power, we question whether such a small increase will really be enough to curb demand and, in turn, inflation.
Thus we would not be surprised to see more aggressive measures coming out of China within the next few weeks.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.