Domestic refined oil prices may eventually fall

On July 20, domestic oil prices were increased. However, according to reports from multiple industry sources, the current inventory of refined oil products remains high. Although short-term price hikes are expected, analysts believe that prices will eventually decline. Market intelligence agencies, such as Treasure Island, have predicted that at 0:00 on the 20th, domestic refined oil prices would rise by approximately 330 yuan per ton. While this increase is favorable for oil producers, concerns remain about the sustainability of such a move. A senior executive from a Shandong-based refinery expressed skepticism, saying, “With such high inventories, any price increase is likely to be temporary.” He explained that due to weak economic conditions, sales of refining companies have been sluggish since last year. After the pricing mechanism was updated in March, the shortened adjustment cycle led many traders to reduce their stock levels to minimize exposure to international price fluctuations. “We even cut ex-factory prices and reduced operating rates,” he said. “Currently, our operating rate has dropped from 45% to 30%, but inventory levels haven’t decreased significantly.” The executive also voiced doubts about the profitability of upgrading oil production facilities. “Retrofitting equipment is costly—adding at least 300-400 yuan per ton to production costs,” he noted. “But with low market demand, can end users really afford such price hikes?” This question highlights the growing challenge faced by oil companies trying to balance rising costs with consumer affordability. An example of market sensitivity can be seen in Shaanxi’s Luyuan Zizhou LNG liquefaction plant. Located near PetroChina’s Changqing Oilfield, the region has developed numerous LNG plants in recent years. In August 2012, it became a major LNG producer, with daily capacity reaching 5 million cubic meters. Most of these facilities are backed by private capital and respond quickly to market shifts. “We constantly adjust ex-factory prices based on market conditions,” said Wang Ruiqi, an analyst at Xiwang Energy. On June 28, the National Development and Reform Commission announced a nationwide increase in non-residential natural gas prices starting July 10. The average gate price rose from 1.69 to 1.95 yuan per cubic meter. Many private LNG producers took advantage of the situation, raising their ex-factory prices sharply. Some increased prices by as much as 20%. For instance, before the announcement, the Luyuan Zizhou plant sold LNG at 4,400–4,700 yuan per ton. After the price hike, it jumped to 5,200 yuan per ton—a 20% increase. Another local plant raised its price from 4,100 to 4,900 yuan per ton. At first, some industry observers were impressed by the quick profit gains. However, the dream didn’t last long. As downstream users struggled to absorb the higher prices, LNG consumption dropped, and some customers simply refused to buy. This led to a slowdown in sales, forcing the Luyuan Zizhou plant to lower its prices again. Now, its ex-factory price has dropped back to around 5,000 yuan per ton. Meanwhile, another company that raised its prices by over 20% still hasn’t lowered them, but its high inventory levels have disrupted normal operations. Wang Ruiqi pointed out that LNG has a limited shelf life, typically only three months in liquid form. “If downstream demand doesn’t pick up, the entire supply chain will suffer,” he said. Given the weak market demand, whether through oil price increases or product upgrades, the success of any policy ultimately depends on market acceptance. He suggested that the government should provide tax and fiscal support to help companies manage the costs of technological upgrades, rather than just setting ambitious goals without practical measures.

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