China's new policy to allow the economic planner to stop reducing refined oil prices when crude prices go below 40 dollars per barrel is credit positive for the country's national oil companies, a Moody's report said Monday.
China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) will benefit because higher profits for refining will likely moderate the negative effect of lower crude prices on the companies' upstream exploration and production segment, the report noted.
The rating agency expects Sinopec to benefit the most from the pricing change as the company has the largest refining business among the three in terms of crude distillation volume, while its upstream production is much smaller in terms of crude production volume. Though lower crude prices largely benefit the Chinese economy, it would damage the domestic oil producers' ability to maintain stable production and their capacity to weather potential supply disruptions, according to Moody's.
As China's dependence on imported oil approaches 60 percent, it will be a major energy security concern for the government if domestic production capacity materially weakens, said the report. In addition, lower oil prices could stimulate inefficient energy consumption and result in greater negative environmental effects for China. "The floor on refined-oil product prices will help curb rapid increases in oil consumption and protect the environment," Moody's said.
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