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China sets oil price floor at $40 to protect domestic supply

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BEIJING (Bloomberg) — China won’t let fuel prices fall in line with crude below $40/bbl as the world’s second-biggest oil consumer seeks to curb pollution and shield domestic producers from oil’s collapse.

The price of fuels, such as gasoline and diesel, won’t be adjusted as long as crude is below $40/bbl, the National Development and Reform Commission, the country’s top economic planner, said in a statement Wednesday. Profits from fuel sales below the $40 level will go to a fund to promote energy conservation and security and improve fuel quality, according to the NDRC.

The decision this winter by President Xi Jinping’s government to suspend fuel price cuts amid oil’s slump, while the country’s biggest cities were shrouded in smog, was explained as an attempt to curb vehicle pollution. It’s also an effort to shield the country’s massive energy companies from the collapse in prices that has punished the global industry, according to Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong.

“China’s biggest oil companies are not equipped to operate and compete in a crude environment below $40/bbl,” Yu said by phone on Wednesday. “From energy security perspective, it makes sense for NDRC to set the floor.”

The $40 floor is “appropriate” even as domestic production costs are higher than that level, the NDRC said.

“As a country that’s both a big oil importer and consumer, as well as a large producer, prices that are too high or too low will have a negative impact on China’s economy,” the NDRC said. Low prices would be a short-term benefit “but it may put constraints on China’s domestic oil production and reduce supply,” it said.

Brent crude, the benchmark for most of the world’s crude, capped a third yearly decline in 2015 and has fallen to the lowest in more than a decade as the Organization of Petroleum Exporting Countries effectively abandons production limits amid a global glut. Prices, which tumbled about 32% in the past year, were trading 2.9% higher at $31.74/bbl at 10:59 a.m. in London.

The creation of the “price adjustment risk fund” for initiatives such as energy savings and emission reduction may mean that China’s refiners won’t reap much of a windfall, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a research report Wednesday.

“The benefits from keeping prices below $40/bbl will accrue to the Chinese government, which will be used to fund energy efficiency and diversify away from oil,” Beveridge said in the report. “By keeping oil prices too low, OPEC are now indirectly funding their largest customer to develop more efficient energy use. In our view, this is another sign that oil prices are too low.”

Oil has fallen since the last price adjustment on Dec. 2, and prices will be adjusted lower from Thursday to reflect the $40 floor, the NDRC said Wednesday. Fuel price changes will also be limited if prices go above $130/bbl, it said.

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