OREANDA-NEWS.  September 06, 2013. Despite a new oil product pricing mechanism introduced by the central government in March, China's state refiners continued to suffer in the downstream in the second quarter because of poor domestic demand, their interim results showed.

Downstream margins have improved considerably since last year, largely due to more timely domestic retail oil product price adjustments by the National Development and Reform Commission that closely track oil price changes, along with relatively lower crude prices. However, poor domestic demand continues to weigh on the companies, analysts said this week.

In particular, gasoil demand, which makes up the largest slate in China's oil product mix, has been weak.

SLUGGISH DEMAND, LOWER OIL PRODUCT PRICES

Chairman Wang Dongjin said at a press briefing last week that oil products demand had been sluggish for the first half of this year, with oil product prices slumping.

PetroChina said the retail guidance prices of gasoline and gasoil in the domestic market fell by Yuan 305/mt and Yuan 310/mt, respectively, in H1.

But Wang said PetroChina expects to see some improvement going forward on rising sales and oil prices.

"We expect that in July the [oil product] marketing business saw a turn for the better and sales have improved significantly. ... We will try our best to narrow the loss for refining," Wang said.

Sinopec on Sunday posted a small H1 operating profit of Yuan 213 million in its refining segment, compared with a Yuan 18.5 billion loss in H1 2012.

But it reported a Yuan 2 billion operating loss in refining in the second quarter, compared with Yuan 2.2 billion operating profit in Q1.

Bernstein Research said Sinopec's downstream segments continued to be "negatively impacted by the weak economic environment in China," adding that its refining and petrochemical margins were "both barely break-even."

Morgan Stanley said in a report: "We believe the downstream divisions' poor [Q2] performance will significantly reduce investors' expectation of recovery."

The bank said earlier this month that both Sinopec and PetroChina have had to export more gasoil to overseas markets, which brings lower margins than domestic sales.

Sinopec said the average realized price for its major oil products fell, with gasoil prices sliding 4.1% year on year to Yuan 7,031/mt, kerosene prices falling 5.4% year on year to Yuan 6,195/mt, and gasoline prices slipping 3.3% year on year to Yuan 8,450/mt.

Morgan Stanley remains bearish in the medium term. It said earlier this month that based on oil price forecasts and China's continued deleveraging, it was adopting the base case scenario of "3-year no downstream recovery," with margins in refining remaining stable to 2015 with no sequential improvement.