OREANDA-NEWS. Fitch Ratings says today that China's new pricing mechanism for refined oil products will likely be neutral for Chinese refiners' profits. However, the special fund created as part of this new arrangement could be used to provide funding required for qualifying investments by China's national oil companies (NOCs).

The new mechanism, unveiled by the National Development and Reform Commission (NDRC) on 13 January 2016 and effective immediately, sets the crude oil price of USD40/barrel as the minimum level that China's refiners use to price their refined petroleum products. Gasoline and diesel prices will not fall further even if the crude oil price drops below this floor price. The extra margin resulting from this, when global oil prices remain below USD40/barrel, will be remitted to a special risk reserve. The usage of the funds in the reserve will need to be approved by the state. As such, we expect this new mechanism to be neutral for profits and immediate cash balances of the NOCs.

According to the NDRC's announcement, funds in this reserve may be used for energy conservation, emission reduction, refined oil products upgrade and oil supply security. The announcement did not clearly state how the risk reserve would be distributed nor the beneficiaries of any disbursements. However, it is likely that the NOCs will be among the chief beneficiaries of this fund given the large investments they undertake in areas identified in the announcement.