The latest global oil price plunge, if extended for several months, may prompt the government to cut domestic oil product prices to reflect the international market, according to industry analysts and traders.

 

Oil prices dropped below US$60 a barrel yesterday, their lowest for six-months, as supply threats from Iran and Nigeria diminished alongside fears about this year's Atlantic hurricane season, insiders said.

 

Crude oil for November delivery fell by as much as US$1.03, or 1.7 percent, to US$59.52 a barrel in after-hours electronic trading on the New York Mercantile Exchange. Oil has fallen 23 percent from a record US$78.40 on July 14.

 

Analysts yesterday said if global crude prices continue to decline for an extended period, the government will have to reduce the domestic prices of major oil products such as gasoline and diesel to float with the international level.

 

"If (global) crude prices remain at a relatively low level for another couple of months, the government will possibly readjust domestic oil product prices," said Gong Jinshuang, a senior analyst with the research arm of China National Petroleum Corp, the nation's biggest oil company.

 

But the long-term trend of oil prices is still unpredictable, Gong added.

 

"Under the current circumstances, the government will have to interfere with the pricing mechanism (of oil products) to ensure stable market supply if global crude prices go up or down to a large extent," Gong said.

 

The National Development and Reform Commission (NDRC), the nation's top economic planning body, raised domestic oil product prices twice in March and May in line with soaring global oil prices. China currently controls the prices of major oil products like gasoline, diesel and aviation oil due to worries over supply fluctuations and inflation, although it has vowed to make the oil pricing system more market-based.

 

Anticipating a possible price retreat, some consumers are momentarily trimming their purchasing plans, according to oil traders.

 

"Some of our clients are just watching with a wait-and-see attitude over whether domestic oil prices will fall or not," said Wang Jian, a division chief with Xiamen Huahang Petroleum Co Ltd, a major firm based in East China which trades fuel oil and diesel.

 

For market-based fuel oil, which is used to drive ships and oil-fuelled power plants, prices have dropped 500-600 yuan (US$62.5-75) per ton at Huahang with the global trend, said Wang. The Xiamen-based oil trader currently sells its ship fuel at 5,550 yuan (US$694) per ton, according to figures posted on its website.

 

"And for government-capped diesel, it is also time to reduce the prices," said Wang, who did not give an estimated margin.

 

Zhou Dadi, former director of the NDRC's research institute, was quoted as saying the government will likely cut domestic oil product prices if global crude prices remain at about US$60 a barrel or less for one to two months.

 

Yesterday's crude price drop came after Iran said it's open to talks on the country's nuclear program and BP Plc announced it will restart Alaskan oil wells earlier than expected.

 

Iran is open to discuss "everything" if the United States stops "threats" of sanctions, President Mahmoud Ahmadinejad said in an interview published on Sunday in the Washington Post.

 

Meanwhile BP started work over the weekend to resume production of about 150,000 barrels a day from the eastern side of Prudhoe Bay later this week, Bloomberg reported.

 

Oil may fall for a fifth week this week amid rising US fuel inventories and speculation that losses on natural gas bets at Amaranth Advisors LLC will trigger selling of energy futures by other funds, a Bloomberg survey showed.

 

(China Daily September 26, 2006)