Latest oil market regulation updates: sales of No. 5 and No. 7 industrial white oil, and isooctane by refined oil production enterprises will be subject to consumption tax declaration and payment from the May tax declaration period. No. 5 and No. 7 industrial white oils can be used as diesel engine fuel after blending and refining, belonging to the off-spec diesel category and subject to diesel consumption tax. Isooctane is an ideal component for gasoline blending and is considered off-spec gasoline, which falls within the taxation scope of naphtha.
GL Consulting noted that recent market news goes that consumption taxes for No. 5 and No. 7 industrial white oil, and isooctane (alkylated oil) will be levied at the producer side according to diesel and naphtha standards starting from May 2023, respectively at 1.2 yuan/liter and 1.52 yuan/liter, equivalent to 1,400 yuan/tonne and 2,187 yuan/tonne. This move indicates that the government's supervision of the oil product market will continue to tighten, and the flexible margin spaces for the blended oil market will further shrink.
Market impacts are as follows according to GL Consulting's analysis:
- For the industrial white oil market: Both state-owned and independent refineries are major producers of No. 5 and No. 7 white oils in China, which outputs mainly flow into the diesel market, followed by downstream chemical fiber producers. In the short term, producers may avoid uncertainties before the policy implementation by conducting unit maintenance, refining configuration, and accelerating inventory consumption. In the long run, the market's available resources will decrease, thus reducing the feedstock supply for independent blended oil traders and increasing their costs.
- For the alkylated oil market: Production from refineries' alkylation units is mainly used for their own blended gasoline for sale, while a small portion flows to the market. The other part comes from independent isooctane producers, mainly supplying refineries as gasoline blending feedstocks, with a small amount serving downstream chemical deep-processing producers.
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- Impact is minimal on major refineries' external isooctane purchase for blending gasoline as they can offset input and output taxes.
- However, for independent blending traders, their operating costs will significantly increase.
- Assuming an average blending ratio of 20%-30% for isooctane, the consumption tax levy will increase the cost of blended gasoline by around 500-750 yuan/tonne. Independent traders will turn to other high-octane gasoline blending components, such as MTBE and aromatics, as partial alternatives.
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the move will further decrease the supply of low-cost oil resources market circulation, and strengthen the market share of dominant major suppliers. The wholesale prices of gasoline and diesel will gradually return to rational pricing logic based on cost and supply-demand, while cutting tax evasion spaces, and the wholesale-retail price difference will show a downward trend in the long run.
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Written by the GL Consulting team (Mysteel's consultancy arm on energy transition): glconsulting@mysteel.com
Edited by Navy Liu: liuchuanjun@mysteel.com