China will raise the ceiling for retail prices of gasoline and diesel by 3 to 4 percent from Wednesday, the first hike in 10 months and a move that lifts prices to record highs and can help refineries improve margins.
The increase, at 300 yuan per tonne or roughly 4 cents a litre, was much anticipated by the market and offset a previous price cut last October.
"The price rise is conducive to motivating refiners and ensuring domestic fuel supplies," the National Development & Reform Commission, the country's economic planner, said in a statement on its website (www.ndrc.gov.cn)
The government timed the price increase as domestic inflationary pressure has eased and after millions of Chinese returned from the Lunar New Year celebrations.
Policymakers have indicated in recent comments that price pressures are easing, suggesting inflation is not an urgent priority.
An earlier domestic diesel shortage has also eased after oil firms raised production to record rates during the last two months of 2011.
"Demand has weakened during the Chinese New Year holiday period and inventory has climbed, so supply tightness has eased," said a Sinopec fuel marketing official.
Following the adjustment, retail gasoline prices will go up by 3.3 percent from Oct. 9 levels to 9,380 yuan per tonne, or about $1.06 per litre. Diesel prices will rise by 3.6 percent to 8,530 yuan, or about $1.11 per litre, according to Reuters calculations.
The move will improve refining margins for leading oil firms such as Petroleum and Chemical Corp (Sinopec) and PetroChina , which have long struggled with depressed margins.
Refineries run by Sinopec Corp are operating at a loss even though the top Chinese oil company by sales raised ex-factory fuel prices and extended other incentives this year, several refinery officials said.
NEW SCHEME
The NDRC sets fuel prices using a secret formula based on a basket of crude oil prices, including the price of Brent, Dubai and Cinta.
The government fell short of announcing a new fuel pricing scheme that is more market-linked, which the industry had expected to see as early as December.
"The new fuel pricing scheme is in the process of revamping. We will solicit public opinion after all aspects reach consensus about the new scheme," NDRC said.
The NDRC normally starts to consider changing fuel prices if the 22-day moving average of international crude oil prices rises or falls more than 4 percent, in addition to giving consideration to other factors such as inflation, fuel supply and demand.
A revamp could include shortening the adjustment period from 22 working days and changing the composition of the basket of crudes to which pump prices are linked.
Such a scheme would bolster refining margins and help prevent the shortages that have often plagued the world's second-largest fuel market as oil refiners are discouraged to pump at a loss.
NDRC said China's oil supplies are facing "severe challenges", given that the Iranian nuclear crisis trigger volatility and a surge in global oil prices, making it more necessary to push through price reform to curb excessive consumption.
China's top refineries will trim their crude oil processing volumes in February to the lowest levels in four months after running hard in winter to meet a seasonal demand spike and ensure ample supplies during Chinese New Year holidays, a Reuters poll showed.
Political tension surrounding Iran and the Middle East, along with a severe cold snap across Europe, have lifted oil prices in recent weeks. Front-month Brent touched $116.70 per barrel, its highest since early August, on Tuesday.
China's last retail ceiling price change was on Oct. 9, when the government cut gasoline and diesel by about 3 percent to reflect falls in global crude oil prices. ($1 = 6.312 Chinese Yuan) (Writing by Fayen Wong, Additional reporting by Jim Bai, editing by Jane Baird) Read More
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