China Fuel Prices at Highest Ever After Sudden Rise

China unexpectedly increased gasoline and diesel prices on Monday, raising them for the third time since late March to their highest level ever.

At nearly 9 and 10 percent respectively for gasoline and diesel, the increases are the biggest since a shock rise up to 18 percent exactly a year ago -- a move that helped pull oil prices off record highs as traders feared that higher fuel costs could slow demand growth in the world's second-largest consumer.

At just over $3 a gallon, Chinese motorists will now pay about one-eighth more for a fill-up than Americans, who were paying an average $2.66 a gallon last week.

The 600 yuan ($87.80) per ton increases announced by the National Development and Reform Commission will aid top refiner Sinopec and to a lesser extent PetroChina, which produces much of its own crude supply domestically.

Sinopec's American Depository Receipts were up 5.8 percent after Hong Kong-listed shares ended mostly flat. PetroChina's ADRs were up 3.3 percent.

Another, smaller fillip for the refiners is a 900 yuan or 22 percent rise in jet fuel rates, which accompanied the motor fuel increases. Jet accounts for only about 4 percent of China's oil demand, whereas gasoline and diesel make up more than half.

The jump in jet fuel, the second in as many months, will not be welcome to airlines such as China Eastern and China Southern, which have already had to overcome a global flu outbreak this year as well as the economic downturn.

But the price-setters in Beijing will be pleased to have achieved surprise on this occasion.

Under Beijing's price-setting formula, fuel prices should track a 22-day moving average of crude oil, giving speculators plenty of time to hoard fuel before the next likely price move.

Last time, the government, which had aborted a planned rise in early May, let Chinese fuel prices get so far behind a surge in crude that it was left with a dilemma: raise prices and hand a windfall to speculators, or abandon its new pricing system.

It eventually opted for a low rise on June 1.

The latest increase, coming hard on the heels of that one, gave the rumor mill little time to gather steam.

"I don't think it should be a shock, but given the delays before, this timely move will surprise the market," Gordon Kwan, head of energy research at Mirae Asset Securities, said earlier after an industry source and a website said a rise was imminent.

"It is earlier than expected given their previous delay. But it should be positive news for the oil sector."
     
Stifling Demand

For oil traders, one concern will be whether the highest prices ever paid by Chinese motorists, taxi drivers and transport companies will stifle demand that has only recently begun to return to growth after months of decline.

The higher motor fuel prices will give Sinopec and PetroChina an incentive to stem massive exports of gasoline and diesel, but may also put the brakes on China's drivers, who have been buying cars in record numbers this year.

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That chimes with the original aim of the fuel pricing system, to discourage waste. China is increasingly reliant on imported oil, a habit that began to get out of hand a year ago, when Chinese pump prices were far below record crude oil prices.

China's politicians are keen to revive economic growth but are wary of a fuel binge caused by pump prices that are out of line with the wider market.

Crude oil prices that have rebounded from February lows near $30 a barrel were not moved by news of higher costs being passed on to Chinese consumers. Benchmark U.S. light, sweet crude was up $1.88 a barrel to $71.04 in the Asian session, on concerns over Nigerian supply.

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