China's fuel price 5% hike to stimulate stockpile

China's surprise 3-5 percent increase in gasoline and diesel prices, its first in three months, may be the nudge needed to get middlemen and wholesalers to refill their tanks, draining swollen refinery stockpiles

While the increase is small, effectively reversing a cut made in January, analysts say it sends a clear signal that Beijing is sticking by its pledge to move pump prices in tandem with global markets.

It will also be welcomed by state-controlled refining giants Sinopec Corp (0386.HK) and PetroChina (0857.HK), which suffered heavy refining losses in 2007 and 2008 and must have been watching oil's 60 percent surge since mid-February with some trepidation.

The two firms, due to release 2008 earnings in the coming days, have enjoyed fat margins in the past few months as global crude oil prices had slumped as low as $32.40 in January, more than $110 down from their July 2008 peak.

But higher prices could hit China's oil demand, which rose slightly in February after falling for three months in a row as shrinking exports in the world's third-largest economy forced many factories to close and hurt the key transportation business. "The government must be disturbed to see the pathetic oil demand figures. By raising pump rates, it at least can help firm up market expectations that prices are going to be up. That can encourage independent wholesalers to store oil," said Yan Kefeng with Cambridge Energy Research Associates (CERA)

A southern Guangdong province-based fuel sales official with top refiner Sinopec agrees.

"We saw little reason for the price hike as we've been having trouble pushing prices up to the government-set ceiling. But this is a good news for us, as the market always buy when prices rise," said the official.

China's implied oil demand rose a tepid 0.5 percent in February, after three months' of falls, Reuters calculations from official data showed on Monday.

Even after two months of cuts in crude imports and bumper overseas sales of diesel and gasoline, refiners still saw fuel stocks expand 11 percent last month, media reported on Tuesday. That has prompted firms to extend hefty fuel exports into March and April, traders said.

But the price hike could lure back independent dealers to fill up tanks, many of which were believed to be idled amid expectations of weaker prices.

"The price rise sends a signal that the authorities are determined to play by the rules, namely the new pricing mechanism," Jiang Xinmin, a senior analyst at Energy Research Institute, a government think-tank on energy policies.

Refiners Benefit

The National Development & Reform Commission announced late on Tuesday a 4.6 percent increase for gasoline and 3.2 percent for diesel, a reflection of steady gasoline demand backed by strong car sales against reduced diesel use.

Chinese diesel now costs almost the same in Singapore, and gasoline has closed the gap to just 20 percent below the price paid in the Asian oil hub.

Just 9 months ago when global crude was near $150 a barrel, Chinese diesel cost half that of Singapore, even after a near-20 percent price increase last June.

While the 5 percent increase in diesel will certainly hurt end-users like private logistics firms, whose businesses have already been badly hit as many factories halted productions amid depleting export orders, oil refiners welcome higher fuel prices.

"The oil giants are to reveal their annual reports soon and we know that their revenue were not very satisfactory last year. Nor have they got much compensation from the government to offset their losses last year. So I think the pump price rise came at a good timing to help stabilize their share prices," Zhao Xianbing, analyst with CITIC Securities.