China fuel price rise may bolster consumption

By Emma Graham-Harrison - Analysis

BEIJING (Reuters) - Beijing's surprise increase in diesel prices will make truckers grumble, but for the first time in weeks they may be able to fill up without rationing or queues, and the easier supply of oil will likely bolster consumption.

The government said on Thursday it would raise low state-set caps on fuel pump prices by around 1,000 yuan a tonne, or nearly 20 percent, the first rise for nearly eight months and the steepest one-off hike ever.

Oil markets fell on the news as traders bet it might help curb soaring demand, as Chinese drivers already squeezed by high inflation looked to cut back on spending.

But they may be underestimating the appetites of the newly rich middle-classes, government plans to protect the poorest with direct subsidies, and most of all the role of state-owned refiners who carry much of the burden of current policy.

"Perhaps somewhat counter-intuitively, it's not bearish," said Kevin Norrish at Barclays Capital in London.

"At the margin it may help to support demand growth for diesel and gasoline as it alleviates shortages," he added.

China's oil majors PetroChina and Sinopec are obliged to sell fuel at often unprofitable state-set levels and get only ad-hoc subsidies to help balance their books.

Fuel prices had been unchanged since last November even as crude climbed by around $40 a barrel, so plants faced feedstock prices far above break-even levels. Many cut output as they plunged into the red, causing widespread shortages.