China cuts fuel prices for first time in two years

By Eadie Chen and Tom Miles

BEIJING (Reuters) - China will cut domestic fuel prices on Friday for the first time in almost two years as it revamps its regulated pricing regime, passing along a share of oil's over $100 slump to help revive flagging economic growth.

Crude oil gained moderately after Beijing announced a 14 percent cut in refinery gate gasoline prices and 18 percent drop in diesel prices, plus a nearly one-third cut in jet fuel.

The cuts were not unexpected after China announced last month that it would push ahead a long-stalled effort to allow its domestic prices to fluctuate in line with the global market.

China also confirmed on Thursday its previously announced tax increase on a range of fuels to curb "unreasonable" consumption in the world's second-largest oil user, whose determination to keep its petrol cheap had aided the rapid oil demand growth that helped drive crude to a record $147 in July.

But modestly lower prices are unlikely to do much to boost oil demand, which shrank last month for the first time in almost three years, as the economy takes a bigger-than-expected hit from the deepening recession in its main export markets.

"The price cuts and reforms will support oil demand in China but the impact of the financial crisis on the country may be more than we expected a few months ago," said Ehsan Ul-Haq, head of research at JBC Energy in Vienna.

After China announced the fuel price cut, the U.S. January light crude contract, which sank to $39.19 on Thursday, was trading up 65 cents at $40.71 a barrel by 7:02 a.m. EST. London Brent crude for February rose 85 cents to $46.38.

"We're seeing a little bit of a recovery, and it could be that China price cuts are playing a part, but I think the market has seen its low when we dipped under $40," said Christopher Bellew at U.S. brokers Bache Financial in London.

But oil, which fell sharply after China raised prices in June on fears that it would temper consumption, is still stuck near an over four-year low around $40 a barrel, after OPEC's biggest ever production cut failed to offset a deepening economic gloom.

The price cut came some sooner than expected -- most believed the new rates would come into effect along with other reforms on January 1 -- and was milder than some analysts were anticipating.

"We expected it to be as high as 20 percent," said David Johnson, an analyst at Macquarie in Hong Kong.

The price cut and tax hike will eat into the earnings of refiners Sinopec and PetroChina, which had finally begun turning a profit as crude oil plunged from its July peak of over $147, helping offset the billions of dollars in losses they endured earlier in the year when Beijing resisted raising prices.

The NDRC said pump prices would not rise on January 1 when the tax element of the reform kicks in, implying that refiners will have to bear the burden of increased tax from that date.

China has been careful to sell the reform package with a week-long "consultation period," which it said showed support from the "great majority" of its people, while refiners will now be able to sell fuel at closer to international prices.

Pump prices will fall by about 0.91 yuan ($0.133) per liter of gasoline and 1.08 yuan ($0.158) per liter of diesel from midnight on Thursday, said the National Development and Reform Commission (NDRC), China's top economic planning body.