A government price rise in gasoline and diesel is expected to boost demand for refined oil products in the domestic market, which has been afflicted with oversupply since mid last year.

However, analysts claim the frail market recovery will only gain depending on the future development of international crude oil prices.

The State Development Planning Commission yesterday announced an increase in the domestic ex-factory price of gasoline by 260 yuan (US$31.4) a ton from 2,320 yuan (US$280), and that of diesel by 240 yuan (US$29.0) a ton from 2,060 yuan (US$249).

The price hike, the second of the year, is in line with the rise in international crude oil prices, caused by supply worries following the conflicts in the Middle East, and the output cut by the Organization of Petroleum Exporting Countries (OPEC).

"The price increase will help inject confidence into the domestic refined oil market, as users and dealers anticipate the price will go up further," said an official from the price department of PetroChina, China's largest oil company.

But the official added market demand would grow strong only when international oil prices maintain their current high in the following months.

China linked the domestic refined oil product prices to Rotterdam and New York markets in addition to the Singapore market in the second half of last year. Sinopec and PetroChina, the only two authorized oil companies to wholesale gasoline and diesel, are allowed to fluctuate their retail price by 8 percent from the government-set benchmark.

But the two companies failed to push their prices to the normal range most of last year, due to overproduction in the market and the weak demand, with stockpiles lingering around 10 million tons.

Gong Jingshuang, an oil analyst with the China National Petroleum Corp, said the domestic market is rebounding after the two companies joined hands to curb the market glut by the end of last year, and the demand is growing for seasonal planting.

Gong said the two companies' joint efforts to improve the market condition, including cutting output and agreements made to avoid dumping, have paid off, but the international oil price in the coming months is vital for the domestic market rebounding.

"The recovery is fragile if international prices drop again," said Gong.

A PetroChina official said the price hike in the international market will end when political tension is eased.

The official also said the price rise will benefit domestic oil companies, which suffered heavy losses last year.

But he warned market recovery will also spur production, which will detrimentally hurt the market, though the senior management of both companies are cautious at raising the output.

(China Daily April 5, 2002)