The China National Petroleum Corp. (CNPC), the nation's largest oil company, raised the ex-factory prices for both gasoline and diesel by 60 yuan (US$7.30) per ton on June 1 to bail refineries from losses.

Analysts said it is not likely the rises for refined oil products will be passed down to consumers by hiking retail and wholesales prices in the short term, although the ex-factory price hike adds pressure for such a move.

Both retail and wholesale oil prices have been picking up recently, reflecting worldwide hikes.

"It is to encourage the production at the refineries to meet market demand," said a CNPC sales manager on condition of anonymity. The government has urged China's refineries to run at full capacity.

The manager said refineries are losing money because the ex-factory prices of oil products lag behind crude oil prices, which have hit 10-year high.

The Beijing Times reported Tuesday that a sales branch of Sinopec--the nation's second-largest oil company-- raised the ex-factory price for gasoline by 100 yuan (US$12.10) per ton and raised diesel rates by a similar margin. However, Sinopec officials denied they have adjusted prices recently.

Insiders said Sinopec's refineries are suffering serious losses at the current price level.

The refinery-heavy Sinopec purchases about 70 percent of the crude it processes from abroad, or from rival CNPC and from the smaller China National Offshore Oil Corp.

Imported crude oil prices have equaled, if not exceeded, the ex-factory prices for refined oil products, squeezing the refineries' profit margins.

Under the current system, the government sets benchmark wholesale and retail prices according to the international markets, and allows Sinopec and CNPC to float those prices by 8 percent. Based on the benchmark prices, the oil companies then decide their ex-factory prices.

Analysts said the increase in the ex-factory prices could ultimately push retail and wholesales prices up.

Industry sources said the two largest oil companies have applied to the State Development and Reform Commission (SDRC) to raise wholesales prices for diesel and gasoline by 300 yuan (US$36.20) per ton to reflect international prices hikes.

But analysts said the SDRC is unlikely to comply immediately because the demand for diesel has picked up during the current farming season. The government is concerned about further price increases raising costs for poor farmers.

In March this year, benchmark wholesale prices for gasoline rose by 300 yuan (US$36.30) per ton, or 8 percent. The diesel price went up by 280 yuan (US$33.8) per ton.

Gong Jingshuang, an expert with CNPC's consulting institute, added that the NDPC will not increase retail prices because international prices are dropping as output from other oil-producing countries rises.

(China Daily June 9, 2004)