CNPC Chairman Signals China Domestic Fuel Price Changes Ahead

A sharp rise in China's gasoline and diesel prices to bring them more closely in line with global crude-oil prices appears imminent, with a public call by the head of the country's largest oil company for an adjustment adding to pressure on the government to make the change sooner rather than later.

With China's annual National People's Congress, or parliament, winding up Wednesday, relatively benign inflation--February's consumer price index climbed 3.2% on year versus January's 4.5% rise--and the government's own conditions for an upward adjustment having been met, the increase could be only a matter of days.

"Oil prices should be adjusted as the 22-day adjustment period has been met," China National Petroleum Corp. chairman Jiang Jiemin told reporters in the margins of the NPC meeting.

A price rise will be good news for the country's largest refiner, China Petroleum & Chemical Corp. (SNP) or Sinopec, whose share price has trailed a 17.3% increase by Hong Kong's Hang Seng index since the start of the year, rising only 11.3%. It has been squeezed hard by its inability to pass on higher crude-oil costs to consumers of the gasoline and diesel it makes due to government controls.

The No. 2 refiner, PetroChina Co. (PTR), a unit of CNPC, has been less hard hit, as it is a bigger oil producer than Sinopec, with its 22% share price gain this year underpinned by run-up in crude prices.

Under China's oil product pricing system, domestic fuel prices may be adjusted when the moving average of a basket of international crudes changes more than 4% over 22 working days. However, the government hasn't always stuck to that formula at times of rising global oil prices, as higher gasoline and diesel prices would contribute to inflation.

The weighted moving average price of Brent, Dubai and Cinta crudes, which Beijing uses as a reference for setting fuel prices, was up 10.3% on Tuesday compared with Feb. 7, when China last adjusted fuel prices, according to analysts at C1 Energy.

In recent days, speculation that the National Development and Reform Commission will increase gasoline prices by around 5% and diesel prices by slightly more than this has been rife in Chinese media. On Feb. 7, the NDRC, China's top economic planner, increased prices by 3.3% and 3.6%, respectively.

China's oil pricing mechanism was introduced in 2009, and the government has said it intends to restructure it this year, with the reforms possibly including a shortening of the reference period.

Jiang said Wednesday that he thought the reform wouldn't happen before a price adjustment has been made.