Singapore (Platts)--22Dec2010/507 am EST/1007 GMT

A decision by China to raise domestic refined oil product prices by 4% from Wednesday surprised industry sources who had expected the government to delay it to early next year due to concerns over rising inflation.

The government is signaling that it intends to contain runaway demand for petroleum products through fuel price liberalization with the latest hike, market watchers and analysts commented.

"We were very surprised," Zhang Liutong, an analyst at Facts Global Energy, said Wednesday.

"The current oil price hike was unexpected, but reasonable," Ding Shaoheng, an analyst at PetroChina's research unit, was quoted by the official Xinhua news agency as saying.

"It also surprised me," said an oil trader with one of the state-owned oil companies, who declined to be named.

In a response to media queries on the price hike, the country's top economic planner the National Development and Reform Commission said that China's dependency on imports for its oil needs has climbed from 53% in 2009 to an expected 55% for 2010, increasing the need to maintain stable oil security.

"Fully leveraging on price and regulatory measures, controlling excessive growth in oil consumption ... is a necessary choice," the NDRC said.

China's apparent oil demand in November surged to an all-time high of 38.09 million mt, or an average 9.3 million b/d, according to Platts' analysis based on recent figures released by the government.

Analysts believe China's oil demand is likely to climb further next year, and the government's decision to adjust retail prices now is a reflection of its resolve to keep demand in check.

"It shows that [the government] has some commitment in controlling consumption," Zhang said.

Late Tuesday, the NDRC announced that retail gasoline prices will be increased to Yuan 7,730 ($1,160)/mt, up by Yuan 310/mt, while gasoil prices will be raised by Yuan 300/mt to Yuan 6,890/mt.

This is the fourth increase this year. China last hiked gasoline and gasoil guidance prices by Yuan 230/mt and Yuan 220/mt respectively on October 26.

Inflation in China, the world's second largest oil consumer, surged to 5.1% in November, the fastest increase in more than two years and above Beijing's full-year target of 3%.

Always wary of inflation, which can spark unrest, Beijing has ordered a range of steps to ensure adequate supplies of key goods and offered financial help to the needy.

In the statement issued late Tuesday, the NDRC said it would not let the increases lead to inflation and that airlines, railway freight companies and public transport operators would not be allowed to pass on the hike in fuel costs to consumers.

--Calvin Lee, calvin_lee@platts.com

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