China Raises Fuel Prices Amid Strong Rally in Crude Oil

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Capitals flowed into the commodity market on Monday as world market leaders pledged to continue the stimulus measures. Crude oil price rose to an intra-day high of 80.19 in NY session but selling pressure above 80 was quite strong. The benchmark contract settled at 79.43, up +2.6%, for the day.

The Chinese government raised ex-factory price of gasoline, diesel and jet fuel for the first time in 2 months in light of rally in crude oil price. According to the National Development and Reform Commission (NDRC), gasoline and diesel prices were both increased by RBM 480/metric ton, or +7% and +8%, respectively. 'The adjustment will encourage refineries to boost production and guarantee domestic supply... it will also help energy conservation and reduce emissions'.

Unlike countries in the advanced economy, prices for oil products in China is under government's control in order to make sure that consumers with low affordability can also buy oil products. However, such control has squeezed refinery margins on refiners for years.

In early May, NDRC unveiled more details about the new oil pricing mechanism introduced in the beginning of 2009. Under the new policy, NDRC may adjust domestic oil product prices when the moving average of 'international crude oil prices' (Brent, Dubai and Cinta) change more than 4% of a period of 22 working days.

The last price adjustment made by the NDRC was on September 30 when it reduced fuel prices after increasing it on September 1. The time between this and the previous change was longer than the 22-day average as scheduled. This might have raised concerns that the mechanism is not closely followed. However, after deducting domestic holidays, the time difference is 23 days which suggested the government policy remained intact.

In Iran, the government has also planned to increase gasoline prices over the next 5 years so as to reduce the subsidy on fuel consumption.

Gold price rallied to as high as 1111.7 before retreat. The December contract added +0.5% to close at 1101.4. Robustness in gold on Monday was driven mainly driven by weakness in dollar. As there's no sign that world market leaders are going to arrest the decline in USD, the dollar index plummeted to the lowest in 15 months yesterday.

IMF's gold sales to the RBI spurred speculations that other central banks, especially from emerging economies, is also seeking reserve diversification to gold. While the market expects that China will likely absorb the rest of IMF's announced gold sales, Wei Benhua, former deputy head of the State Administration of Foreign Exchange, said that China should not rush. Instead if should wait for gold price to drop to a 'relatively low level of around $800/oz'.

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