The recent hike in prices for domestic oil products is expected to help stabilize the oil market, which has been saddled with a supply crunch for more than one month, industry watchers said.

But they also warned that the expected demand increase around the Spring Festival --the Chinese lunar New Year-- in January will likely cause problems for suppliers..

On December 6, the National Development and Reform Commission increased the benchmark ex-factory price for gasoline by 200 yuan (US$24.2) a ton, or 6.6 per cent, to 3210 yuan (US$388.1) a ton. Diesel prices rose by 180 yuan (US$21.8) a ton, or 6.8 per cent, to 2820 yuan (US$341.0) a ton.

The benchmark retail prices increased by the same margin.

The adjustment aims to help the domestic price match international oil price hikes, and encourage whole sellers to release the stock to ease the supply shortfall, experts said.

China sets its benchmark prices for oil products in accordance with average rates in the Rotterdam, New York and Singapore markets.

Despite the price increase on the international markets, the government has not adjusted domestic prices since July, partly to stabilize the costs to downstream industrial users, and thus, stabilize the economy, experts said.

Lower domestic prices have encouraged wholesalers to hold on to their products in the hopes that prices will rise.The speculation, along with the rapid increase in market demand, have forced thousands of filling stations in East, Central and West China to ration the supply of diesel oil since last month.

An official with Sinopec, Asia's largest refiner, said the price increase was expected since domestic prices are lagging behind.

"The price hike, together with many other efforts by oil companies, will ease the market shortage,'' said the official.

Sinopec and PetroChina, the nation's two largest oil companies, have increased refinery runs and crude imports since last month.

The companies have also reduced the export of gasoline and diesel oil this month to satisfy domestic demand.

"The effort seemed to have paid off as the supply in the East China area is recovering,'' said an industry watcher in Beijing. "The South China market is the next target area for the two companies to step up their efforts to ensure the supply. And the oil market is likely to return to normal by the end of this month,'' he added.

But experts also caution that demand will pick up next month as millions of people will drive home for the Spring Festival, which falls on January 22.

They also warn that heavy traffic will likely slow the transportation of oil products from refineries to targeted markets.

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