Nov. 1 (Bloomberg) -- Crude oil's surge beyond $95 a barrel and a lack of diesel and gasoline forced the Chinese government to reverse a decision not to increase fuel prices this year, JP Morgan Chase & Co. said.

``The widespread oil-product shortages apparently forced the Premier Wen Jiabao to blink,'' Frank Gong, chief China economist at JPMorgan in Hong Kong, wrote in a research note today. ``The move last night apparently was forced on the authority after a big lesson: they cannot time the market.''

Wen said after a State Council, or cabinet, meeting last week that China wouldn't take any price liberalization moves for the rest of 2007, according to Gong. Higher prices may encourage China Petroleum & Chemical Corp. and PetroChina Co. to process more crude and ease supply shortfalls that threaten to disrupt the world's fastest-growing major economy.

China unexpectedly increased fuel prices by as much as 10 percent effective today in what the government said was an ``urgent step'' to help the nation's oil refiners cover rising costs as crude touched records above $96 a barrel. The country is the world's second-biggest energy consumer.

``It's a prudent measure -- to let businesses and consumers face the real price of oil,'' said David Cohen, an economist at Action Economics in Singapore. ``China's probably the biggest source of pressure on global oil prices, because of its surge in demand.''

September Inflation

September's inflation fell to 6.2 percent from an almost 11-year high of 6.5 percent in the previous month as food-price gains slowed. That decline may have led government officials to believe they had room to move on energy prices, Cohen said.

China controls fuel prices to limit their impact on inflation in the world's most-populous nation. The National Development and Reform Commission, the country's top economic planner, said in September there would be no energy tariff increases this year as inflation was exceeding a government target.

A plan by the commission to reform fuel pricing was blocked at a senior government level, because China's leaders ``always wanted to time the market - wait for crude oil prices to fall before pushing out the reform,'' Gong wrote.

Crude oil for December delivery gained as much as $1.71, or 1.8 percent, to $96.24 a barrel on the New York Mercantile Exchange, the highest since trading began in 1983. Oil was at $95.64 a barrel at 1:46 p.m. in Beijing.

Supply, Conservation

To ``guarantee domestic refined oil supply and promote energy conservation,'' gasoline, diesel and jet fuel prices will rise 500 yuan ($67) a metric ton, the commission said. The higher fuel prices will add 0.05 percentage point to China's monthly inflation figure, the commission said in a separate statement. ``We will strictly limit the impact of increasing fuel prices.''

Benchmark gasoline prices will rise 9.1 percent and diesel by 9.96 percent, the commission said in its statement. Fuel retailers are allowed to sell products 8 percent above or below the state-determined levels.

China Petroleum, or Sinopec, as Asia's largest refiner is known, surged as much as 11 percent in Hong Kong trading. PetroChina advanced as much as 4.4 percent.

Higher fuel prices should ease losses from refining oil at Beijing-based Sinopec and PetroChina. Sinopec this week posted a 5.3 billion yuan ($709 million) third-quarter loss from turning crude into gasoline and diesel as it strained to supply the market at below-cost prices through its network of about 29,000 filling stations.

`Good Impact'

``The price hike will have a very good impact on our refining margin,'' Gong Jinshuang, an oil analyst with PetroChina parent China National Petroleum Corp., said by phone from Beijing today.

The increase will boost Sinopec's 2007 earnings by 0.05 yuan a share and 0.36 yuan in 2008, said Qiu Xiaofeng, an oil analyst with China Merchants Securities Co. in Shanghai. PetroChina's 2007 full year earnings will rise by 0.02 yuan a share and by 0.14 yuan in 2008, Qiu said.

The Chinese government will also increase prices for natural gas, excluding that used for fertilizer, by an unspecified amount at a future date, the commission said. Fees for railway, airplane and other transport services will need to be adjusted because of the price increase, it said.

``At crude prices of $80 a barrel, China's refiners would make a loss of 1,000 yuan to produce each ton of fuels,'' the commission said. ``Some refineries have halted production due to the losses, putting heavy pressure on market supplies.''

Stimulate Production

The price increase is an ``urgent step'' to stimulate production and ensure supply, the commission said.

Sinopec's parent, China Petrochemical Corp., said yesterday it will run its refineries at full capacity in November, bearing ``heavy losses'' in a bid to ensure adequate fuel supplies. Sinopec Group has halted most diesel and gasoline exports since the start of the second half, it said.

The refusal by some non state-owned retail filling stations to sell oil products has increased pressure on Sinopec to ensure adequate supplies, Chief Financial Officer Dai Houliang said Oct. 30.

To contact the reporter on this story: Wang Ying in Beijing at wang30@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

Last Updated: November 1, 2007 01:51 EDT