Chinese traders on Wednesday welcomed the government's oil product pricing reforms, saying more frequent price adjustments would allow gasoline and gasoil supply in the domestic market to better match demand.

The National Development and Reform Commission said Tuesday that it was making changes to the way it sets regulated retail prices of oil products, mainly gasoline, gasoil and kerosene. Price changes will now be made every 10 days in line with crude oil price fluctuations.

Under the previous system, the NDRC only reviewed the retail prices of oil products if the rolling 22-day average of a basket of Cinta, Brent and Dubai benchmark crudes fluctuated by more than 4%. Even then, this was not always executed in practice, particularly when inflation was high or when crude oil prices were volatile.

Traders said that if retail prices are going to be set every 10 days with regularity, wholesalers and distributors will now be able to predict when a price change is happening and hold stocks accordingly, resulting in less hoarding.

Previously, wholesalers often withheld oil products from the market if there was speculation of an imminent price hike.

The NDRC will not implement any price adjustment if a potential change is less than Yuan 50/mt ($8/mt), or roughly $1/b, to save on administrative costs. Instead it will roll it over to be reflected in the next adjustment.

"The Yuan 50/mt ceiling is roughly $1/b so this suggests that the government will likely raise or cut product prices if crude prices fluctuate more than this amount," said an oil company executive in Beijing.

The NDRC also retains the right to suspend or delay price adjustments if there is a significant impact on inflation in the country, or if international crude oil markets face extreme volatility.

Analysts say the government's oil price threshold could be between $120/barrel and $130/b.

"Previously, we saw that when crude oil prices were over $120/b, the government would delay its product pricing adjustments, and I think this will continue with the new system," Liu Gu, analyst at Guotai Junan Securities in Shenzhen, said on Wednesday. "There are worries about spiking inflation."

In its new rules, the NDRC did not identify specific crudes it would use to set retail product prices but indicated that it would make "appropriate adjustments" based on China's crude oil imports.

Sources said the government has deliberately chosen not to identify these crudes to avoid speculation in the international market.

"The fact that these crudes are not specified is significantly different from the old pricing system," a Guangzhou-based trader said.

"The crudes, if identified, would be open to speculation in international markets. This could push up crude prices if the formula was released," said a Beijing-based analyst.

Currently the majority of China's crude imports come from the Middle East and Africa, where grades are linked to Dubai and Oman, and Dated Brent, respectively. Saudi Arabia and Angola have traditionally been China's top two suppliers of crude, with significant volumes also coming from Russia, Iraq and Oman.

There was a suggestion last year, however, that the NDRC would also consider using the light, sweet West Texas Intermediate benchmark in its formula and its inclusion now is still probable.

"Because WTI is a global benchmark, I think it is still very possible that the government will include it in its crude basket," said Liu.