(Yicai Global) Dec. 8 -- Diesel supply has become tight in China and diesel prices have kept rising in the second half of the year, radio.cn reported. There was even a shortfall last month. As the central government strengthens oversight of environmental protection, some local refineries whose products fail to meet the quality requirements are forced to stop production, radio.cn said, quoting insiders.

Tight supply conditions started to spread from Jiangsu, Sichuan and Yunnan provinces to northern China last month. In some areas, trains for transporting diesel needed to wait for days at refineries in order to get loaded, the report mentioned.

Light cycle oil, a type of raw materials used to produce low condensation point diesel in winter, is already in short tight supply, with almost zero inventories, said a worker at Longkou Port in eastern Shandong province. A direct result of tight diesel supply is substantial price increases. Domestic retail prices of diesel have risen CNY930 (USD140.4) per ton since July, meaning a CNY0.79 increase per liter in the price of diesel No. 0, weighing on downstream gas stations and logistics companies.

"For a truck with a capacity of 50 tons, monthly operating costs have increased some CNY3,000 yuan," said a person-in-charge of a logistics firm in Yantai, Shandong. "Logistics companies that use refined oil products as their main fuel have seen a 15 percent to 20 percent increase in operating costs."

Regarding reasons for tight diesel supply, Zhang Hongmei, deputy general manager of Shandong Qingyuan Group Co. told Yicai Global: "Primarily, it is due to environmental protection. Many small refineries that fail to meet the standards are asked to halt production. Just a few refineries are able to produce diesel products that meet the requirements. Some refineries have stopped production for maintenance purposes in winter, leading to even tighter supply."

To accelerate upgrading of refined oil quality and help clean the air, China has decided to supply no more than 10ppm sulphur content in diesel oil and to stop domestically selling diesel oil with more than 10ppm sulphur content. The National Development and Reform Commission (NDRC), the country's top macro-economic planner, issued a notification on the issue at the end of October.

However, as PetroChina Yunnan's project, as well as part of Huizhou Refinery, begin operations this month and that some independent refineries in Shandong complete their maintenance work, some 70 percent of refineries will become operational, said Xu Guishou, chairman of Zhongchu Energy Trade Center, said, adding that supply constraints will be eased then.

"Diesel shortage is just temporary. As exports decline and vast amounts of resources are invested, the situations will improve substantially earlier next year," said Wang Zhixin, deputy general manager of Shanghai Petroleum and Natural Gas Exchange.