OREANDA-NEWS. March 19, 2015. Chinese state refiners could process less crude oil in the second quarter, as domestic demand is dented by tax hikes and a slowing economy, potentially curbing the import needs of the world's second biggest oil consumer.

As global oil prices plummeted, China increased taxes for oil products in late-2014 and early this year, denting demand for diesel - widely used in construction and heavy industry - and other transport and industrial fuels.

This has put pressure on China's state refiners, China National Petroleum Corporation, Sinopec and CNOOC, who buy crude at global market prices and have to sell refined products into the domestic market at levels set by the state economic planning agency.

"The government controls the product prices, that's the reason Chinese refiners can't make money at the moment," said a trader with a state refiner.

Sinopec had aimed to raise its crude runs by 5 percent between April and June, from about 59 million tonnes or 4.8 million barrels per day (bpd) in the first quarter, but that is now unlikely, according to two refinery sources.

A plan to process about 20 million tonnes in March also looks difficult to achieve, one of the sources said.

"Margins are not good. We're under big pressure from the domestic market," a Sinopec source said, adding that the trouble in the domestic market could mean higher exports of diesel this year.

In contrast, refiners elsewhere in Asia have seen robust demand and low feedstock prices push refining margins to near 5-year highs.

CRUDE IMPORTS China's crude imports surged over the past six months, reaching a record 7.2 million bpd in December, as the country bought cheap oil to build its strategic petroleum reserves (SPR).

Imports have dropped back since on worries about second-quarter demand as refinery maintenance season gets underway and on concerns about how much spare storage capacity is available.

China's crude imports fell to an average 6.6 million bpd in the first two months of this year, according to customs data and assessments by Thomson Reuters Oil Research and Forecasts.

Analysts say China's demand will likely fall further once the available SPR capacity is filled.

"Stockpiling activities at the SPRs this year will remain constrained by available spare capacity," said Wendy Yong, a senior analyst at oil consultancy FGE.

International oil prices have climbed off a six-year low hit in January, but are still down more than 50 percent from last year's peak in June above \\$115 a barrel.

China's economy is growing at its slowest pace in 25 years, and rating agency Moody's said the lower energy costs would not stop its economic slowdown.