China's diesel production in August shrank on year for a third month, providing further evidence that the world's second-largest economy is slowing as downstream demand weakens for refined oil products.

China's diesel output in August, which fell 0.5% to 13.74 million metric tons, corresponds with weaker Chinese value-added industrial output--which grew in August at its slowest pace since May 2009--and the country's crude-oil imports, which fell to a 22-month low in August.

Although diesel is a main component of refinery output, China still processed 37.74 million tons of crude oil in August, up 1.5% from a year earlier. Overall processing volumes were higher because of year-on-year increases in other fuels such as gasoline and kerosene, which rose 5.8% and 7.2% to 7.47 million tons and 1.85 million tons, respectively. China's fuel oil output also rose to 1.66 million tons, up 17.8% on year.

China will continue to process higher volumes of crude in the coming months, with its two largest state-run refiners--China Petroleum & Chemical Corp. (SNP), or Sinopec Corp., and PetroChina Co. (PTR)--raising overall refinery operating rates by 4.3% in September from August, according to analysts at C1 Energy. The increases will likely be attributed to the end of heavy refinery maintenance in the second quarter, they said.

Some support could also come from China's independent refineries, also known as teapots, which raised throughput by a third in August, C1 said. The refineries, mostly based in Shandong province, accounted for 12% of the country's total refinery throughput in August, it said.

Meanwhile, China raised retail gasoline and diesel prices effective Tuesday between 6% and 7%, the National Development and Reform Commission said Monday.

Sinopec's refining loss in the first half of the year widened to 18.5 billion yuan, while PetroChina booked a refining loss of 23 billion yuan, data from UOB KayHian showed.

Although further retail price increases are necessary for state-owned refineries to break even, it will provide some relief to their bottom lines and encourage them to raise output beyond targets established by the central government. Teapot refiners may also raise their refinery rates due to the increases.