Oil Falls More Than $4 as China Announces Fuel Price Increase

Crude oil fell more than $4 a barrel on speculation demand will decline, after China said it will raise fuel prices starting tomorrow.

China, the second-biggest fuel consumer after the U.S., will increase gasoline and diesel prices by 1,000 yuan ($145.50) a ton, the National Development and Reform Commission said. The increases represent a 17 percent gain for gasoline and 18 percent for diesel. Gasoline, natural gas and heating oil also fell.

``The announcement of the Chinese fuel price increase sent the market sharply lower,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. ``This should have a big impact on demand.''

Crude oil for July delivery fell $4.81, or 3.5 percent, to $131.87 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures climbed to a record $139.89 on June 16. Prices are 91 percent higher than a year ago.

Brent crude oil for August settlement declined $4.24, or 3.1 percent, to $132.20 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.

China will also raise jet-fuel prices by 1,500 yuan a ton, or 25 percent, tomorrow, the top policy planner said. On July 1, China will increase electricity prices by an average 0.025 yuan a kilowatt-hour, or 4.7 percent. China will impose temporary caps on thermo-coal prices until the end of this year.

The government is considering a so-called environmental tax, a new levy on auto fuels and changes to existing taxes on natural-resource use, Fu Jing, deputy director of policy and legislation at the State Administration of Taxation, said at the Energy Efficiency Asia conference in Beijing today.

Developing Countries

``The developing countries, in particular China, have been driving demand growth,'' said Eric Wittenauer, an analyst at Wachovia Securities in St. Louis. ``Subsidies and price caps insulate consumers from the full impact of higher prices. By rolling them back, some of the insulation is reduced and we can expect to see a demand response.''

Oil demand will fall 240,000 barrels to 48.71 million barrels a day among the 30-member Organization for Economic Cooperation and Development, the U.S. Energy Department said in a report on June 10. The OECD doesn't include developing countries such as China.

Chinese consumption is expected to rise 440,000 barrels to an average 8.02 million barrels a day this year, according to the report.

India, Malaysia, Indonesia and Taiwan have increased fuel prices and reduced subsidies this year, a move that may cut Asian demand and slow global oil-consumption growth.

Jeddah Meeting

Oil rallied for the first time in four days yesterday as President George W. Bush said he doesn't expect pledges of higher supplies to emerge from a June 22 meeting of producers and consumers in Jeddah, Saudi Arabia.

Saudi Arabia plans to increase crude-oil production by 200,000 barrels a day, according to a statement from the kingdom's embassy in London.

The statement didn't specify the timing of the increase. Oil Minister Ali Al-Naimi pledged on May 16 to boost output by 300,000 barrels a day in June. The country has since indicated it plans to announce a further addition at the Jeddah meeting.

Oil's volatility on a 10-day basis dropped by more than 17 percentage points today, according to data compiled by Bloomberg. Volatility is a measure of how far the price of a commodity deviates from average closing prices over a period of time, such as 10 or 30 days.

Oil futures traded in New York veered 38 percent from the 10-day average, as of 2:27 p.m. New York time. They strayed 63 percent from the average on June 13, the highest volatility since January 2007.

Gasoline Prices

Gasoline for July delivery fell 10.92 cents, or 3.2 percent, to $3.3575 a gallon in New York. Futures reached a record $3.5762 a gallon on June 16. Heating oil for July delivery dropped 14.68 cents, or 3.8 percent, to $3.7132 a gallon in New York.

The profit margin, or crack spread, for making three barrels of crude into one of heating oil and two of gasoline has dropped 21 percent in five days. The margin is $13.6084 today, the lowest since May 8, based on futures prices.

``Refiners aren't going to run at high rates because of these low margins,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``We need to see these margins improve or we'll end up with higher diesel and gasoline prices.''

Natural gas in New York declined after an Energy Department report showed that U.S. inventories advanced 57 billion cubic feet to 1.943 trillion cubic feet last week. Analysts forecast an increase of 58 billion cubic feet, according to the median of 23 estimates compiled by Bloomberg News.

Natural gas for July delivery fell 34 cents, or 2.6 percent, to $12.87 per million British thermal units in New York. Futures are up 71 percent from a year ago.