Oil drops as China says it will raise fuel prices
Saturday, 21 June 2008

AP, NEW YORK -- Oil prices dropped Thursday after China said it will raise fuel prices, a move that could dampen the booming Asian nation's oil consumption. Retail gas prices slid overnight.

Light, sweet crude for July delivery fell $2.82 to $133.86 a barrel on the New York Mercantile Exchange, but dipped more than $3 at times.

China disclosed that it will raise the prices of gasoline, diesel, aviation kerosene and electricity.

Growing Chinese demand for oil has underpinned the multiyear rally in oil prices, but higher prices could crimp that demand. Concerns about spiking Chinese demand for diesel due to cleanup operations in the aftermath of last month's earthquake contributed to oil's recent run-up.

''This could change the psychology of the market completely,'' said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

Lower demand in China ''would be a major factor in driving prices down,'' said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Also pressuring prices Thursday were the dollar's gains against the euro. Investors who buy commodities such as oil as a hedge against inflation when the dollar falls tend to sell when the greenback gains ground. Also, a stronger dollar makes oil more expensive to overseas investors.

Energy investors are also awaiting a weekend summit in Saudi Arabia between oil consuming and producing nations to address high prices.

Meanwhile, Iraq's Oil Ministry said Thursday that the nation is close to signing oil service deals with several major Western oil companies in an effort to boost its output capacity. The agreements would be the first major Iraqi contracts with big Western companies since the 2003 U.S.-led invasion.

Price declines were limited Thursday by news of an attack on a Royal Dutch Shell PLC oil field in Nigeria that produces about 200,000 barrels of crude per day.

At the pump, meanwhile, gas prices slipped 0.2 cent overnight to a national average of $4.073 a gallon, according to a survey of stations by AAA and the Oil Price Information Service. Gas prices have followed oil futures higher this year. But with oil prices stalled in a rough range between $132 and $139, gas prices appear to have topped out, for now.

Demand for gasoline is already falling in the U.S., and may have peaked last year, according to a new study. Energy Department data shows demand has fallen steadily since January, leading Cambridge Energy Research Associates to conclude that gasoline demand may fall this year for the first time in 17 years.

If gas prices remain at or near current levels, ''2007 could prove to have been the peak year for U.S. gasoline demand,'' CERA said in a statement.

On Wednesday, the Transportation Department said Americans drove 1.4 billion fewer highway miles in April than during April 2007, and 400 million miles less than in March of this year. Vehicle miles traveled on all public roads in April fell 1.8 percent from a year earlier.

In other Nymex trading Thursday, July gasoline futures fell 8.42 cents to $3.3825 a gallon, and July heating oil futures fell 9.37 cents to $3.7663 a gallon. July natural gas futures fell 29.2 cents to $12.918 per 1,000 cubic feet. The Energy Department said natural gas inventories rose by 57 billion cubic feet last week, toward the lower end of the range of analyst estimates.

In London, August Brent crude futures fell $2.75 to $133.67 a barrel on the ICE Futures Exchange.

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