[OIL PRICES] Crude Oil Declines as China to Increase Fuel Prices Tomorrow

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. Oil has almost doubled in the past year, partially because of growing demand from China.

``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 $4.10, or 3 percent, to $132.58 a barrel at 12:15 p.m. on the New York Mercantile Exchange. Futures climbed to a record $139.89 on June 16. Prices are 94 percent higher than a year ago.

Brent crude oil for August settlement declined $3.13, or 2.3 percent, to $133.31 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.

Oil rallied for the first time in four days yesterday as U.S. 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. Prices also rose because a government report showed that U.S. crude-oil inventories fell for a fifth week.

Source: Bloomberg|By Mark Shenk

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