Oil Settles Below $132 as China Raises Fuel Prices

Oil prices dropped sharply Thursday after China said it will raise fuel prices, a move that could dampen the booming Asian nation's oil consumption.

Oil Pipeline
Oil Pipeline

Prices also were given a downward push by the Iraqi Oil Ministry's announcement that it is close to signing oil service deals with several major Western oil companies in an effort to boost its crude output.

Retail gas prices, meanwhile, slid overnight.

Light, sweet crude for July delivery fell $4.75 to settle at $131.93 a barrel on the New York Mercantile Exchange. London's Brentcrude was also lower.

China disclosed that it will raise prices for gasoline and diesel fuel 16 percent and 18 percent, respectively, beginning Friday.

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 in Chicago.

Also pressuring prices Thursday was Iraq's announcement.

The service agreements would be the first major Iraqi contracts with big Western companies since the 2003 U.S.-led invasion.

In March, Iraq's Cabinet said the ministry could sign deals worth around $500 million each.

Baghdad hopes to boost output by 600,000 barrels a day over its current 2.5 million barrels per day.

While that's not a huge increase, and is unlikely to occur for some time, analysts said the announcement contributed to market psychology on Thursday.

"It's part of the puzzle," Cordier said. "It all adds up."

The dollar's gains against the euro gave traders even more reason to sell. 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.

Investors shrugged off 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 falling in the United States.

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 11.41 cents to settle at $3.3526 a gallon, and July heating oil futures fell 14.65 cents to settle at $3.7135 a gallon.