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Oil price bounces despite Chinese subsidy cut

Times Online

June 21, 2008

Oil price bounces despite Chinese subsidy cut

Increase could spark even more demand in China

Crude oil prices climbed yesterday despite hopes that a rise of up to 18 per cent in the cost of Chinese motor fuel would cut demand and lead to lower prices globally.

Initially the price of crude fell $4 to $132 a barrel on the news that China was to follow India, Taiwan and Indonesia in cutting fuel subsidies. However, just hours later, the oil price had recovered ahead of a crucial meeting between oil producers and consumers in Jeddah, Saudi Arabia this weekend.

Oil rose by almost $3 a barrel as analysts said that the Chinese fuel price increase may actually lead to higher consumption, rather than curtail demand from the world’s second-biggest consumer.

Prices for US crude for July delivery recovered by $1.67 to $133.60 in afternoon trading on Friday. London Brent was $2.99 higher at $134.99.

Beijing’s move prompted Chinese motorists to rush to petrol forecourts before the midnight deadline, where police and government officials were drafted in to guard the pumps.

There are concerns that cutting subsidies on Chinese petrol and diesel will encourage healthier supply at the pumps. Chinese motorists have had to put up with long queues and rationing in recent months as refiners cut on production to limit hefty losses made by selling discounted fuel.

James Neale, analyst at Citigroup, said: “We do not think that a country where consumers are used to waiting three hours for automotive fuel in many cases, will see significant negative demand elasticity from a simple 20 per cent price increase.”

China’s fuel subsidies have helped to support the country’s growing demand but it was thought these would remain in place until after the Olympics, because the authorities would not want to trigger social unrest.

“Global crude prices have been rising sharply and Chinese domestic fuel prices have lagged behind. The price difference has highlighted the contradiction between demand and supply,” Chinese state television said, quoting the country’s National Development and Reform Commission.

The 16.7 per cent increase in petrol — diesel rose by 18 per cent — takes the pump rate to about 75 US cents a litre, about one third what British motorists pay. Prices have doubled since 2003, but crude has more than quadrupled.

Demand from China, India and the Middle East has been blamed for oil’s surge from $20 a barrel six years ago to a record high of nearly $140 a barrel this week.

Analysts said that the climbing price was also down to traders’ desire not to be short on oil going into the weekend as bad news from Nigeria could see output drop suddenly. Militants in speedboats attacked Royal Dutch Shell’s 220,000-barrel-per-day Bonga offshore facility in Nigeria this week and cut the country’s oil output by a tenth.

Meanwhile, expectations are fading that an emergency meeting between consumers and producers in Saudi Arabia tomorrow to discuss ways to tame oil prices could lead to a meaningful increase in supplies.

Gordon Brown will attend the meeting in Jeddah, at which he hopes to persuade producers to increase output that will lead to lower prices.

In Europe and the US, high fuel prices are threatening the economy and encouraging spiralling inflation.

Saudi Arabia, the world’s largest producer, has said that it will increase its output by 200,000 barrels per day to help to stabilise the world oil market.

But other Opec members are much more resistant to increasing production as they believe supplies are adequate to meet demand. They blame soaring prices on market speculators.

In an abrupt reversal, Rafael Ramirez, Venezuela’s oil minister, said yesterday he had decided to attend the Opec meeting.

Chakib Khelil, president of Opec, said yesterday it was illogical and irrational to ask the oil cartel to increase output. Iran said it was unlikely that Opec members would agree on changes to crude output at the meeting.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4183258.ece

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