Oil prices drop after China says it will raise fuel prices

Source: Agencies  |   2008-6-20  |     ONLINE EDITION

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

Light, sweet crude for July delivery fell US$4.75 to settle at US$131.93 a barrel on the New York Mercantile Exchange.

In London, August Brent crude futures fell US$4.44 to settle at US$132 a barrel on the ICE Futures Exchange.

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

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

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.

The service agreements would be the first major Iraqi contracts with big Western companies since the 2003 US-led invasion. In March, Iraq's Cabinet said the ministry could sign deals worth around US$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 is not a huge increase, and is unlikely to occur for some time, analysts said the announcement contributed to market psychology yesterday.

"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.