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Oil Near $136 on Israel Military Exercise Report

By Reuters | 20 Jun 2008 | 11:34 AM ET

http://www.cnbc.com/id/25272836

Oil rebounded more than $4 a barrel on Friday in response to views now gaining ground that a fuel price increase by China may actually boost rather than curtail demand for fuel.

Oil had plunged nearly $5 in the previous session after China raised fuel prices by up to 18 percent, its first hike in eight months as the government bowed to a nearly $40 increase in crude prices since the last hike in November.

Initial forecasts suggested the move by China, the world's second-largest oil consumer, would hurt demand, but some analysts now say consumption will rise as the price increase will encourage healthier supply at the pumps.

Chinese fuel pumps have faced long queues and rationing as refiners cut back on production to limit hefty losses made by selling discounted fuel.

"We do not think that a country where consumers are used to waiting 3 hours for automotive fuel in many cases, will see significant negative demand elasticity from a simple 20 percent price increase," said Citi analyst James Neale.

Societe Generale analyst Mike Wittner added: "We think, if anything, the Chinese price increase would tend to increase consumption and not decrease it." Demand from China, India and the Middle East has been cited as a factor behind oil's almost sevenfold surge from $20 six years ago to a record high of nearly $140 a barrel.

Oil's rally on Friday was also supported by a weaker dollar and concerns over tensions in the Middle East after reports that Isreal had carried out a large military exercise this month that appeared to be a rehearsal for a potential bombing attack on Iran's nuclear facilities.

Hotspots

"Traders don't want to be short going into the weekend. There are just too many hotspots around the world now... There is more potential for bullish news than bearish news," said Gerard Rigby of Fuel First Consulting in Sydney.

Another hotspot is Nigeria, where militants in speedboats attacked Royal Dutch Shell's 220,000-barrel-per-day Bonga offshore facility and cut oil output at the world's eighth-largest oil producer by a tenth.

Shell said it was too soon to say how long output at the deepwater installation would be shut down.

OPEC member Nigeria is already producing about 20 percent below potential due to sabotage by militants in the Niger Delta oil hub.

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

"The more information that comes out, it seems that there is possibly less to this meeting than meets the eye," said Wittner, adding that expectations of any supply boost had been scaled down to 200,000 barrels per day now from 500,000 bpd a week ago.

OPEC President Chakib Khelil said demands by consumer countries for OPEC to increase its offer of oil was "illogical and irrational." Iran said it was unlikely that OPEC members would reach an agreement on crude output change at the weekend meeting.

Venezuela does not plan to attend.

Copyright 2008 Reuters.