Oil falls $3 as China to raise fuel prices

LONDON (Reuters) - Oil fell $3 to $133 a barrel on Thursday on news that China will raise retail gasoline and diesel prices for the first time in 8 months, which will curb demand in the world’s second largest energy consumer.

Gas and diesel pumps along with gas prices are shown at an Exxon gas station in Carlsbad, California May 28, 2008. REUTERS/Mike Blake

Soaring energy use in China has been one of the main factors driving oil prices to a record near $140.

“This is very significant, a watershed move which suggests the Chinese government is prepared to risk unpopularity to curb the growth in domestic fuel demand,” said John Kemp, an economist at RBS Sempra.

“We’ve already seen other Asian economies cut subsidies and the big one to hold out, until now, was China.”

The move comes just days before an emergency meeting on Sunday in Saudi Arabia between consumers and producers to discuss soaring oil prices.

U.S. crude fell $3 to $133.68 a barrel before firming a touch to stand $2.50 lower at $134.18 at 3:14 p.m.

London’s Brent crude was $2.42 lower at $134.02.

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China is to raise retail fuel prices by 1,000 yuan ($145.50) a tonne from Friday to help recoup losses in the face of record crude prices, industry sources told Reuters.

“Back of the envelope calculation shows its about 47 cents a gallon. It looks like it could definitely do something in the medium term, before the Olympics, maybe not,” said James Crandell of Lehman Brothers Energy Research in New York.

Earlier, oil had rallied to over $137 after rebels from Nigeria’s oil producing Niger Delta warned oil and gas tankers to avoid the region or risk being attacked.

The rebel Movement for the Emancipation of the Niger Delta also said it might carry out further attacks on oil facilities after gunmen caused the shutdown of production at the Bonga field earlier on Thursday.

Bongas pumps an average of around 220,000 barrels per day.

Nigeria is already producing about 20 percent below its potential, contributing to the rally in oil prices to a record high near $140 earlier in the week.

Its output has suffered from a violent campaign of sabotage by militants in its southern Niger Delta, the heartland of its oil industry.

News that Goldman Sachs has raised its oil price forecasts further on continued supply tightness, had supported prices.

Oil would average $117 a barrel this year, compared with its previous estimate of $108, and price would average $140 next year, Goldman Sachs said.

Traders say the market is cautious ahead of the emergency meeting this weekend between producers and consumers in Saudi Arabia.

The White House said on Wednesday it was not expecting Saudi Arabia to announce an output increase in Jeddah.

Reporting by Chua Baizhen in Singapore and Ikuko Kao in London; editing by James Jukwey