Oil Falls as China's Interest Rate Boost May Cut Consumption
 

Oil Falls as China's Interest Rate Boost May Cut Consumption
Oct. 28 (Bloomberg) -- Crude oil futures fell to a three- week low in New York after China's central bank raised its benchmark interest rates for the first time in nine years, a move that may reduce growth in fuel consumption.

China last year surpassed Japan as the world's second- largest oil consumer after the U.S., because of a surging economy. Chinese oil use is expected to jump 15 percent to 6.3 million barrels a day this year, the International Energy Agency said this month. Oil in New York rose 59 percent this year as threats to production coincided with record demand growth.

``The Chinese economy will slow and as a result they will need less oil,'' said Mordechai Abir, director of energy research at Burnham Securities Inc. in New York. ``The wild rise in oil demand growth will slow and we may even see a little bit of a decline in consumption.''

Crude oil for December delivery fell 31 cents, or 0.6 percent, to $52.15 a barrel at 12:50 p.m. on the New York Mercantile Exchange. Oil dropped to $51.29, the lowest price since Oct. 6. Futures surged to $55.67 on Oct. 25, the highest since futures began trading in 1983. Oil futures were 76 percent higher than a year earlier.

In London, the December Brent crude-oil futures contract fell 27 cents, or 0.6 percent, to $49.18 a barrel on the International Petroleum Exchange. Brent futures touched $51.95 on Oct. 27, the highest price since the contract began trading in 1988.

``China has been the catalyst that started the ball rolling as far as oil prices are concerned,'' said Fadel Gheit, oil analyst at Oppenheimer & Co. in New York. ``Oil prices are in a speculative bubble that is likely to burst -- I don't know when.'' When it does burst, prices are likely to drop below $40 a barrel, he said.

Oil in New York has not fallen below $50 since Oct. 5.

Demand Growth

The IEA said on Oct. 12 that it expects oil demand in China next year to rise by 5.6 percent to 6.68 million barrels a day, less than last month's projection for an increase of 7.6 percent to 6.84 million barrels a day. The agency, an adviser to 26 industrialized nations, was founded in 1974 after the Arab oil embargo of the previous year caused an economic slowdown.

``The Chinese don't have the most sophisticated methods of managing their economy,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. ``The historical pattern has always been there to be incredible growth followed by sudden slowdowns. It's a real stop-and-go pattern.''

The last time China tried to cool its economy to control inflation, growth almost halved to 7.1 percent in 1999 from 12.8 percent in 1994.

Sweet Oil

``The potential effects of the Chinese move are very significant because their refining sector is less developed than in Japan and other Asian consumers,'' Mueller said. ``They are pulling in a lot of sweet oil from West Africa, which has put them in direct competition with us.''

Some Chinese refineries are unable to process the high sulfur crude oil grades that have become available this year as production in the Persian Gulf increased. They have boosted their purchases of low sulfur West African grades that are preferred by U.S. refiners because they yield more gasoline.

U.S. refiners ``are competing for relatively scarce supplies of sweet crude,'' said Thomas D. O'Malley, the chief executive of Old Greenwich, Connecticut-based Premcor Inc., a U.S. refiner. ``China has become a very large importer of sweet crude, particularly from West Africa. The Chinese are also importing sweet crude from as far away as Norway.''

Profits Soar

Oil company profits have soared as demand for crude oil and petroleum products increased this year. Exxon Mobil Corp., the world's largest publicly traded oil company, said third-quarter profit rose 56 percent to $5.68 billion, or 88 cents a share, from $3.65 billion, or 55 cents, a year earlier.

ConocoPhillips, the third-largest U.S. oil company, yesterday said its third-quarter net income rose 54 percent to $2.01 billion as refining and oil and gas earnings surged. BP, Europe's largest oil company, this week reported a 53 percent increase in profit to a record $3.46 billion.

Prices rose after the Energy Department said that U.S. natural gas supplies climbed less-than-expected last week. Gas held in the nation's more than 400 underground caverns and reservoirs rose by 26 billion cubic feet to 3.249 trillion cubic feet, the department said. Analysts had expected a gain of 36 billion, the median estimate of 22 polled by Bloomberg.

Between 5 and 10 percent of U.S. factories can burn either natural gas or petroleum products, depending on which is more economical.

``Seeing strength in natural gas, which was clipped strongly yesterday, is keeping oil from falling,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut energy consultant.

Natural gas for December delivery rose 19.5 cents, or 2.2 percent, to $8.97 per million British thermal units in New York. Prices fell 9.2 percent yesterday, the biggest one-day decline since Dec. 22.

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