Oil higher as supply fears return

Oil prices have rebounded as investors begin to consider that a fuel price rise in China may actually increase demand there.

US sweet, light crude rose as much as $4 to $136 a barrel, while London Brent rose $3.52 to $135.52.

The rises almost erased Thursday's losses after the unexpected announcement that China would increase petrol and diesel prices by 18%.

Soaring oil costs will be discussed in Jeddah this weekend at a key meeting.

Oil prices have risen about 40% this year, reaching almost $140 a barrel earlier this week.

Prices in London and New York fell back slightly at the end of their normal trading sessions.

In New York, US light sweet crude was $2.69 higher at $134.62. While in London, Brent crude rose $2.86 to $134.86.

Mixed reaction

China's rapid economic growth has been one factor driving up prices.

"The markets could go back and forth on the Chinese announcement for a while"
Edward Meir, MF Global

Some analysts have said that fuel subsidies in China have helped to increase demand, and an increase in retail prices could dampen energy consumption.

A view that sparked Thursday's sell-off.

But an increasing number of analysts believe the effect could be the opposite, as refiners will be encouraged to increase production to take advantage of the better prices.

This would lead to improved fuel supply at the pumps, which would help to meet pent-up demand.

Chinese fuel prices have been frozen since an 11% rise in November. Refiners have been cutting output to minimise losses and this has led to rationing and queues at petrol stations.

Volatile market

"The markets could go back and forth on the Chinese announcement for a while," said Edward Meir at commodities brokerage MF Global.

With supply running short in many parts of the country, he added, "demand could move even higher, as much of the country's pent-up needs would be met".

Other factors behind the relentless rise in oil prices over the past few months include political problems in major oil producing countries, which have either reduced or threatened to reduce global supply.

Some analysts site this as another reason for Friday's spike.

"Traders don't want to be short going into the weekend, " said Gerard Rigby of Fuel First Consulting in Sydney.

"There are just too many hotspots around the world now. There is more potential for bullish news than bearish news," he said.

Venezuelan President Hugo Chavez has threatened to stop exports to European countries if the EU applies stringent new immigration laws.

His comments came as the country said it would not attend the emergency meeting on Sunday in Saudi Arabia between oil producers and consumers to discuss prices.

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