Oil slides as China raises interest rates

Oil fell Tuesday after China said it will raise interest rates again to help control inflation. Declining gasolene demand and a rare oil shipment from Libya also pulled crude lower later in the day.

Benchmark West Texas Intermediate crude for May delivery gave up 13 cents to settle at US$108.34 per barrel on the New York Mercantile Exchange.

In London, Brent crude added $1.23 to settle at US$121.89 per barrel on the ICE Futures exchange.

China hiked interest rates for the fourth time since October.

China raised key interest rates Tuesday for the fourth time since October as it tries to dampen high inflation.

The People's Bank of China, the country's central bank, said the quarter-percentage-point increase lifts the one-year lending rate to 6.31 per cent and the rate for one-year bank deposits to 3.25 per cent.

The series of rate hikes reflects concerns about overheating and excess liquidity in the Chinese economy that are driving up prices, especially of food.

China's consumer prices rose 4.9 per cent in February, driven by an 11 per cent jump in politically sensitive food costs that account for half or more of household spending among the millions of Chinese who have seen little benefit from three decades of economic reform.

Beijing is using gradual hikes in interest rates and bank reserve levels to stanch a flood of lending that helped China rebound quickly from the global financial crisis but now is fueling price rises.

Analysts say a bank lending boom is partly to blame for the overheating, prompting measures to curb the credit boom that is pushing up real estate and stock prices.

Higher interest rates could slow China's economy and shrink its appetite for oil. China trails only the US in oil consumption and should still drive world oil demand this year, though it might not increase consumption as much as previously expected, analysts said.

tough raising money

"With higher interest rates, it's tougher to raise money," PFGBest analyst Phil Flynn said. "Businesses won't be able to hire as much. People will buy (fewer) cars and they'll drive less."

The Energy Information Administration expects China to account for about 40 per cent of increased world demand this year, as it boosts consumption by another 600,000 barrels per day.

The United States will increase consumption by 130,000 barrels per day, according to the EIA.

US oil and gasoline consumption has fallen as prices rise. MasterCard SpendingPulse said Tuesday that retail gasoline demand slipped for the fifth straight week when compared with the same period last year. SpendingPulse said gasoline purchases fell 3.6 per cent to 64.3 million barrels for the week ended April 1.

MasterCard analyst Jason Gamel pointed out that demand has been dropping as gasolene prices surged 31.7 cents since the end of February.

A gallon of regular is 18.2 cents more than a month ago and 85.7 cents higher than last year.

It now costs more than US$4 per gallon in California, Alaska and Hawaii.

Energy traders are still concerned about unrest in North Africa and the Middle East, which supply about 27 per cent of the world's oil.

It could be months, even years, before Libya returns to the level of oil shipments it had before the uprising, experts said.

Libya supplies less than two per cent of world demand. Saudi Arabia and other OPEC countries are covering some of the shortage by boosting production. That will put pressure on world supplies, especially if demand increases as expected later this year.

In other Nymex trading for May contracts, heating oil added 1.36 cents to settle at US$3.1850 per gallon and natural gas lost 5.8 cents to settle at US$4.231 per 1,000 cubic feet.

- AP