Oil rebounds after fall on China fuel price hike

By Santosh Menon

LONDON (Reuters) - Oil rose by almost $3 a barrel on Friday on a view now gaining ground that a surprise fuel price increase by China may actually boost rather than curtail demand for fuel in the world's second-largest oil consumer.

Oil plunged nearly $5 in the previous session after China raised pump gasoline and diesel 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.

U.S. July crude CLc1, which expires on Friday, rose $2.68 to $134.61 a barrel by 1:14 p.m. after slipping earlier in the day. London Brent LCOc1 was $2.76 up at $134.76.

Initial forecasts suggested the Chinese move 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. ID:nSP280059

"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 this week.