Oil Rises to Record Above $127 on Speculation China to Buy Fuel

Oil Rises to Record Above $127 on Speculation China to Buy Fuel

May 16 (Bloomberg) -- Crude oil rose to a record above $127 on speculation China will need to increase diesel purchases for its power plants, straining limited supplies.

Oil-product traders may increase diesel fuel imports to run generators after State Grid Corp. of China said 0.5 percent of China's total power capacity remains shut after an earthquake on May 12. Goldman Sachs Group Inc. raised its crude-oil price forecast for the second half of this year to $141 a barrel, from $107, citing supply constraints.

``You'll probably see some effect from the earthquake as they'll need energy to rebuild the parts that were destroyed,'' said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. ``There's also a lot of political risk, as we've seen with the production shut-in in Nigeria.''

Crude oil for June delivery rose as much as $3.17, or 2.6 percent, to $127.29 a barrel in electronic trading on the New York Mercantile Exchange. It was at $126.22 a barrel at 1:03 p.m. London time.

U.S. President George W. Bush will ask Saudi Arabia to increase oil production to help lower prices during a visit to Riyadh this weekend, White House spokeswoman Dana Perino told reporters traveling on Air Force One.

About 500,000 barrels a day will remain shut in by militant attacks in Nigeria for the ``foreseeable future,'' the International Energy Agency said on May 13.

A gasoline pipeline explosion that killed about 100 people in Nigeria yesterday prompted concerns of further supply disruption. The fire was caused accidentally during construction work, according to Nigeria's Civil Defense Corps.

Diesel Shortage

``The main driver for the oil market is still distillates,'' said Tetsu Emori, fund manager at Astmax Ltd. in Tokyo. The damage ``is quite unbelievable. Generators will be necessary to produce electricity and in that case diesel should be a very important material.''

Supplies of distillate fuels, including diesel and jet fuel, in developed countries fell 6.7 percent to 477.6 million barrels in March from a year earlier, the International Energy Agency said May 13. U.S. inventories in the week ended May 9 were 2 percent lower than their five-year average, according to data from Barclays Capital.

PetroChina Buys

PetroChina International Co., the trading unit of PetroChina Co., the country's biggest oil producer, has already purchased 400,000 tons, or 2.9 million barrels, of diesel for June. That's in addition to the 200,000 tons that China International United Petroleum & Chemicals Corp., the nation's largest trader, bought for the month.

Refiners in the U.S. are limited in their ability to produce large amounts of distillates, including heating oil and diesel, because their units are designed to produce higher amounts of gasoline.

The profit margin, or crack spread, for making a barrel of oil into one of heating oil surged to $29.554 a barrel on May 13, the highest since at least 1989, according to futures prices. It is at $28.73 a barrel today. The spread for gasoline is 75 percent below a year earlier.

BLOOMBERG