Oil prices drop after China says it will raise fuel prices

Oil prices dropped sharply on Thursday after China said it will raise fuel prices, a move that could dampen the booming Asian nation's oil consumption.

Light, sweet crude for July delivery fell USD4.75 to settle at USD131.93 a barrel on the New York Mercantile Exchange.

In London, August Brent crude futures fell USD4.44 to settle at USD132 a barrel on the ICE Futures Exchange.

China disclosed that it will raise prices for gasoline and diesel fuel 16 per cent and 18 per cent, respectively, beginning tomorrow.

Growing Chinese demand for oil has underpinned the multiyear rally in oil prices, but higher prices could crimp that demand. Concerns about spiking Chinese demand for diesel due to cleanup operations in the aftermath of last month's earthquake contributed to oil's recent run-up.

"This could change the psychology of the market completely," said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.Com.

Lower demand in China "would be a major factor in driving prices down," said Phil Flynn, an analyst at Alaron Trading Corp. In Chicago.

Prices also were given a downward push by the Iraqi Oil Ministry's announcement that it is close to signing oil service deals with several major Western oil companies in an effort to boost its crude output.

The service agreements would be the first major Iraqi contracts with big Western companies since the 2003 US-led invasion. In March, Iraq's Cabinet said the ministry could sign deals worth around USD500 million each. Baghdad hopes to boost output by 600,000 barrels a day over its current 2.