China (Platts) -- August 4 - 8, 2008

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Oil futures prices fell by 8% last week while a major oil pipeline blazed in Turkey, a tropical storm moved through in the oil and gas producing parts of the Gulf of Mexico, Iran continued to threaten to block the Straits of Hormuz, and massive production problems haunted Nigeria.

The oil market is bearish indeed, and it looks as though it will take a singularly massive event to change the mood.

For most of the past four years, any one of those events could have sent prices rallying by 8% or more.

For the market to shake off all three in one efforts shows the truth behind what most analysts have been repeating as mantra for the duration of the rally.

This has been a demand-led rally in oil prices, not a supply-led rally.

And the reality is that demand is falling in the US, growth is softening in China, and the oil market can handle a few disruptions like those seen last week.

Light, sweet crude futures fell by 8% over the week on the New York Mercantile Exchange to settle Friday at $115.20 per barrel.

On ICE Futures in London, they settled at $113.33, down almost 9%.

Middle distillates lead collapse

Heating oil and gasoil derivatives fell even more quickly, losing more than 9% over the week as a whole.

It is fitting that the middle distillates led the fall, since it was a prolonged surge in demand for middle distillates that took headline oil futures to almost $150 only a month ago.

The value of middle distillates derivatives was crushed during trading at the end of Friday in Asia, as gasoil and jet derivatives slumped by more than $2.50, or around 2%, in one day.

The fall smartly outpaced relative movements in crude oil futures, which also fell but at a much slower pace.

The movement means that Asia crack spreads, which measure the relative value of refined products against the value of the crudes that they are made from, continued to retreat.

Several Asia-based traders surveyed after the market closed expressed surprise at the rate of decline.

Fears that a giant new refinery being built in western India will send the middle distillates markets into retreat this winter seem to be playing on the minds of traders, according to some sources.

The impact of that refinery will be felt very soon. India's petroleum and petrochemical major Reliance Industries is widely expected to carry out a trial run of its new refinery, at Jamnagar in western Gujarat state, in August, and to start regular fuel output by late September or early October.

The 580,000 barrels per day refinery will be next to RIL's existing 680,000 barrels per day refinery already on site.

It is expected to inject a massive new supply of gasoil and gasoline into export markets, making a repeat of this year's historic shortages of middle distillates in Europe, China and South America considerably less likely.

Heating oil in the US closed the week at $3.128 per gallon (down 9%) and gasoil futures in Europe ended at $1,019.75 per metric ton (down 9.5%).

Updated: August 11, 2008