Nymex

China's plans for the Olympics and its relief efforts in the wake of the earthquake have helped push oil to its recent record highs and could contribute to further spikes this year, analysts say.
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The country's lately soaring demand for diesel fuel, in particular, is putting pressure on crude-oil prices, which this week rose as high as $133.17 before settling Thursday at $130.81 per barrel at the New York Mercantile Exchange. Year to date, crude is up 36%. The so-called light, sweet crude traded on Nymex is a high-quality grade that is sought after to make diesel.

Prices of ultralow-sulfur diesel at New York harbor have risen 48.3% so far this year, and just this month they are up 22.5%, according to Platts.

"The fundamental [issue] now is tight supply of middle-distillates, mainly coming from China," said Ken Hasegawa, manager of commodity derivatives sales at broker Newedge Japan Inc., referring to a mix of petroleum products that includes diesel, jet fuel and heating oil. "Every refiner in Japan is trying to sell diesel to China."

China's diesel demand is by no means the only culprit behind oil's rise. Among other factors are energy demands from other emerging markets, geopolitical tensions, a tight supply by an underinvested oil industry and an influx of speculative funds.

Still, analysts say the Olympics and the earthquake are playing their part. China has been stockpiling diesel and other oil products to smooth out supply hiccups during the August games in Beijing. Also, using diesel instead of coal could help lower pollution levels during the Games.

Meanwhile, the devastating earthquake that hit southwest China on May 12 hurt refining capacity and left a dire need for back-up generators in the affected area. The country's large oil companies have pledged to send hundreds of thousands of tons of diesel, gasoline and kerosene into the area, to fuel power generators, rescue vehicles and helicopters, according to government media. Meanwhile, thousands of diesel-fueled generators have been donated by machinery makers to help restore power there.

Diesel is mainly used in transportation and power generation. Middle distillates accounted for 36% of the world's total petroleum consumption in 2006, the year of the most recent data available from the BP Statistical Yearbook of World Energy.

Last month, diesel imports in China surged by more than eightfold from a year earlier, as domestic refiners have been unable to keep up with demand. To increase the flow of diesel fuels into the country, the government in November cut tariffs on diesel imports from 6% to 2%, and further halved them to 1% in January. In addition, state-run oil companies that import oil products were granted a rebate on another tax, the 17% value-added tax, which is slated to last through June.

Meanwhile, gas stations in several provinces have limited sales of diesel to drivers, as wholesale prices have come to exceed the retail prices they are permitted to charge.