Tuesday, May 6, 2008

Oil hits record $120.93 on fear of tight supply

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Oil futures rose to an all-time high near $121 a barrel Tuesday with new concerns about a threat to supply and a weaker dollar.

The surge in oil prices was also fueled by hopes that the U.S. economy will be spared a sharp downturn after the release of data Monday showing an unexpected expansion in the U.S. service sector in April, analysts said.

Light, sweet crude for June delivery rose to a record $120.93 a barrel in electronic trading on the New York Mercantile Exchange on Tuesday. The contract later retreated to $119.88 a barrel, down 9 cents from Monday's close.

Crude futures settled on Monday at $119.97 a barrel, up $3.65 from Friday's close.

"The bulls are in control of the market," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The economic report out of the U.S. yesterday on the service sector seems to suggest the economic slowdown may not be as deep as initially thought."



"The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility," Shum said.

The dollar weakened against the euro on Monday, attracting investors to oil and other commodities viewed as hedges against inflation. Also, a falling dollar makes oil less expensive to investors overseas. A series of U.S. Federal Reserve rate cuts starting last year weakened the dollar considerably against foreign currencies, and analysts blame the dollar's protracted decline for oil's sharp rise this spring.

Supply outages or potential threats to supply emerged in Iran and Nigeria over the weekend and from Iraq on Monday; events in all three nations have caused prices to spike many times in recent months.

In Iraq, Kurdish rebels warned they could launch suicide attacks against American interests to punish the U.S. for sharing intelligence with Turkey after Turkey bombed rebel bases in Iraq on Friday. In Nigeria, a Royal Dutch Shell PLC spokesman said attackers hit an oil facility belonging to Shell's joint venture in southern Nigeria and that some oil production has been shut down. And Iran's Supreme Leader Ayatollah Ali Khamenei said his country will not bend to international pressure and give up its nuclear program.

Energy investors grow concerned any time conflict breaks out or is threatened in the oil-rich Middle East. Years of unrest in Nigeria have cut off nearly a quarter of the major U.S. supplier's oil output.

Amid the occasional threats to crude supplies, global demand for oil continues to grow. The Chinese and Indian economies are growing by double digits, boosting global demand for oil.

In the U.S., where demand has been dampened over economic concerns, the prince for "gasoline at the pump is averaging 29.4 percent above last year's pace," noted Stephen Schork of the Schork Report. "Meanwhile, average diesel prices are up by 41.1 percent or $1.079 a gallon (3.8 liters)."

In other Nymex trading, heating oil futures were both down slightly at $3.3005 and $3.0455 a gallon. Natural gas futures slipped more than 3 pennies to $11.145 per 1,000 cubic feet.

Brent crude futures rose 52 cents to $118.53 a barrel on the ICE Futures exchange in London.

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