Oil approaches $126 per barrel ahead of US driving season

 The Associated Press

Oil prices neared $126 per barrel today on the eve of the U.S. driving season as a weakening U.S. dollar drove investors to snap up commodities.

Light, sweet crude for June delivery rose to a record $125.98 a barrel in electronic trading on the New York Mercantile Exchange near midday before falling back to $125.75, up $2.06 on the day, by the afternoon in Europe.

On Thursday, the contract rose to a record close of $123.69 a barrel.

In London, Brent crude contracts also hit record highs before slipping and traded up $1.96 on the day at $124.80 a barrel on the ICE Futures exchange. Earlier today, Brent had reached $125.68 before falling back.

Today, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government, heightening chances that the U.S. could impose sanctions on one of its biggest oil suppliers as a state sponsor of terror.

Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas.

``If we put on sanctions I'm sure Chavez would threaten to cut off our oil supply,'' said Phil Flynn, an analyst at Alaron Trading Corp. ``Obviously that would have a major impact on oil prices.''

Even if Chavez cut oil shipments to the U.S., Venezuela would still pump and sell oil, Flynn said. And much of that oil would come to the U.S. via middle men, who would buy it from Venezuela and resell it to the U.S. But that new layer in the supply chain would bump up costs, he said.

The European Central Bank also indicated that it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar.

By the afternoon in Europe, the euro stood at $1.5444 compared to $1.5404 in late trading Thursday night in New York. The dollar was also weaker today against the British pound and the Japanese yen.

Investors view commodities such as oil as a hedge against inflation, and some analysts think the dollar's protracted decline is the main reason behind oil prices doubling from a year ago. Also, a weaker dollar makes oil cheaper to investors overseas.

A prediction by analysts at Goldman Sachs seeing oil rising as high as $150 to $200 a barrel within two years also has boosted prices.

Analysts, however, struggled to explain the continued rise of oil futures after a larger-than-expected buildup of crude oil stocks reported Wednesday in the United States.

``Crude oil is currently held up in a tug-of-war between the Goldman reality and the physical reality,'' said Olivier Jakob of Switzerland's Petromatrix in a research note, adding that the investment bank's prediction made for ``a great story to support pension funds piling more into commodities.''

Mark Pervan, senior commodity strategist at ANZ Bank in Melbourne, Australia, said it may be a combination of continued wariness over potential supply disruptions as well as prospects for a strengthening in crude demand heading into the U.S. summer driving season.

``U.S. gasoline stocks have certainly dropped quite sharply over the last month,'' he said. ``What'll happen in the near term is that we may likely see an uptick in U.S. refining capacity to rebuild gasoline stocks and we may see a short-term build in crude demand as a result.''

Prices may also be getting a boost from comments Thursday by the OPEC secretary general.

Abdalla Salem El-Badri on Thursday said again that oil supplies are adequate, and that several member countries are having a hard time finding buyers for their additional supplies.

In other Nymex trading, June gasoline futures rose 3.82 cents to $3.1760 a gallon, while heating oil futures rose 8.22 cents to $3.5920 a gallon. Natural gas futures rose 13.5 cents to $11.398 per 1,000 cubic feet.

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