Oil prices set new highs above US$110 as dollar weakens against euro, yen

Oil prices on Thursday rose to new trading highs above US$110 a barrel, driven by the further weakening of the dollar.

Light, sweet crude for April delivery was down 26 cents to US$109.66 in electronic trading on the New York Mercantile Exchange by the afternoon in Europe, after setting a new high of US$110.70 earlier in the session. On Wednesday, it set a record trading high of US$110.20 a barrel before closing at US$109.92.

In London, Brent crude futures rose 22 cents to US$106.49 a barrel on the ICE Futures exchange.

Many analysts believe the dollar's decline is the reason crude futures have surged to new records in 11 of the past 12 sessions, despite the fact that crude supplies have risen 10.2 percent since early January.

The euro has risen as high as $1.5625 in European trading _ also a new record _ before falling back to $1.5592.

In Asia, the dollar briefly slumped to 99.75 yen, a 12-year low, before creeping back up to 100.27 yen, amid concerns about the flagging U.S. economy.

"The dollar will remain the dominant factor until the Fed meeting next Tuesday but oil will also have to balance with equities under the pressure of more credit hedge funds going bellyup," said Olivier Jakob of Petromatrix in Switzerand, referring to the U.S. Federal Reserve.

The Amsterdam-listed fund Carlyle Capital Corp. was near liquidation after suffering huge losses in its portfolio of residential-mortgage-backed bonds.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak.

"Oil and other commodities have an intrinsic value so that to the extent that the U.S. dollar depreciates, (oil) becomes relatively cheaper in terms of other currencies, such as the euro," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "So you get an adjustment to compensate for that effect."

Oil prices initially fell Wednesday in New York trading after the U.S. Energy Department's Energy Information Administration, or EIA, said crude supplies rose 6.2 million barrels last week, more than three times the 1.6 million barrels forecast by analysts surveyed by Dow Jones Newswires. But buyers quickly returned to the market.

"We did see oil prices take a bit of a hit when the EIA data was released ... but obviously that dent was only temporary," Moore said. "Subsequently, oil prices went up higher again, and I think the weakness of the U.S. dollar was a key part of that."

The EIA also reported that gasoline supplies rose 1.7 million barrels last week, well above the expected 300,000 barrel increase, and distillate supplies dropped 1.2 million barrels, less than the expected 2 million barrel decline.

It was the eighth increase in crude supplies in nine weeks, putting oil inventories back on a growth track after a one-week decline. Meanwhile, forecasters including the Energy Department, the International Energy Agency and OPEC have consistently reduced their demand growth predictions for this year.

Wednesday's EIA report offered more evidence demand is falling: Gasoline consumption fell 0.7 percent last week compared to the same week last year. Normally, gasoline consumption grows about 1.5 percent year-over-year, just to keep pace with population growth.

Many analysts argue that current oil prices can't be justified by the market's underlying supply and demand fundamentals. Yet evidence of weak demand amid growing supplies has not stopped oil prices from rising in the past, particularly when the dollar is falling.

"Some investors are apparently viewing oil and other commodities as providing something of a hedge against U.S. dollar weakness and possibly inflation concerns as well," Moore said.

In other Nymex trading, heating oil futures gained 1.63 cents to US$3.0407 a gallon (3.8 liters) while gasoline prices were down 3.36 cents to US$2.6950 a gallon. Natural gas futures added 2.4 cents to US$10.035 per 1,000 cubic feet.

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Associated Press writer Gillian Wong in Singapore contributed to this report.