Oil prices surpassed US$103 a barrel for the first time Friday as persistent weakness in the U.S. dollar and the prospect of lower interest rates attracted fresh money to the oil market.
Light, sweet crude for April delivery jumped to a new trading record of US$103.05 a barrel in electronic trading on the New York Mercantile Exchange before slipping back to US$102.02 a barrel, down 57 cents, by midday in Europe.
On Thursday, the contract jumped US$2.95 to settle at a record US$102.59 a barrel.
Prices were supported by comments Thursday from Federal Reserve Chairman Ben Bernanke, who said the American economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.
Investors chose to see the comments as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy.
"It seems that further interest rate cuts, additional dollar weakness and more investment buying will anchor oil to higher prices," energy risk management firm Cameron Hanover said in its daily report. "It can't go on forever, but it looks like it can go on for a while."
Lower U.S. interest rates tends to weaken the dollar, and crude futures offer a hedge against a falling dollar.
"Due to the weakening dollar and the rising fear of inflation, investors have put money into commodities, oil included," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.
"Commodities, as tangible assets, do not face as much inflationary threat as opposed to holding a currency," Shum said. "Even though the value of money is changing, the asset continues to have an intrinsic value."
In London, Brent crude futures fell 28 cents to US$100.62 a barrel on the ICE Futures exchange.
Shum warned that a price bubble was emerging in the crude futures market as investors ignored market fundamentals that have shown continuous increases in U.S. crude supply while several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy.
"We've seen seven straight weeks of builds in crude oil inventories. The oil market fundamentals are softening and yet we see record highs being set, day in and day out," Shum said.
Shum warned of the possibility of a sharp correction at some point, though unlikely in the near term.
"Right now, there's a lot of trading based on emotion _ emotions are high and that could keep crude oil at elevated levels, but the market faces the risk of a price collapse."
The Japanese government on Friday urged the oil cartel OPEC to increase output to help ease record prices.
"The high crude prices are gradually damaging the global economy. This will damage the economies of oil-producing countries," Minister of Economy, Trade and Industry Akira Amari said.
The Organization of Petroleum Exporting Countries holds its next policy meeting on March 5. It is likely to decide to keep current production levels unchanged, or even cut production, according to reported comments by OPEC President Chakib Khelil.
Khelil noted that oil inventories were growing, and that the recent rally in oil prices has been driven by the U.S. dollar's weakness and speculative trades amid geopolitical risks.
"Several OPEC ministers are just itching for a reason, any reason, to cut output. A number of OPEC countries have become as addicted to high prices as the West has become to their oil," Cameron Hanover's report said.
"The ministers may not be able to find any reason to cut production now, especially if oil prices keep rising. If they cannot, they will plan another meeting in five weeks and will cut output at the first hurdle."
Crude prices are within the range of inflation-adjusted highs set in early 1980. A US$38 barrel of oil then would be worth US$97 to US$104 or more today, depending on the how the adjustment is calculated. A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.
In other Nymex trading, heating oil retreated 1.06 cents to US$2.8350 a gallon (3.8 liters), while gasoline futures fell 2.02 cents to US$2.4755 a gallon. Natural gas futures were down 1.3 cents to US$9.430 per 1,000 cubic feet.
Associated Press writer Gillian Wong in Singapore contributed to this report.