Oil near $125 a barrel, eyes dollar

Enlarge Photo A view of an oil refinery off the coast of Singapore is seen in this...

Thu, May 15 05:02 PM

By Jane Merriman

LONDON (Reuters) - Oil rose on Thursday, boosted partly by weakness in the U.S. dollar after strong economic growth data from France and Germany pushed the euro higher.

U.S. crude was up 86 cents a barrel at $125.08 by 1102 GMT. U.S. crude oil options for June expire later on Thursday.

London Brent , whose nearby June contract expires later on Thursday, was up 87 cents at $122.73.

Oil had retreated on Wednesday from a record high near $127 a barrel reached in the previous session, pressured by U.S. government data that showed a bigger-than-expected rise last week in distillate stocks.

The data eased concern about a tightening distillates market that has sent heating oil futures to record highs this week.

Strength in the euro against the dollar helped prices recover. Oil and the U.S. currency have become closely intertwined in recent months as investors have turned to oil as a hedge against the falling dollar.

But strong emerging market demand and supply constraints are the main forces behind oil doubling in price in the past year.

The commodities rally is generally based on a lack of supply and increasing demand from developing countries, said Angus McPhail, of UK investment manager Alliance Trust.

"OPEC is holding back," he said, referring to the Organization of the Petroleum Exporting Countries output controls, while oil companies are slow to bring on more oil. "It's not an easy, quick fix."

OPEC has rebuffed calls from consumer countries to increase output, and has pointed to the weak dollar and speculative inflows into commodities as reasons for high prices.

Oil's rise has more to do with financial market volatility than fundamentals, Saudi Oil Minister Ali al-Naimi said on Thursday, according to the text of a speech obtained by Reuters.

"The short-term oil price gyrations seen in recent years are more closely tied to the internal logic of the financial markets than to underlying supply/demand fundamentals," Naimi said in a speech due to be delivered in Seoul.

Investment bank UBS raised its projection for oil prices on Thursday. The bank's oil economist Jan Stuart raised its 2008 U.S. crude forecast to $115 a barrel.

The forecast for this year is the most bullish among banks polled by Reuters. UBS previously was the most bearish forecaster in the poll last updated on April 25.

(Additional reporting by Maryelle Demongeot in Singapore and Alex Lawler in London)

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