Oil smashes $135 in Asian trade


Oil smashed past $135 a barrel for the first time Thursday, continuing its astonishing rise following unexpected drops in US crude and gasoline stocks in a tight market, dealers said.

Large institutional investors continued to pile money into oil, which is giving better returns than investments in stocks and bonds, further heating up prices, they said.

The Commonwealth Bank of Australia said in a market commentary that the "oil price also benefited from further US dollar weakness."

In Asian morning trade, New York's main oil futures contract, light sweet crude for July delivery, briefly rose to a high of 135.04 dollars a barrel before easing to 134.30 dollars.

The benchmark futures contract had closed a whopping 4.10 dollars higher at a record 133.17 dollars on the New York Mercantile Exchange, and continued its upward spiral in after-hours electronic trade.

London's Brent crude contract for July was also busting records, rising to a high of 134.50 before pulling back to trade at 134.12 dollars, smashing its intraday peak of 133.34 dollars set a day earlier.

"Currently, market psychology is trumping fundamentals," said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.

"The psychology is that the oil market is tight. Even though there is no shortage, global oil demand continues to grow and supply growth is restrained," he added.

"Oil has performed better than equities and bonds. There is money looking for better returns and oil has offered better returns and continues to offer better returns."

The US Department of Energy's weekly snapshot of energy inventories, which unexpectedly showed declines, further galvanised the market.

The DoE report Wednesday showed US crude oil stocks fell in the week ended May 16, by 5.4 million barrels to 320.4 million barrels. Most analysts had expected a build of 300,000.

Gasoline inventories dropped by 800,000 barrels, to 209.4 million, confounding expectations of a gain of 250,000 barrels.

The news was particularly market-sensitive, coming days ahead of the US summer-holiday driving season that kicks off this weekend for the Memorial Day holiday on Monday.

Americans have already begun buying less gasoline as prices at the pump hit new highs. The change in driving habits is raising concerns about a slowdown in consumer spending, the main engine of the world's biggest economy.

Shum of Purvin and Gertz said the high oil prices could prompt some people to cut down on fuel consumption, but added that demand would still pick up seasonally.

The rapid surge in oil prices came as the US Federal Reserve slashed its 2008 growth forecast for the US economy, the world's biggest oil consumer.

The Fed on Wednesday slashed its forecasts to a range of 0.3 to 1.2 per cent, from its prior forecast of 1.3 to 2.0 per cent in January. The central bank cited higher oil prices as a key factor weighing on momentum.