Supply Concerns Send Oil Prices Soaring

NEW YORK--Oil futures shot to nearly $108 a barrel Thursday as concerns about Iraqi oil output stole investors' attention from the dollar, which stabilized against the euro.

Retail gas prices, meanwhile, inched up overnight while diesel prices slipped.

The bombing of a key Iraqi oil pipeline Thursday morning appeared to cut oil exports from the southern oil city of Basra, despite oil officials' statements to the contrary. Dow Jones Newswires reported that exports from southern Iraqi terminals have been cut to about 1.2 million barrels a day from a normal rate of 1.56 million barrels a day.

"We're going to be getting less oil because of the explosion," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.

For traders, the big factor is that Iraqi oil supplies were cut by a deliberate act of terrorism, Cordier said. That raises the prospect of more attacks, and less oil.

Light, sweet crude for May delivery rose 90 cents to $106.80 a barrel on the New York Mercantile Exchange after earlier rising as high as $107.70.

The news from Iraq added to supply concerns stoked Wednesday when the government reported that domestic crude oil inventories were mostly unchanged last week, while fuel supplies fell more than expected.

The supply concerns temporarily drew investors' attention from the dollar, which rose slightly against the euro, reversing a trend that sent oil futures surging nearly $5 on Wednesday. A stronger dollar makes hard assets such as energy commodities less attractive as a hedge against inflation than when the greenback is falling. Exacerbating the impact of foreign exchange moves, oil futures are priced in dollars, making them more expensive to investors overseas when the greenback rises.

Despite Thursday's strength, analysts expect the dollar to soon resume its decline against foreign currencies. The Federal Reserve is expected to cut interest rates several more times this year, and lower rates tend to weaken the dollar.

"I think crude oil is easily going to be testing $120 (in coming weeks)," Cordier said. Crude futures rose to a trading record of $111.80 earlier last week before retreating as the dollar strengthened.

At the pump, meanwhile, gas prices rose 0.6 cent Thursday to a national average of $3.267 a gallon, according to AAA and the Oil Price Information Service. Diesel prices slid 0.5 cent to a national average of $4.022 a gallon.

Both fuels have followed oil's recent surge higher, and remain near recent records. High gas prices are pressuring consumers already buckling under the effects of high food prices, falling home values and tight credit markets.

The Energy Department expects gas prices to peak near $3.50 this spring as suppliers stock up in advance of peak summer driving season. Many analysts think prices will rise even higher than that.

In other Nymex trading Thursday, April heating oil futures rose by 5.64 cents to $3.1002 a gallon, while April gasoline futures slid by 4.41 cents to $2.6988 a gallon.

April natural gas futures fell by 8.7 cents to $9.485 per 1,000 cubic feet. The Energy Department, in its weekly inventory report, said natural gas supplies fell last week by 36 billion cubic feet, less than analysts surveyed by Dow Jones Newswires had expected.

In London, Brent crude gained 41 cents to $104.40 a barrel on the ICE Futures exchange.