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"[S]upply concerns, dollar weakness, inflation fears, and turmoil in equity markets" were factors cited by the Financial Times of London pushing the price of oil to another all-time high on Friday.[1] -- "Adam Sieminski of Deutsche Bank said there was a tug of war in oil markets based on two distinct views of how the marginal price of crude was set," Chris Floyd reported. -- "One view was that 'marginal cost of supply' should dominate and this might be near $75 to $100 a barrel. The other view was that prices were rising toward the level required to destroy demand, or to get it to slow dramatically, probably above $150 a barrel." -- The Financial Times's Lex observed laconically: "Human nature means that shocks are occasionally necessary to change behavior. These will be painful, but will ensure that a high oil price eventually self-corrects."[2] -- "Corn [also] reached a record today, and rubber advanced to a 28-year high," Bloomberg News observed in a survey of commodity prices.[3] ...

Oil prices extended their record breaking run on Friday after pushing above the $140 a barrel level for the first time in the previous session, driven higher by a cocktail of supply concerns, dollar weakness, inflation fears, and turmoil in equity markets.

NYMEX August West Texas Intermediate hit a hit a record $142.26 a barrel before easing back to trade $2 higher at $141.64. ICE August Brent hit a record $141.98 a barrel before easing back to trade $1.67 higher at $141.50.

Oil prices rose by more than $5 a barrel on Thursday after Libya threatened to cut its oil production and OPEC’s president warned that prices could surge as high as $170 a barrel this summer.

Shokri Ghanem, Libya’s top oil official, said the country was considering reducing oil production in response to a bill before the U.S. Congress that would empower Washington to sue OPEC members for cutting supplies.

“We are studying all the options,” Mr. Ghanem told Reuters. “There are threats from the Congress and they are taking OPEC to court, extending the jurisdiction of the U.S. outside the U.S.,” he said.

Earlier, Chakib Khelil, president of OPEC, said oil prices could rise as high as $170 a barrel before easing back by the end of the year.

Traders took the warnings as a green light for buying with further encouragement for buying interest provided by dollar weakness and weakness in equity markets.

In late April, Mr. Khelil warned that oil prices could reach $200 a barrel this year, but since then Saudi Arabia has promised to increase supplies to 9.7m barrels a day, the highest level in almost 30 years. At a conference last weekend, the kingdom said it planned to raise crude production capacity to 12.5m barrels a day by 2012 from 9.8m b/d currently.

“It is unlikely that global markets will see this additional crude in a hurry,” said Kona Haque, commodity strategist at Macquarie. “This is either because Saudi won’t be able to, due to delays and soaring project [cost] inflation, or won’t be willing to, due to the need to maintain reserves for future generations.”

Macquarie said that over the next five years, oil prices were likely to test the $200 a barrel level and were unlikely to sink below $100.

Adam Sieminski of Deutsche Bank said there was a tug of war in oil markets based on two distinct views of how the marginal price of crude was set.

One view was that “marginal cost of supply” should dominate and this might be near $75 to $100 a barrel. The other view was that prices were rising toward the level required to destroy demand, or to get it to slow dramatically, probably above $150 a barrel.

Mr. Sieminski noted that oil producers were becoming more accustomed to higher prices and Deutsche Bank’s review of the extremes in oil valuations suggested that prices might have to remain at elevated levels to curb demand growth.

“The oil market is in a state of confusion unable to believe that the forces that have driven prices higher over the past year, (namely OPEC production cuts, non-OPEC supply problems, strong economic growth in emerging markets, and a falling U.S. dollar) may be moving in reverse or at least not moving in the direction of even higher oil prices,” said Mr. Sieminski.

Oil’s strength inspired further gains for gold which rose to $920.10 a troy ounce from New York’s late quote of $912.60 on Thursday. Gold has seen renewed buying interest as the dollar retreated against the euro following the Federal Reserve’s statement on monetary policy on Wednesday which indicated that an imminent rise in U.S. interest rates was unlikely.

Peak oil or freak oil? The current oil shock, with prices closing in on a new record high of $142 today, has as much to do with bad luck as geology. And as usual with luck, man has largely made his own.

The central theme of this decade’s bull market in crude is little different from that experienced during previous oil shocks: a change in expectations about future supplies. In other words, many think we have enough oil today but might not tomorrow. A series of largely man-made disruptions has fed that fear. In countries such as Russia and Mexico, resource nationalism has stifled investment in supply. Violence in Nigeria and Iraq has shut down fields. The Energy Policy Research Foundation estimates the world’s lost actual output at up between 2.5 million and 4.5 million barrels per day. If available, that amount could double or almost triple the world’s effective spare capacity.

Whether the problems are below or above the ground, the result is the same: fewer barrels available. However, the distinction is important, if only because humans, even politicians, can alter their behavior. When oil prices are rising, producers have some incentive to keep markets tight. But eventually, expensive oil encourages conservation. Meanwhile, protectionism breeds inefficiency. Already, both Russia and Mexico are taking steps to reduce oil taxes or attract foreign companies, respectively, to address stagnant or falling output.

The same point extends to the demand side. In the U.S., for example, high oil prices prompt drivers to buy smaller, and more fuel-efficient cars. Meanwhile, even if Asia’s drivers are becoming richer, they will never reach America’s currently extraordinarily high per capita usage of oil -- it is not feasible for them to do so. Governments across Asia are already cutting increasingly expensive fuel price subsidies. Human nature means that shocks are occasionally necessary to change behavior. These will be painful, but will ensure that a high oil price eventually self-corrects.

OIL RISES TO $142 FOR THE FIRST TIME AS INVESTORS SPURN STOCKS
By Grant Smith

Crude oil rose to a record above $142 a barrel in New York and gold advanced as falling stock markets spurred investment in commodities.

Oil has gained 47 percent this year, headed for the biggest six-month gain since 1999, as recession concerns have pushed the MSCI World Index of global equity markets down 12 percent. Oil may rise further if the European Central Bank boosts rates on July 3, further weakening the U.S. dollar, traders said.

"It's a combination of equities underperforming and pricing in some further risk on what the ECB will do next week," said Oliver Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. Trading volumes are so low that price movements are being exaggerated, he said.

Crude oil for August delivery rose as much as $2.62 a barrel, or 1.9 percent, to $142.26 in electronic trading on the New York Mercantile Exchange. It was at $141.95 at 12:31 p.m. London time.

Yesterday, the contract rose $5.09, or 3.8 percent, to $139.64 a barrel, a record settlement price, as Libya threatened to cut output and OPEC's president said prices may reach between $150 and $170 within months.

Many of the companies most reliant on oil, such as airlines and refiners are having to buy futures now after waiting earlier in the year in the expectation of lower prices, said Gerrit Zambo, an oil trader for BayernLB in Munich.

"In the first months of this year consumers were waiting, but now they've reached a painful limit and have no choice but to hedge," Zambo said. "The costs put so much pressure on the companies and they have no choice."

The doubling of prices in the last year is "a blessing in disguise" for Asian economies and currencies, according to Stephen Jen, chief currency strategist at Morgan Stanley in London. High transport costs will force the region to become less reliant on exports and more on local demand, Jen said in a report yesterday.

Gasoline for July delivery rose 0.5 cent to $3.528 a gallon in New York as of 12:00 p.m. London time. Futures reached a record $3.5762 a gallon on June 16.

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials rose 2.42 percent to a record 1665.69 yesterday. Corn reached a record today, and rubber advanced to a 28-year high.

Gold headed for a second weekly gain as the dollar weakened, boosting the appeal of the metal as a hedge against inflation and an alternative investment to the U.S. currency. Gold for immediate delivery rose $5.17, or 0.6 percent, to $922.47 an ounce as of 11:39 a.m. in London.

The MSCI World Index lost 1.8 percent to 1,403.36 at 10:37 a.m. in London as 8 of the 10 industry groups retreated.

ECB President Jean-Claude Trichet reiterated in a June 25 speech that policy makers may increase the main refinancing rate by a quarter-percentage point next month to contain inflation.

The U.S. dollar was 0.2 percent lower at $1.5757 against the euro, and 0.6 percent weaker versus the Japanese currency at 106.33 per yen at 11:37 a.m. London time.

Brent crude oil rose as much as $2.30, or 1.6 percent, to a record $142.13 on London's ICE Futures Europe exchange. The contract traded at $141.74 a barrel at 12:31 p.m.

--To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net