Oil's Broken Record, Surges Above $126

Traders fear that a fight with Venezuela could stop the flow of oil.

May 9, 2008— -- NEW YORK (AP) -- Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.

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"If we put on sanctions, I'm sure Chavez would threaten to cut off our oil supply," said Phil Flynn, an analyst at Alaron Trading Corp. "Obviously that would have a major impact on oil prices."

Light, sweet crude for June delivery vaulted to a new record of $126.20 on the New York Mercantile Exchange before retreating to settle up $2.27 at a record $125.96.

Oil prices also were boosted Friday by the dollar, which declined against the euro. The European Central Bank said it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar. Investors often buy commodities such as oil as a hedge against inflation when the greenback falls. A weaker dollar also makes oil less expensive to overseas investors.

Many analysts believe the dollar's protracted decline has much to do with the doubling in oil prices since this time last year. Another school of thought thinks tight global supplies of oil, driven by growing demand in countries such as China, Brazil and India, is the primary factor driving oil higher.

In other Nymex trading Friday, June gasoline futures rose 6.34 cents to settle at a record $3.2012 a gallon after rising to its own record of $3.2038. Heating oil for June delivery rose 12.62 cents to settle at $3.636 on the Nymex after earlier setting a trading record of $3.6524.