reason why oil is falling , page-6

Oil Rises to Record on Weakening Dollar, Morgan Stanley Outlook

By Robert Tuttle

June 6 (Bloomberg) -- Crude oil surged more than $10 a barrel to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.

Oil may ``spike'' because ``Asia is taking an unprecedented share'' of Middle East exports, Morgan Stanley analyst Ole Slorer wrote. The dollar weakened against the euro after unemployment rose to 5.5 percent, signaling the Federal Reserve may be reluctant to increase interest rates. Oil also rose after an Israeli minister said an attack on Iran may be necessary.

Oil is ``being used as a hedge by speculative buyers for the weakened dollar,'' said Gary Adams, vice chairman of oil and gas consulting at Deloitte & Touche LLP in Houston. ``We are seeing that the price will continue to go up as investors look for alternatives.''

Crude oil for July delivery rose $10.75, or 8.4 percent, to settle at $138.54 a barrel at 2:48 p.m. on the New York Mercantile Exchange. Today's increase was the biggest gain in dollar terms ever and the largest on a percentage basis since June 1996. Oil rose $11.33 to an all-time high $139.12 a barrel during trading.

Today's rise was bigger than the entire price of oil on Dec. 10, 1998, when crude traded at $10.72 a barrel. Oil has more than doubled in the past year.

``This is all just a plain old stampede,'' Tim Evans, an energy analyst for Citi Futures Perspective in New York, said in an e-mail. ``The sellers have basically pulled their orders so it doesn't take much incremental buying to push prices higher.''

Record Gasoline

Gasoline for July delivery rose 21.35 cents, or 6.4 percent, to $3.548 a gallon in New York after reaching a record $3.565. Regular gasoline at the pump fell 0.3 cent to an average $3.986 a gallon after touching a record yesterday, AAA, the biggest U.S. motoring organization, said today on its Web site.

Shaul Mofaz, Israel's transportation minister and a contender for the post of prime minister, told the Yediot Ahronot daily newspaper that Israel will have to attack Iran if it doesn't abandon its nuclear-development program.

``The Iranian risk premium, which had left the market for some time, is likely to return and hover over the market in the next few weeks,'' said Antoine Halff, head of energy research at Newedge USA LLC in New York. ``The knee-jerk reaction to the comments by Mofaz will wear off quickly because Israel would not broadcast its intention in this fashion.''

Brent crude oil for July settlement rose $10.15, or 8 percent, to $137.69 a barrel on London's ICE Futures Europe exchange, a record close, after reaching an all-time high of $138.12 a barrel.

With Asia taking an ``unprecedented'' share of Middle East oil, U.S. benchmark West Texas Intermediate crude oil may reach $150 a barrel by July 4, Morgan Stanley's Slorer said in his report.

Oil Forecast

BNP Paribas SA, France's biggest bank, boosted its 2008 oil outlook by 19 percent to $124 on climbing Asian demand for diesel fuel and kerosene. Last month, Goldman Sachs Group Inc. raised its New York crude-oil price forecast for the second half of this year by 32 percent.

The market ``is underpinned by demand, which is totally different than 1973 and 1979'' when supply cuts caused prices to surge, said Ray Carbone, president of Paramount Options Inc. in New York. Oil's rise is linked to ``supply and demand. Nobody wants to admit it. Too bad.''

A decline in oil prices earlier in the week came after Congress held hearings on possible energy price manipulation, and billionaire investor George Soros said an oil price ``bubble'' is working with fundamentals in the market that may lead to a recession.

Prices rose yesterday after European Central Bank President Jean-Claude Trichet's comment that the bank may raise interest rates next month caused the dollar to fall against the euro.

Weaker Dollar

Oil has surged to records this year partly because investors have turned to commodities as a hedge against the falling dollar.

The dollar weakened further today after the Labor Department said the U.S. jobless rate increased by half a point to 5.5 percent, the biggest increase since 1986 and higher than every forecast in a Bloomberg News survey.

Rising unemployment ``is going to lead to a drop in the dollar and higher commodity prices,'' said Phil Flynn, a commodities trader for Chicago-based Alaron Trading. The Fed will be ``less aggressive in raising interest rates.''

The dollar decreased 1 percent to $1.575 per euro at 1:52 p.m. in New York, from $1.5593 yesterday.

Chevron in Nigeria

Workers at Chevron Corp. in Nigeria may strike, a union official said. Chevron has yet to respond to worker demands that the head of the Nigerian unit be replaced, said Ethelbert Uka, treasurer of the Petroleum and Natural Gas Senior Staff Association of Nigeria. Daily production of about 450,000 barrels of crude oil may be threatened, the Lagos-based newspaper Vanguard reported earlier.

A Chevron spokesman said the company is trying to open negotiations with the workers.

Nymex trading in crude oil, heating oil and gasoline on the Globex electronic system was ``briefly halted'' and resumed around 1:15 p.m. New York time because heating oil reached its limit move for the session, said Brenda Guzman, a spokeswoman for the exchange.

The limits, which govern maximum price moves, up or down, were doubled for the remainder of the electronic session, she said. Crude oil's limit rose to $20, natural gas to $6 and heating oil and gasoline rose to 50 cents