Weak dollar and supply worries push oil to fresh high of $128

· Cost of crude has shot up sixfold in past eight years
· Bush seeks Saudi Arabian help to curb rising prices

* Ashley Seager
* The Guardian,
* Saturday May 17 2008
* Article history

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This article appeared in the Guardian on Saturday May 17 2008 on p39 of the Financial section. It was last updated at 00:05 on May 17 2008.

World oil prices jumped to a fresh record of almost $128 a barrel yesterday on the back of a weaker dollar, fears over a shortage of diesel and a bullish price prediction from Goldman Sachs.

Goldman, which for some years has predicted that oil prices would rise strongly, raised its forecast for oil prices to an average of $141 a barrel in the second half of the year, up from $107.

"Tight supply conditions continue to be the primary catalyst for higher crude prices. The near-term outlook for oil prices continues to be bullish," it said.

US light crude futures climbed by more than $3 barrel to a peak of $127.82 while Brent rose a similar amount to $125.79.

Chinese demand for imported diesel is expected to rise sharply in June after this week's earthquake disrupted gas supplies to major cities and as companies build stockpiles ahead of the summer Olympics.

Robert Laughlin at MF Global said: "People are looking at diesel. The situation is worse since the earthquake on Monday in China. Demand is robust as there are so many recovery processes going on."

Oil prices are also being pushed up by the long-running fall in the value of the dollar, in which crude is priced. The dollar continued to fall today after weak industrial output data on Thursday. Investors have been drawn to the oil markets as a hedge against the falling greenback.

Oil prices are up more than a quarter so far this year and more than sixfold in the past eight years and has fuelled the debate about whether there is enough oil in the ground to meet the growing demand.

President George Bush landed in Saudi Arabia yesterday to renew his appeal to the world's biggest producer for help to tame record oil prices although the Saudis blame speculators rather than fundamentals for the high oil price.

Gold prices also benefited from the record oil prices and falling dollar, rising to just under $904.30, although that is still well below March's record high of $1,030 an ounce.

Shares in Europe and Asia rose to their highest in four months earlier in the day after strong figures on Japanese economic growth for the first quarter of the year.

The FTSE-100 index of leading shares closed up 53 points at 6,304, its highest since early January.

As the London market closed, the Dow Jones was down about 83 points at 12,937 after a mixed bag of economic data which showed that construction starts on new US homes rose unexpectedly strongly last month but that consumer confidence tumbled to its lowest since 1980.

Building starts in April ran at a 1.03m-unit annual rate, up 8.2% from a revised 954,000-unit rate in March, while permits gained 4.9% to 978,000 a year from a revised 932,000 in March, the best showing for five months.

The construction sector in the US has shed hundreds of thousands of jobs in response to massive foreclosures by homeowners in some parts of the country and huge stocks of unsold homes resulting from the sub-prime mortgage crisis.

Prices are down sharply and most experts think they are likely to fall considerably further.

Economists warned against reading too much into the numbers, however. The housing starts improvement was all down to good numbers from the flat and condominium sector, while starts of single-family homes fell to their lowest level since 1991.

Zach Pandl, an economist at Lehman Brothers in New York, said: "The headline number is stronger than expected due to strength in the multi-family sector which tends to be volatile so I would discount the headline number."

And the housing numbers were quickly followed by the University of Michigan's monthly snapshot of consumer confidence, which fell to a 28-year low, knocking market sentiment back again.