By Janet McBride 41 minutes ago
LONDON (Reuters) - Oil thundered towards $88 a barrel on Tuesday, hitting a new record and extending a rally that has added eight dollars in a week on tight supplies, strong demand and tension in northern Iraq.
Oil is closing in on the inflation-adjusted high of $90.46 seen in 1980, the year after the Iranian revolution and at the start of the Iran-Iraq war. Prices this year have averaged $67.
At 7:08 a.m., U.S. crude was up $1.33 at $87.46, off a high of $87.97. London Brent was up $1.22 at $83.97.
Oil has set a series of records over the past three days.
Investors have cited rising tensions between Turkey and Kurdish separatists in northern Iraq, sturdy world energy demand growth, tight inventories in consumer nations heading into winter and unprecedented weakness in the U.S. dollar.
"There's a lot of risk there and that is being reflected in the price," said fund manager David Dugdale of MFC Global Investment Management.
"It is difficult to find any bearish factors now. There's the Iraq-Turkey issue, a weak dollar, and inventory levels for U.S. heating oil are much lower than a year ago," said Tetsu Emori, a fund manager at Japan's Astmax Futures Co. Ltd.
The Turkish cabinet asked parliament on Monday for permission to launch an attack on the separatists.
Iraqi oil exports via Turkey have been sporadic since 2003, although Turkey is also now a major conduit for Caspian oil exports to the Mediterranean.
But some analysts said the easing of a global credit crunch was a bigger factor driving oil.
Moves by the U.S. Federal Reserve to cut interest rates and add billions of dollars of temporary reserves to the banking system have added liquidity that is finding its way into oil, seen by some as a one-way bet.
FREIGHT TRAIN
"We suspect massive long-side commitment by sidelined money has had more to do with it," said Edward Meir of MF Global.
Oil has climbed from below $70 in mid-August and surged 10 percent surge since October 9. The rally has also been aided by fund buying as a hedge against a weaker dollar. Gold hit a 28-year high and platinum breached record levels.
Indonesia's OPEC governor said there was no fundamental justification for oil's spike towards $88.
"The market fundamentals are in balance. There is too much money coming into the market," Maizar Rahman told Reuters.
OPEC officials said they had heard no discussion within the organization about raising output beyond the 500,000 barrels per day agreed in September, which takes effect on November 1.
Oil prices have more than quadrupled since 2002 and climbed 43 percent since the start of 2007.
"Barring a massive selloff, the path of least resistance seems to be higher still, although like many others out there, we are hard-pressed to justify such high valuations," MF Global's Meir said.
"Still, we learned long -- and many dollars ago -- that it is best not to take on a speeding freight train."