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Oil rises near $127 despite dollar gains

Oil rose, extending last week's climb that saw prices jump to a record high near $128 a barrel, as concerns over tight fuel supplies overshadowed gains in the US dollar.

US light crude for June delivery rose 52 cents to $126.66 a barrel.

It closed up $2.17 at $126.29 a barrel on Friday after touching a peak of $127.82 earlier in the day on a bullish price forecast from investment bank Goldman Sachs.

London Brent crude rose 41 cents to $125.54.

“The market still has a bullish leaning because of a weak dollar and fuel supply concerns,” said Sydney-based David Moore, a commodity analyst at the Commonwealth Bank of Australia.

“As for OPEC, the market has taken the view that it is reluctant to raise production and is not expecting a sudden increase in output over and above what Saudi Arabia has indicated.”

Saudi Arabia has boosted oil output by 300,000 barrels per day to meet demand and compensate for other producers' lower output, Saudi Oil Minister Ali al-Naimi said on Friday.

While OPEC's smallest producer, Ecuador, said last week that members should consider raising output to stem the oil rally, other larger OPEC members Iran and Qatar said over the weekend that there was no need for an emergency OPEC meeting before September.

Iran, the world's fourth largest crude exporter, on Saturday rejected any idea of OPEC raising production, saying it would fail to ease record prices as the market was already “saturated” with oil.

Diesel has also taken centre stage in the world energy crunch as tight power supplies in China, South Africa, Chile, Argentina and parts of the Middle East triggered a boom in demand for middle distillates for electric generators, lending support to oil prices.

Chinese demand for imported diesel is expected to rise even further in June after last week's deadly earthquake disrupted gas supplies to major cities and as companies built stockpiles ahead of the summer Olympics.

Oil's gains came despite a rising US dollar, which inched higher against the yen on Monday, making up for some losses late last week when a plunge in US consumer confidence stirred concerns about the outlook for the US economy.

Oil prices have risen six-fold since 2002 and doubled since last year as rising demand from China and other developing nations stretched spare production capacity, adding pressure on the US economy already hard hit by a housing slump.

The International Monetary Fund's chief economist warned on Friday that record high oil prices could significantly dampen progress that has been made so far in calming financial markets.

Broker Lehman Brothers warned that record-breaking commodities prices that were drawing in hundreds of billions of dollars in new investments threaten to create an asset bubble.

A willingness among investors to chase returns on commodities was providing “fertile ground for a potential asset bubble,” Lehman analyst Edward Morse said in a special report. (Reuters)