Oil surpasses $125 per barrel ahead of U.S. driving season

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Oil prices surged past $125 per barrel Friday on the eve of the U.S. driving season as a weakening U.S. dollar drove investors to snap up commodities.

Light, sweet crude for June delivery rose as high as $125.12 a barrel in electronic trading on the New York Mercantile Exchange at midday before falling back to $124.86 by early afternoon in Europe.

On Thursday, the contract rose to a record close of $123.69 a barrel.

In London, Brent crude contracts also hit record highs before slipping and traded up $1.13 on the day at $123.97 a barrel on the ICE Futures exchange. Earlier today, Brent had reached $124.25 before falling back.

Today, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia’s government, heightening chances that the U.S. could impose sanctions on one of its biggest oil suppliers as a state sponsor of terror.

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.

Comments Thursday from European Central Bank president Jean-Claude Trichet signaling that the bank was unlikely to consider interest rate cuts helped strengthen the euro against the U.S. currency.

By midday in Europe, the euro stood at $1.5466 compared to $1.5404 in late trading Thursday night in New York. The dollar was also weaker today against the British pound and the Japanese yen.

Investors view commodities such as oil as a hedge against inflation, and some analysts think the dollar’s protracted decline is the main reason behind oil prices doubling from a year ago. Also, a weaker dollar makes oil cheaper to investors overseas.

A prediction by analysts at Goldman Sachs seeing oil rising as high as $150 to $200 a barrel within two years also has boosted prices.

Analysts, however, struggled to explain the continued rise of oil futures after a largerthan- expected build in crude oil stocks reported Wednesday in the United States.

Some pointed to a small decline in distillate stocks, which include diesel and heating oil and normally drive prices during the Northern Hemisphere winter; others said speculation and computer- generated buying was keeping oil prices high.

“Crude oil is currently held up in a tug-of-war between the Goldman reality and the physical reality,” said Olivier Jakob of Switzerland’s Petromatrix in a research note, adding that the investment bank’s prediction made for “a great story to support pension funds piling more into commodities.”

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