Another Record for Oil

Prices for West Texas intermediate crude close in on $123 a barrel before pulling back a bit. Reformulated gasoline edges up 6 cents to $3.11 a gallon. Stocks in the energy group are higher.
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Crude futures soared to a new record high Tuesday amid a combination of dollar weakness, disruptions to Nigerian oil exports and a new energy research report claiming that oil could reach $200 a barrel in as few as six months.

West Texas crude for June delivery advanced $1.98 to $121.95 a barrel late in the trading session at the New York Mercantile Exchange. Earlier, it reached $122.73. Brent crude rose $2.35 to $120.34 a barrel.

Reformulated gasoline edged up 6 cents to $3.11 a gallon, and heating oil gained 5 cents to $3.36 a gallon. Natural gas climbed 5 cents to $11.22 per million British thermal units.

Energy stocks followed commodity prices higher. Among the integrateds,

ConocoPhillips

(COP) - Get Report

advanced 1.7% to $88.65,

Chevron

(CVX) - Get Report

rose 0.9% to $96.47 and

Hess

(HES) - Get Report

jumped 7.7% to $116.57.

Forget $200 Oil -- $240 Is Next!

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In the oil services space,

Baker Hughes

(BHI)

rose 2.7% to $80.07,

Smith International

(SII)

climbed 2.7% to $80.21 and shares of

Transocean

(RIG) - Get Report

gained 2.1% to $157.08.

The U.S. dollar fell against most major world currencies Tuesday, which in turn helped lift the price of crude. Oil tends to rise when the value of the U.S. dollar falls because oil is denominated in dollars in international markets.

Also affecting crude markets is the recent escalation in violence in Nigeria between the rebel group Movement for the Emancipation of the Niger Delta, or MEND, and the Nigerian government. A MEND assault last weekend on an oil-flow station owned by

Royal Dutch Shell

(RDS.A)

was the latest in a stream of attacks that have severely restricted Nigerian oil exports to the global market.

MEND is seeking an agreement with the government to share profits generated by oil and gas operations in the Niger Delta, and has taken to sabotaging oil installations and kidnapping oil workers in order to spur progress.

Most Nigerian oil is exported to the United States, so the U.S. oil market has the greatest exposure to the violence there. Nigerian oil tends to have a low sulfur content, making it ideal for converting into motor gasoline.

According to Stephen Schork, president of the Schork Group, anything that could affect the ability of U.S. refiners to adequately supply the domestic gasoline market for the summer driving season will be closely tracked by traders.

Adding to the upward pressure in the energy market was a new report released by Goldman Sachs analyst Arjun Murti asserting that oil is heading toward a "super spike," with prices potentially reaching $150 to $200 a barrel in the next six to 24 months.

"We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent and resulting in needed demand rationing in the OECD areas and in particular the United States," Murti wrote.

According to the Goldman report, a prolonged decrease in global oil demand is needed to "recreate a spare capacity cushion and bring about potentially lower energy commodity prices" in the long run. Under the "super-spike" scenario, the price of oil would rise so high and so quickly that marginal demand for oil would collapse. Were that to happen, "especially sharp price increases would result in accelerated behavioral change."

If Murti is right about the spike, investors may soon find out just how much pain consumers will endure before succumbing to the economic pressure and adjusting the lifestyle that they have stubbornly protected for so long.

In the near term, West Texas crude is trading in $10 "buckets," says Schork. Oil blew through the $110 to $120 a barrel bucket in little more than a week, but with only two consecutive closings above $120 a barrel to its name, it still has more to prove before $120 can confidently be recorded as the new bottom of its trading range.

If it succeeds in doing so, the next level of resistance for WTI will likely be $130 a barrel, Schork says. If not, oil will likely retrace its latest advance and trade sideways in the $110 to $120 bucket.