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Oil above $130 on weak dollar, Israel comments

By Margaret Orgill

2 hours, 43 minutes ago

http://news.yahoo.com/s/nm/20080606/bs_nm/markets_oil_dc_8;_ylt=AuLiFntnq6E13258th0UEeuAsnsA

LONDON (Reuters) - Oil rose by more than $2 a barrel to above $130 on Friday, bringing gains in the last two days to $8 as the U.S. dollar weakened on signals the European Central Bank may raise interest rates this year.

Comments from Israel's transport minister that an attack on Iranian nuclear sites looked "unavoidable" given the apparent failure of sanctions to deny Tehran technology with bomb-making potential also helped drive prices higher.

This was the most explicit threat yet against Iran from Prime Minister Ehud Olmert's government.

U.S. light crude for July delivery was up $2.46 at $130.25 a barrel by 1018 GMT.

Oil surged $6 in after-hours trading on Thursday in the U.S., erasing two days of sharp losses triggered by worries that high oil prices were starting to dent demand.

Crude hit a record high of $135 last month.

London Brent crude rose $2.18 cents to $129.72.

Analysts said the dollar's weakness in the wake of comments from the ECB sparked a rush to cover oversold positions.

The remarks from the Israeli government gave added momentum to the rally, said Olivier Jakob of analysts Petromatrix.

"The comments from the head of the ECB...triggered a very strong rally. Financial money is flowing back into oil and commodities," said Jakob. "When the market is in such a strong rally, there is a tendency to read the bullish headlines rather than the bearish ones."

The dollar weakened further against the euro on Friday, having fallen by more than 1 percent on Thursday after European Central Bank President Jean-Claude Trichet said a number of policymakers wanted higher interest rates and a hike was possible as soon as next month.

Investors have used oil and other commodities as a hedge against the weaker dollar and inflation as the housing crisis and high fuel prices batter the U.S. economy.

Gold rose on Friday from a three-week low but investors were looking ahead to U.S. payroll data at 1230 GMT.

DEMAND

The sharp reversal in the dollar put longer-term worries about weakening oil demand on the backburner, after they were rekindled earlier this week when India and Malaysia decided to raise domestic fuel prices to cope with bulging subsidy bills.

The International Energy Agency (IEA), an adviser to 27 industrialized countries, issues its latest forecasts next week and has said it may lower its 2008 demand growth projection further, after having already more than halved it to 1.03 million barrels per day (bpd).

But some analysts say subsidy cuts in Asia will not be enough to slow oil use.

"World oil demand growth is still accounted mostly by China, the Middle East and Latin America -- and through the summer, there is no reason to expect a material slowdown in demand growth in these areas," said Harry Tchilinguirian, oil analyst at BNP Paribas in London.

Ahead of a weekend meeting of G8 energy ministers plus their peers from China, India and South Korea, to try and agree on the role of consumer nations in stemming oil's five-year price rally, the IEA warned that oil demand would rise by 70 percent if governments continued with current policies.

It also urged world governments to start a $45 trillion dollar "energy technology revolution" or risk a 130 percent surge in carbon emissions by 2050.

(Additional reporting by Santosh Menon in London and Maryelle Demongeot in Singapore; editing by James Jukwey)