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The plummeting US dollar has pushed crude oil prices to an all-time high of US$110.20 a barrel in New York despite news that American oil reserves are much higher than the market expected.
The surge reflected a growing disconnect between the realities of oil supply - which have not shifted markedly in the past few days - and markets which are obsessed with the falling US dollar, analysts said.
Investors have raced into commodities over the past month to hedge against inflation and the slumping dollar, sending oil to fresh peaks despite concerns about the economic health of top oil consumer the United States and rising fuel stocks.
The weakness of the US dollar is making oil cheaper for other countries and is encouraging speculators to buy oil as insurance against further declines by the US currency.
The dollar hit an all-time low of $1.554 against the Euro yesterday morning, ending hopes that a rescue package by the Federal Reserve would spark a sustained rally.
One index of the US dollar's value against a basket of other currencies put it at its lowest in 40 years - for the 10th time in 12 days.
The US dollar rally, which was prompted on Tuesday when the Federal Reserve injected US$200 billion ($249 billion) of new securities into the banking system to ease the credit crisis, has proved disturbingly short lived.
"There has been a huge detachment between price and fundamentals in the energy markets," said Rob Kurzatkowski, futures analyst at optionsXpress. "It has been more of a dollar play of late."
US oil stockpiles climbed 6.18 million barrels to 311.6 million in the week ended March 7, the Energy Department said in a report which indicated consumer consumption was falling.
Petrol inventories rose 1.69 million barrels to 236 million, the highest since 1993.
Total implied fuel demand averaged 20.5 million barrels a day in the past four weeks, down 2.7 per cent from a year earlier, the report showed.
US crude-oil use typically falls at this time of year when refiners schedule repairs and upgrades as US heating-fuel demand slows and before warmer weather spurs an increase in petrol consumption. "It is a ridiculously bearish report," said Stephen Schork, editor of energy newsletter The Schork Report.
"We have major concerns regarding the economy in the United States, rising supply, falling demand. Why is crude oil trading at over US$100 per barrel? It makes no fundamental sense."
US consumers already face record petrol prices at the pump due to soaring crude costs for refiners, prompting forecasts for petrol above US$4 a gallon in some regions as the summer driving season approaches.
"Oil is being purchased because of how it looks compared to other asset classes, not because of its fundamentals," said Antoine Halff, head of energy research at New York-based Newedge USA.
"The fall of the dollar has been a very strong driver of the commodity rally this year."
Oil in New York has surged 87 per cent over the past year while the Standard & Poor's 500 Index dropped 7 per cent and the Dow Jones Industrial Average has declined 1.7 per cent.
Oil for delivery in April eventually closed at US$109.92, after hitting the highest intraday price since futures trading began in 1983.
Last week Opec ignored demands from the US to increase production to bring the price of oil down.
Opec president Chakib Khelil said the oil price spike was being driven by "the mismanagement of the US economy.
"If the prices are high, definitely they are not due to a lack of crude. They are due to what's happening in the US," he said.
- ADDITIONAL REPORTING BY AGENCIES
