Oil hits record $107

A rush by financial funds into commodities and political tensions are the prime drivers of a rally that has lifted oil's average to above $95 for the year. U.S. crude jumped $1.85 to $107 a barrel. It had sunk to $104.08 in earlier trading and by 1451 was up $1.50 at $106.65. London Brent crude was up 40 cents at $102.78.

Fears of recession, following the biggest U.S. job losses in five years and strains in the credit market, have depressed equities and the dollar while prompting many investors to seek safety in commodities including oil. "The disconnect between slowing U.S. growth and a soaring commodity/energy complex has truly been quite remarkable," said Edward Meir of MF Global.

The effect of the slowdown in top consumer the United States could start to have an impact on demand. "What you have seen over the last few months is fantastic strength in a whole range of commodities, all of which together significantly add to inflation and erode real incomes and profits," said Michael Saunders of Citigroup. "If it were just oil it would be more manageable, but it's not ... What you are seeing now is far more widespread and therefore more damaging," added Saunders.

A sharp drop in U.S. crude oil inventories and OPEC's decision last week to hold supplies steady have also boosted oil prices. OPEC President Chakib Khelil was quoted on Monday as saying that speculation and political tension would keep prices at triple digits through the year. Khelil, also Algeria's oil minister, said prices could retreat in 2009 with a recovery of the U.S. dollar following the election of a new U.S. president, and as fundamentals reassert themselves.

Some analysts think oil could go higher still, possibly breaking through $110, although there are expected to be dips below the $100 mark too. "We certainly do see the balance for the rest of the year averaging $100," said Paul Horsnell of Barclay's Capital. "But we are not going to say that it's going to stay above $100 for every single minute of every trading day for the rest of the year," he said.

The Organization of the Petroleum Exporting Countries, supplier of more than a third of the world's oil, has argued high prices do not reflect fundamentals and are driven by speculation. OPEC will next meet in September, although ministers could confer informally at a conference between consumers and producers in Rome on April 20-22.