Oil rallies to new high near $128

U.S. crude hit a peak of $127.82 and was trading at 127.70, up $3.58 early on Friday. Brent was $3.53 higher at $126.16.

Goldman Sachs raised its forecast for average oil prices for the second half of the year to $141 a barrel from its previous forecast of $107.

"I would say the bigger story today is that Goldman upped their target on average oil prices for the back half of the year... That's causing oil to run up about $3 today," said David Katz of Matrix Asset Advisors.

Record high oil prices have helped to drive strength across the energy complex, especially for diesel, which has been driven by strong global demand.

Gas oil, which includes heating oil and diesel, was trading at $1,208 a tonne, just off a record hit earlier in the week.

Chinese demand for imported diesel is expected to rise sharply in June after this week's deadly earthquake disrupted gas supplies to major cities and as companies build stockpiles ahead of the summer Olympics.

"People are looking at diesel. The situation is worse since the earthquake on Monday in China," said Robert Laughlin at MF Global.

The Organization of the Petroleum Exporting Countries (OPEC) has repeatedly said high oil prices have been driven by factors other than supply and demand.

Saudi Oil Minister Ali al-Naimi reiterated on Thursday prices had more to do with financial market volatility than fundamentals.

But U.S. President George W. Bush arrived on Friday in Saudi Arabia, the world's biggest oil exporter, where he renewed his appeal for more oil.

OPEC's smallest producer Ecuador said the group should consider raising output because record prices are hurting poor nations.

"I think OPEC has to deal with this issue, because this is hitting all the poorest countries that are oil importers," Ecuador's President Rafael Correa told Reuters in the Peruvian capital, Lima.