Oil near $125 on heating oil supply strain

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Friday , May 16, 2008 at 0959 hrs Oil rebounded to near $125 a barrel on Friday, led by the bullish heating oil market as China and Europe scramble for barrels, thinning global supply.

US crude for June delivery rose 67 cents to $124.79 a barrel by 0133 GMT, erasing a loss of 10 cents on Thursday's close. The contract was 1.8 percent below the all-time peak of $126.98 a barrel achieved on Tuesday.

NYMEX June heating oil was up 0.151 cents at $3.6375 a gallon, a whisker below the record high of $3.7228 on Wednesday.

"Global supply of distillates is very tight," said Tetsu Emori, fund manager at Astmax Co Ltd in Tokyo.

Trading was volatile in New York on Thursday, driven by technical activity associated with the June crude contract options expiry. A power outage that shut the Intercontinental Exchange's trading platform was also cited as adding to the volatility.

A bigger-than-expected rise in US natural gas stocks dulled oil prices initially. On Thursday, the US Energy Information Administration said natural gas storage rose 93 billion cubic feet last week, above expectations for an 87 bcf build.

But surging demand from developing countries, such as China, helped bolster heating oil prices. PetroChina is seen buying a third more diesel at 400,000 tonnes for June versus May's levels, following a deadly earthquake.

Thin gas oil stocks in Northwest Europe caused by a string of refinery outages prompted players to scramble for Asian barrels.

Some support came as the dollar weakened against the euro on Thursday, after data showing US industrial production fell 0.7 percent in April, reflecting the biggest drop in the manufacturing sector since September 2005.

Oil and the US currency have become closely intertwined in recent months as investors have turned to oil as a hedge against the falling dollar.

US President George W. Bush heads for Saudi Arabia on Friday to renew his appeal to help tame record oil prices and try to shore up Arab support to contain Iran's growing regional clout.

However, OPEC reiterated that prices had more to do with financial market volatility than fundamentals.

The oil cartel's Monthly Oil Market Report provided more evidence that record oil prices are slowing demand growth, lowering its forecast for world demand growth to 1.16 million barrels per day, 40,000 bpd less than its previous forecast.