Oil sets new record above $120 a barrel

By James Jukwey

LONDON (Reuters) - Oil set a new record high above $120 a barrel for a second day on Tuesday, resuming its advance after a sharp downward move last week.

Supply disruptions in Nigeria, where a strike and attacks by militants hit production, has continued to support a market that is nervous about any threats to supply.

Tensions with Iran appeared to ratchet higher when the world's fourth-biggest oil producer refused to accept intrusive inspections of its nuclear program that the West fears could be linked to weapons.

U.S. light crude for June delivery was up 2 cents at $119.99 a barrel, by 5:40 a.m. EDT (0940 GMT) after earlier touching a record high of $120.93.

London Brent crude was up 26 cents at $118.25 a barrel, after an earlier record of $119.07.

Gold was also strong, as oil's advance helped spur a rebound from a four-month low last week. But gold is still some way below a record of $1,030.80 an ounce reached on March 17.

"The downward move in oil last week now seems like only a correction," said Christopher Bellew, senior vice president at Bache Commodities.

"The effect of the credit crisis in the United States is reducing people's disposable incomes and you'd expect this to have an impact on the oil price, but it's not having any impact."

Demand from emerging markets such as India and China is more than compensating for the U.S. downturn, he said.

VULNERABLE

Oil is up by a quarter since the start of this year partly due to the problems in Nigeria, plus weakness in the U.S. dollar, which has boosted the price of commodities denominated in the U.S. currency.

Last week, oil retreated almost $10 a barrel, partly due to a reduction in speculative positions and as strikes affecting Nigeria and North Sea came to an end.

Exxon Mobil said on Tuesday it had returned oil output in Nigeria to normal levels after an eight-day strike, but Shell said its production there was still down by about 164,000 barrels a day due to recent militant attacks.

"A lot of this is supply-driven, with the market very vulnerable to any disruption in supplies," said Mark Pervan, a senior commodities analyst at the Australian & New Zealand Bank.

"We are seeing large oil-producing countries coming up as a question mark," he said.

U.S. President George W. Bush is expected to talk with officials from Saudi Arabia about the effects of high fuel prices on the U.S. economy on his trip to the world's top exporter later this month.

Bush has called on the Organization of the Petroleum Exporting Countries to raise output to help bring down prices.

The U.S. dollar, whose decline in the past months has been driving speculative investments in dollar-denominated crude and other commodities, slipped further on Tuesday on continued doubts about the health of the U.S. economy despite upside surprises from recent economic indicators.

Later in the week on Wednesday, traders will watch the weekly U.S. government report on fuel inventories, which is expected to show a 1.8 million-barrel build in crude stocks, a 1.1 million-barrel rise in distillate inventories and a 100,000-barrel fall in gasoline stocks.

(Additional reporting by Baizhen Chua in Singapore; editing by James Jukwey)

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