(STAR) Oil prices were steady above $107 a barrel after rising to a record trading high of $108.21 per barrel earlier in the session as the dollar weakened further.

Speculation that rising prices for oil and other commodities will offset the falling dollar has driven oil’s rally from $87 a barrel in January.

The dollar has fallen to three-year lows against the yen and the head of the European Central Bank expressed concern Monday about the “disorderly movements” of exchange rates.

“This surge to new records is driven by the speculative and large funds moving money into commodities. It’s primarily a dollar and inflation play by financial investors,” said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Light, sweet crude for April delivery dropped 21 cents to $107.69 a barrel in Asian electronic trading on the New York Mercantile Exchange, by midday in Singapore.

Crude futures on Monday rose $2.75 to settle at a record $107.90 a barrel after setting an all-time trading high of $108.21 earlier in the session.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

There was little in oil’s price uncertainty to convince analysts that the huge runup in oil prices has run its course. Analysts have said expectations are growing that the U.S. Federal Reserve would cut interest rates at its policy planners’ next meeting March 18.

“Lower interest rates would mean increasing liquidity, which means a further weakening of the dollar and rising US inflation,” Shum said. “What that means for investors is that they therefore move their money into commodities as a hedge against inflation.”

While the dollar fluctuated against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates. Many analysts believe the rise in crude prices is not supported by the market’s underlying fundamentals, noting that supplies are generally rising while demand is falling.

“Crude oil futures’ relentless advance is a price bubble and certainly, a sharp pullback cannot be ruled out,” Shum said.

“What may at some point trigger investors to exit oil is perhaps a build up of poor economic data out of the US,” he added. “That may be enough of a trigger to refocus attentions on the US and slow oil demand growth there.”

Natural gas was following oil higher, but also rising in anticipation of cooler temperatures across the U.S. Midwest and Northeast, analysts said.

In London, Brent crude futures were flat at $104.16 a barrel on the ICE Futures exchange.

The US Energy Information Administration releases its short-term energy outlook later Tuesday and weekly oil and product inventory data on Wednesday. These indicators, along with the Commerce Department’s retail sales data release on Thursday, are traditionally used as cues for oil prices, though their impact has been muted lately.

Chief News Editor: Sol Jose Vanzi

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