Oil jumped nearly 9 per cent to a record $139 a barrel on Friday, extending a two-day rally to more than $16 as the slumping US dollar and mounting tensions between Israel and Iran attracted a stampede of buyers.
Oil prices could top $150 by July 4, one of the busiest US travel holidays, as strong demand in Asia triggers a slowdown in shipments of crude to the United States, investment bank Morgan Stanley said.
"We are calling for a short-term spike in oil prices," the bank said in a research note.
US crude settled up $10.75 at $138.54 a barrel before touching an all-time high of $139.12 in its biggest gain in dollar terms on record, adding to a rise of $5.49 on Thursday. London Brent crude settled $10.15 higher at $137.69, off the record $138.12 hit earlier.
"It's eye-popping. It's absolutely stunning," said Chris Feltin, analyst at Tristone CapitaL Inc in Calgary.
Oil has risen 44 per cent this year, threatening economic growth in major consumer countries including the United States, whose economy already is hobbled by a housing crisis.
Analysts have said the dramatic rally in oil prices is due to rising demand in China and other developing economies as well as an influx of cash from investors seeking a hedge against the weaker dollar and inflation.
The greenback extended weakness against other currencies on Friday on data showing the US economy lost jobs for the fifth straight month and the unemployment rate shot up to its highest in more than three years.
The drop in the dollar added to losses from on Thursday when European Central Bank President Jean-Claude Trichet said a number of policymakers wanted higher interest rates, possibly as soon as next month.
"Obviously there's a lot of concern on the economic impacts of a weakening US dollar. That seems to be driving some of the momentum here today," said Feltin.
Further support came from remarks by Israel's transport minister that an attack on Iran's nuclear sites looked "unavoidable." It was the most explicit threat yet against Tehran from Prime Minister Ehud Olmert's government.
Worries of a potential disruption of the OPEC member's crude supply have helped support prices over the past year.
"We've had a huge historic rally on little fundamental input, other than the weakness of the dollar and the news this morning out of Israel that seems to have pushed some geopolitical risk premium back in the market," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.
Morgan Stanley forecast the diversion of Middle East oil shipments away from the United States to Asian markets could push US crude to $150 a barrel by the US July 4th holiday.
"Middle East oil exports are stable, but Asia is taking an unprecedented share," Morgan Stanley said in a report, adding US inventories have dropped by 35 million barrels since March.
"Robust Asian non-OECD demand growth, coupled with a stagnant global oil supply backdrop, appears to be pricing out Atlantic basin consumers while at the same time driving Atlantic inventories to critically low levels."
The report added to a string of upward price forecast revisions by analysts, with Goldman Sachs in May predicting prices could tip $200 a barrel within the next two years.
A six-year rally in oil has sent prices up six-fold as demand from emerging economies such as China and India strain supplies.
High prices have started to eat away at global growth however, with some consumers such as the United States and the United Kingdom showing signs of lowering consumption.
Some Asian governments -- including India -- have decided to cut fuel subsidies, stirring concern rising prices could cut further into demand.
The International Energy Agency (IEA), an adviser to 27 industrialized countries, said it may cut its 2008 demand growth projection further after having already more than halved it to 1.03 million barrels per day (bpd).