Oil crosses $100 threshold

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NEW YORK (CNNMoney.com) -- Oil prices, after taking an initial dip on a weekly government report on inventory levels, crossed the $100 threshold Thursday and continued a six-year, five-fold spike driven by surging demand and limited supply.

U.S. light crude for February delivery crossed $100 a barrel around 11:30 ET on the New York Mercantile Exchange and hit a new all-time trading high of $100.09 later in the session before slipping to settle at $99.18 a barrel, down 44 cents.

On Wednesday, oil briefly touched $100 for the first time - although that amount was paid by one trader who bought one contract - before settling at the end of the day at a record $99.62.

The latest market mover was an inventory report showing a drop in U.S. crude supplies.

In its weekly inventory report, the U.S. Energy Information Administration said crude stocks fell by 4 million barrels last week. Analysts were looking for a drop of 1.7 million barrels, according to a Dow Jones poll. It's the seventh straight week crude inventories have fallen.

Distillates, used to make heating oil and diesel fuel, rose by 600,000 barrels while gasoline supplies gained by 1.9 million barrels. Analysts were looking for a 600,000 barrel decline in distillates supplies and a 1.3 million barrel increase in gasoline stockpiles.

Oil prices initially fell after the report. One trader said the drop was not as big as some of the previous inventory reports.

"The market was expecting a bigger decline," Ray Carbone, president of Paramount Options, said from the floor of the NYMEX. "This is a market that's slightly exhausted, you're going to need something to really push it."

The inventory report is just the latest mover in a market that is hyper-sensitive to news. Oil prices have surged five-fold in the last six years, going from under $20 a barrel in early 2002. In 2007 alone, crude jumped nearly 60 percent.

Most analyst blame the runup on rising demand - mostly from developing countries and the United States - that eats up any new gains made in oil production.

Oil companies have posted record profits for the last few years. While their budgets for finding new oil have increased, most of the windfall has been returned to shareholders in the form of dividends and share buybacks.

The companies - and oil industry analysts - say vastly increasing spending on oil and gas exploration won't do any good, as there's only a limited amount of equipment and manpower available for the task. Plus, many analysts say new, big oil fields are getting harder to find, especially in countries friendly to Western oil firms.

This tight supply and demand scenario has also attracted a ton of investment money, although its effect on prices is debated. Some say investment money has a minimal effect, accounting for a premium of maybe $10 or $15 a barrel, and is generally good for the market as it provides liquidity.

Others say investors are making a bundle off Americans who must pay record gas prices at the pump, and are adding $30 or $40 to the price of a barrel.

Tight supply and demand also exaggerates the effects of geopolitical tensions, as there is less spare capacity to make up for a disruption in supplies.

The falling U.S. dollar has also played a role, since investors buy oil and other commodities as a hedge against a lower dollar.

This combination of factors has led many analysts to believe oil prices are, on average, only headed higher.

"Why aren't we over $100? Give it time," said Carbone.

Wednesday's surge of over $3 was fueled by violence in oil-rich Nigeria, the prospect of more interest rate cuts and a lower dollar, a halt in Mexican U.S. exports and talk of the expected drop in U.S. crude stockpiles.

Adjusted for inflation, oil is at or near the prices of the early 1980s. At that time, following the Iranian revolution and the outbreak of the Iran-Iraq war, oil traded in the high $30-a-barrel range, the equivalent of between $92 and around $103 a barrel in current prices, depending on the contract cited and the inflation calculation used.

Retail gasoline prices have not risen as fast as oil prices over the last few months, largely due to weak demand.

But with oil prices so high, gasoline is beginning to catch up. The national average price for a gallon of regular Thursday was about $3.05 a gallon, a penny less than last month but about 30 percent higher than the same time last year, according to the motorist organization AAA.

"Unfortunately, we also continue to believe that new record high prices will be paid by consumers for gasoline in the year ahead," AAA spokesman Geoff Sundstrom said in a statement Wednesday.