Oil retreats after surging to record

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NEW YORK (CNNMoney.com) -- Oil prices briefly spiked more than $5 per barrel to a trading record Monday, but crude tumbled throughout the afternoon as traders took profits after prices couldn't get over the $140 a barrel hump.

Light, sweet crude for July delivery edged 25 cents lower to settle at $134.61. That's a sharp drop from the session high of $139.89, set just before 9 a.m. ET.

Oil initially surged as the dollar weakened after the Empire State Manufacturing Survey, which monitors manufacturing capacity in New York State, indicated deteriorating business conditions in June.

"The dollar took a pounding in early morning trading, leading to a steep rise in oil prices," said Stephen Schork, editor of the energy industry newsletter The Schork Report.

But after several attempts to pass $140 stalled throughout the morning, oil quickly tumbled in the afternoon hours.

"Everyone who tried buying in the morning decided it wasn't going higher, so they sold off," added Schork. "They were gunning for $140, and then the bulls and bears slugged it out."

Schork still thinks the bulls will win the fight, and oil could top $150 a barrel by next Monday.

"The market has repositioned itself for a massive move," he said. "The market hasn't moved much higher since it rose nearly $17 June 5th and 6th, but there hasn't been a corrective sell-off either."

The previous trading high was set June 6, when oil hit $139.12. On Friday, oil fell $1.88 to settle at $134.86. The price of oil has risen nearly 40% since January, one consistent factor being weakness in the dollar.

"We're trading in skittish times," said Phil Flynn, a senior market analyst also with Alaron Trading.

Flynn called Monday morning's price jump "unusual" and said the market may have also reacted nervously to news of a weakened dollar.

The dollar fell against the euro Monday. Because oil is traded in dollars, the weakened American currency has contributed to the run up in crude prices. A recently announced increase in oil output from Saudi Arabia failed to influence prices.

"People have done the math on this Saudi output rise," and it may not be enough to meet demand, said John Kilduff, energy analyst with MF Global in New York.

According to a spokesman for U.N. Secretary-General Ban Ki-moon, Saudi Arabia said Sunday that it would increase oil production by 200,000 barrels a day over the next month. The OPEC nation should be pumping out a total of 9.7 million barrels per day by July, according to U.N. estimates.

As oil has continued to trade at record levels, Saudi Arabia, a charter member of the Organization of the Petroleum Exporting Countries, has been under intense international pressure to boost output.

When President Bush visited the country in May, Saudi oil minister Ali al-Naimi pledged to raise output by 300,000 barrels a day in the month of June. However the boost announced last month appeared to have little impact on the high price of crude.

An increase in production from Saudi Arabia won't be enough to cover rising global demand for oil, according to Mark Waggoner, president of Excel Futures in California. Despite sky-high prices, people continue to buy.

"If you look at just about any country out there, they continue to pay those higher prices," said Waggoner.

Countries such as Saudi Arabia are focused more on rising demand in Asia than the U.S., according to Waggoner. "Even if it does go down here, it's still going to be up in China," he said. The oil spike comes as the average price of gasoline at the pump hit a new record high of $4.080 per gallon, according to a daily survey from AAA. As of Monday morning, gasoline cost $4 a gallon in over half of all U.S. states.

As gas approaches $5 a gallon, a majority of Americans are cutting back on the amount of driving they do, according to a CNN telephone poll. Furthermore, oil giant Exxon Mobil (XOM, Fortune 500) said last Thursday it would be getting rid of its retail gasoline business as crude prices and refining costs continue to eat away at margins.

The average price of regular unleaded gasoline broke $4 for the first time on June 8 after crude prices surged more than $16 in two days to set the previous trading high.