Oil hits record - near $104

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NEW YORK (CNNMoney.com) -- Oil reached a historic high near $104 a barrel Monday, surpassing the inflation-adjusted level of the 1980s, as a weakening dollar made crude futures attractive to investors.

U.S. crude for April delivery hit $103.95 a barrel in early trading before easing to settle at $102.45 on the New York Mercantile Exchange, up 61 cents for the day.

Crude has now passed what many analysts consider to be the previous record high - $103.76 when adjusted for inflation, set in early 1980 - following the Iranian Revolution. The record high is a bit subjective however - ranging from about $93 to over $103 - depending on the contract cited and the inflation calculation used.

The NYMEX contract now cited as a benchmark for oil prices had just debuted in 1980 and was rarely traded.

Crude gave back some gains Monday after Royal Dutch Shell (RDSA) said it would resume oil shipments from Nigeria that had been disrupted by rebel attacks, according to the Associated Press.

Oil set a new trading record earlier in the day as the dollar fell and the health of the U.S. economy worsened. Traders said oil offered an inflation hedge and is attractive to foreign investors who can buy dollar-priced commodities at a relative bargain.

"It's a dual play," said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank.

Barakat also said rumors circulated Monday that two big investment funds were plowing money into commodities, pushing the price run up.

Commodities across the board have risen in the last few weeks as recession fears have shaken the dollar. The greenback hit fresh lows against the euro Monday, with the European currency reaching $1.52 following weak reports on U.S. manufacturing and construction spending.

Economic fears have also hit stocks, and offered investors further incentive to buy commodities such as oil. Barakat noted that, so far this year, the Goldman Sachs Commodities Index is up over 11%, while the Dow Jones industrial average has fallen over 7%.

In addition to a falling dollar, geopolitical woes are also making traders nervous.

In South America, troops from Ecuador and Venezuela have been ordered toward their borders with Colombia amid a tense crisis that threatens to erupt into war.

The leftist presidents of Ecuador and Venezuela ordered the troop movements in response to a raid by the right-wing Colombian government that killed a top Colombian rebel on Ecuadoran soil.

Venezuela is the fourth largest importer of crude into the United States, behind Canada, Saudi Arabia and Mexico, according to the Energy Information Agency.

In other events this week, international regulators are set to revisit Iran's nuclear program, an international court takes up Exxon Mobil (XOM, Fortune 500)'s $12 billion case against Venezuela and OPEC is set to meet. An increase in production from the cartel is not expected.

"There seems to be a whole bunch of factors in the market," said Barakat.

At the pump, shielded from rising oil prices for much of the winter, gas prices continued their recent rise. The nationwide average for a gallon of regular is now $3.16 a gallon, up $2.99 a month ago, according to the motorist organization AAA.

With gasoline futures having gained some 30 cents over the last few weeks, and the summer driving season yet to be priced in, analysts say gasoline prices will climb substantially over the next couple of months and will likely top $4 a gallon in many areas by mid-May.

With the economy in or near recession and gas prices around $3 a gallon, growth in gasoline demand slowed to a near standstill in 2007, according to a report Monday from EIA.

The agency said gasoline demand rose 0.4% for the year, the smallest increase since 1991. The average rate of demand growth is around 1 to 1.5%. Nonetheless, Americans still used more gasoline in 2007 than in any prior year.

Demand for oil rose slightly from 2006, although remained about 0.5% below the highest demand year ever, which was 2005.

Oil prices have nearly doubled over the last year, and have risen five-fold since 2002.

Most analysts say rising demand, especially from developing nations, coupled with few new discoveries of easily accessible oil fields are the main culprits behind the runup.

The tight supply and demand situation has also attracted a slew of investment money, and the falling dollar has played a role as well.

The fact that the world uses nearly as much oil as it produces has magnified the effect of geopolitical tensions, as there is less spare capacity to cover a supply disruption.