Oil settles at record on tight supply forecast

Investors hedge against dollar as energy agency sees supply problems and demand growth over the next five years.

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By Kenneth Musante, CNNMoney.com staff writer

In the next year, I believe the economy:
  • Is going to get worse
  • Is going to get better
  • Will be more of the same

NEW YORK (CNNMoney.com) -- Crude prices settled higher Tuesday after an energy advisory group reduced its estimate on the amount of oil that will reach the market in the coming years.

Light sweet crude settled up 97 cents to a record $140.97 a barrel on the New York Mercantile Exchange. During the trading day oil climbed as high as $143.33 before falling back. That's still below the intraday record of $143.67 set Monday.

The International Energy Agency, which guides the energy policies of 27 nations, predicted serious supply concerns after 2011 and average demand growth of 1.6% a year to 2013, driven overwhelmingly by the consumption of growing economies in Asia, the Middle East and Africa.

"I think that gave us a little bit of a bounce," said Phil Flynn, senior market analyst with Alaron Trading in Chicago. But he noted that the market was already strong before the IEA report's release.

Hedge against risk: Investors continue to purchase commodities such as oil as a hedge against dollar inflation. Over the past several months, investors have been purchasing oil contracts, hoping they will prove a stronger investment than U.S. currency.

The 15-nation euro rose Tuesday to $1.5787 from $1.5757 a day earlier, prompting many to shift to commodities. The dollar also fell to ¥106.05 from ¥106.10.

But dollar isn't the only thing investors are hedging against.

"They're also buying [oil] not just as a hedge against the dollar, but also against the stock market," said Flynn.

Stocks slumped Tuesday afternoon as U.S. auto sales for Ford (F, Fortune 500) slipped 28.1% in June and General Motors (GM, Fortune 500) sales fell 18%.

During the month of June, the Dow Jones industrial average lost 10.2% in its worst June performance since the Great Depression.

Supply concerns: Meanwhile, Mideast tensions continued to threaten supplies Tuesday.

Earlier this week, Iran, the second-largest oil producing member of the Organization of Petroleum Exporting Countries, threatened to blockade the Strait of Hormuz if it is attacked. More than 40% of the Middle East's oil passes through the strait, which connects the Persian Gulf with the Arabian Sea.

A spokesman for the U.S. Fifth Fleet said the United States would not let Iran close the strait, according to reports Tuesday. To top of page

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