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Oil Prices Now Fueled By Supply And Demand

CNBC.com

"It's like a comet that just keeps soaring" is how one floor trader described oil's historic rise to nearly touch $114 a barrel for the first time ever this morning.

Energy futures on both sides of the Atlantic hit new records on some serious supply concerns and surging overseas demand.

Crude oil reached the highest nominal price in history, topping $113 a barrel for the first time ever at the New York Mercantile Exchange this morning and a new high near $112 for Brent futures traded in London. It's also been another record day for gasoline futures here at the Nymex.

On the supply side, the lead story in today's Wall Street Journal spooked many traders on the floor. Russia, the world's largest oil producer and one of the biggest exporters, saw its production decline in the first quarter, the first time in 10 years that this has happened. We can no longer assume Russia will keep pumping like it has in the past.

Supply disruptions along the Mexican Gulf Coast on the heels of the sabotage on ENI oil plants in Nigeria yesterday also have helped tip prices to their near peak. Several Mexican oil ports closed over the weekend remain shut today, slowing crude oil exports by state-run Petroleos Mexicanos (Pemex), which produced 2.929 million barrels a day of crude in February, most of it in the offshore Bay of Campeche, and exported 1.429 million bpd, mostly to the U.S. Gulf Coast.

And did anyone hear about a fire in Bahrain? Well the energy markets did adding to supply jitters, although the problem in Bahrain had hardly any impact on production.

On the demand side, the distillate market is also on fire this morning with heating oil futures surging over 1.5 percent on a report that China's diesel imports rebounded soared more than 500% in the first quarter from the same period last year. Demand may be down in the U.S. and Europe, but it's bustling in emerging markets.

And while we'd like to blame the weaker dollar on today's rise in crude too. We can't. The dollar's slide against the euro may have contributed to the overnight surge.

But during this morning's trading session, so far the greenback has stabilized fairly well. The decline in the dollar index pales in comparison to the huge spike in oil prices since the late August lows to now. Even if traders start to price in this factor, supply/demand issues will take center stage.

Next test for oil: $115 a barrel. Not a big stretch, just a little over a dollar away. Oil prices could skyrocket even further. How high could they go? Options trades tell me there's significant buying in June $140 calls. June crude options will be the front month starting on Friday, following Thursday's expiration of the May contract. That's a good indication that this upward momentum will continue to send oil to prices never seen before.

Questions? Comments? energysource@cnbc.com