Crude oil futures have taken out so many records this year that you'd be forgiven for losing count. This week was no exception. New York crude futures breached the $115 a barrel level, with prices holding steady at $115 during the Asian session Friday.

AP

Once again, the incredible shrinking dollar led oil higher. The euro hit a new high against the greenback, just shy of $1.60, after March euro-zone consumer inflation rate rose to 3.6 percent, well above the European Central Bank's 2 percent target and contrasting with the relatively benign reading for the U.S. core consumer price index.

The bottom line: Eurozone policymakers are more likely to raise rates while the Fed remains on an easing track. That was the green light for investors to pile back into the short dollar/long commodity trade once again.

Investment demand has been a headline-grabber but wasn't the only game in town this week. Supply fundamentals, relegated to bit-part player status by the sheer speculative inflows, won the market’s attention.

The Energy Information Administration’s weekly snapshot of U.S. oil supplies showed crude oil stocks unexpectedly falling 2.3 million barrels -- a bullish surprise since most traders were banking on a 1.5 million barrel build. Fog in the Houston Ship Channel fouled up imports on the Gulf Coast causing this latest supply drop, which leaves crude stockpiles in the lower half of the average range for this time of year.

Interestingly, the crude decline came despite voluntary run-cuts by major refiners. Refiners are processing less crude -- demand for refined products has softened because of the economic slowdown and product prices are not keeping up with the surging cost of crude oil. Latest government data puts the picture into perspective: U.S. refineries operated at their lowest rates since October 2005 when the Gulf Coast, the U.S. refining heartland, was struggling to recover after being devastated by hurricanes Katrina and Rita.

Another striking highlight from the supply data -- a larger-than-forecast 5.5 million barrel drop in gasoline stocks representing the fifth straight week of declines. Still, stockpiles overall remain comfortably above the five-year average by some 7 percent which bodes well for the third-quarter driving season when demand typically peaks.

Some in the market expect a softer gasoline demand during this period as families 'garage the station wagon' and cancel the driving vacation to the Grand Canyon as pump prices near $4.00 a gallon. This summer will be the litmus test on just how resilient U.S. motorists are to higher retail gasoline prices.

"Retail prices need to hit $4 to really see people throw in the towel and change their driving habits," Tom Weber, chief market strategist, at Axis Global Management in Los Angeles, told me recently. The national price for regular, self-service gasoline hit a record $3.39 a gallon this week, according to the EIA.

True, we have witnessed some demand destruction because of record retail prices but we haven't seen an outright collapse in demand. If anything, latest government data shows gasoline demand over the past four week rose 0.8 percent from a year ago to about 9.3 million barrels a day -- proof perhaps that the American love affair with the automobile is far from over.

Where do we go from here? Near term, the consensus view suggests higher prices with much hinging on the direction of the dollar. In L.A., Tom at Axis Global tells me he's sticking with his call of $120 as soon as within a week should the dollar continue to forge new record lows against the euro.

And oil could trade above $120 that should the euro make a convincing break above $1.60, he says. Meanwhile in Chicago, Phil Flynn of senior market analyst with Alaron Trading, agrees with the $120 call. "That wouldn’t surprise me ... we closed close enough to $115 (on Wednesday) to take a shot at $120.”

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