Oil prices surge to fresh two and a half year highs

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Oil prices have surged to a two-and-a-half-year high on concerns about supply and a weaker dollar.

Brent crude topped $126, while US crude was at $112.79.

Other commodity prices were also boosted by the fall in the US currency, as a weaker dollar makes commodities cheaper for investors holding other currencies.

Gold hit a new record of $1473.40 an ounce, while silver went to $40.22 an ounce, its highest since 1980.

With little prospect of an interest rate rise in the US any time soon, the dollar has fallen in recent weeks.

It stands at a 15-month low against a basket of currencies. In morning Friday trade, the pound and the euro rose further, to $1.6427 and $1.4422 respectively.

Interest rates in the eurozone rose on Thursday, from 1% to 1.25%, with the UK expected to increase borrowing costs within the next few months.

Higher rates are used to combat inflation, which is being driven by rising commodity prices.

Gold guard

Gold is also seen by many investors as a good way of guarding against rising prices. Traditionally it gains in value when inflation is rising and eroding the value of cash.

There have been persistent worries that the unrest in Libya and the Middle East will hurt oil supplies.

Production in Libya, the world's 17th largest oil producer, has been severely affected as fighting between the government and rebels continues.

Officials in rebel-held eastern Libya are calling on Nato to safeguard oilfields under rebel control.

In his first television interview the head of the rebel oil company, Wahid Bourgaighis, told the BBC it was in everyone's interest for Nato to keep a close watch over the facilities.

While there has been concern about a shortfall in supplies from the oil-producing nations, the demand for oil has been increasing.

The economic growth of emerging nations is producing a surge in demand, fuelled by a need for oil to power the industrial sector, as well as an ever growing number of vehicles on the road.

The International Monetary Fund (IMF) issued a warning that the disparity in demand and supply of oil is likely to push prices even higher.

"There is a risk that the tensions between demand and supply trends could intensify again and prices could rise rapidly," said Thomas Helbling an advisor to IMF's research department.


The IMF also warned that the markets are likely to face further scarcity in oil supplies.

"The increase in the trend component of oil prices suggest that the global oil market has entered a period of increased scarcity," the IMF said.

As concerns continue about a shortfall in supply, oil companies' efforts to add more supply sources are also being hampered.

"To make matters worse there are considerable constraints affecting the development of new oil supplies." said Rajiv Biswas of IHS global insight

He said the current events in North Africa and the Middle East are forcing companies to rethink their investment strategies.

"Political risks in large, low-cost oil producers like Iraq and Iran mean that companies face considerable difficulties and restrictions in investing in these countries" he added.

Mr Biswas said as these issues continue to affect the markets, oil prices are likely to rise even further.

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