Rising oil pushes up wholesale prices

The price of oil shot to a record Tuesday, pushed up by supply worries — and a gusher of new money into the commodities markets.
Texas light, sweet crude for May delivery closed at $113.79, up $2.03 from Monday's record settlement at $111.76. Oil has soared 79% the past 12 months. The record followed a government report that said prices at the wholesale level soared nearly 7% in the 12 months ended in March and that half the increase came from energy. Moving the prices:

•Oil production jitters. Middle East producers are pumping at full capacity. "Any supply disruption has an outsized impact," says Alec Young, equity market strategist for Standard & Poor's. Traders have been fretting about problems in Nigeria and Russia.

•Huge demand. "Even though the U.S. is in recession, analysts have underestimated the voracious demand for oil from emerging markets," Young says. Just seven in 1,000 Indians own a car, for example, despite India's booming economy. As emerging economies grow, so will the demand for oil and energy.

•The weak dollar. Oil is priced in dollars, and the value of the dollar has tumbled 8% this year vs. the euro. Producers raise prices to compensate for the lower value of the dollar.

All of these forces have been in place for some time. But huge demand for commodity investments — particularly in energy — have sent oil prices skyrocketing, says Tom Kloza, chief oil analyst for the Oil Price Information Service. "People are pouring money into commodities as the can't-miss asset class of the second half of the decade," Kloza says.

The number of energy futures contracts traded at the New York Mercantile Exchange in the first three months of 2008 soared 18% vs. the same period in 2007. Investors have poured a net $928 million into four of the largest commodity exchange-traded funds this year, Lipper says.

Commodity markets are smaller than the stock or bond markets, and even modest increases in volume can push up oil prices sharply. "People who say it has nothing to do with speculation are the same people who said there wasn't a housing bubble a few years ago," Kloza says.

Soaring oil prices drove wholesale prices up 1.1% in March from February, the second-largest increase in 33 years, the Labor Department said Tuesday.

Producers' prices in March were up 6.9% from a year earlier, and about half the increase came from higher energy costs. Energy prices on a monthly basis leaped 2.9% in March, led by a 13.1% rise in heating oil and a 15.3% gain in diesel fuel. Core producer prices, which are stripped of the volatile food and energy components, grew 0.2%.