Oil prices approached $109 a barrel Thursday as traders weighed the fighting in Libya and a weaker dollar against concerns rising fuel costs could undermine U.S. economic growth and demand for crude.
By early afternoon, benchmark crude for May delivery was up 12 cents at $108.95 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained 49 cents to settle at $108.83 on Wednesday.
In London, Brent crude for May delivery was down 15 cents to $122.15 a barrel on the ICE Futures exchange.
"The war in Libya and unrest in the Middle East are pushing oil prices up further and further," said analysts at Commerzbank in Frankfurt.
Crude has traded near $108 this week as traders mull the impact of Libya's civil conflict, a weakening U.S. dollar and China's fourth interest rate hike since October. Investors are also concerned that a 29 percent jump in oil prices since mid-February will force consumers to spend more on fuel costs and will eventually undermine crude demand.
Regular unleaded gasoline in the U.S. currently averages $3.69 a gallon, up 23 percent from a year earlier.
"The main worry is that with more of the consumer's budget going toward gas at the pump, it will hold back the nascent recovery," said Anthony Michael Sabino, a professor at St. John's University business school. "It will put a crimp into spending plans for corporate America, as the costs of energy, transportation, and so forth rise accordingly."
A weaker dollar makes commodities like oil priced in dollars cheaper and more attractive for investors holding other currencies, often leading to higher oil prices.
The euro strengthened Thursday as the European Central Bank said it was raising its main interest rate by a quarter of a percentage point.
"The impact of a stronger euro will likely fuel commodity prices even higher over the balance of the week, although in energy's case, prices are starting to get dangerously high, and have gotten to a point where yet another inflationary spiral could be unleashed, particularly in emerging markets," said Edward Meir of MF Global in New York. "As prices move up, the prospect of creeping demand destruction in energy now seems to be more likely," Meir concluded.
In Asia, subsidies and price controls will help temper the impact of rising crude costs on inflation and consumer spending. However, India, Japan, South Korea, Taiwan and Thailand remain the most vulnerable to higher fuel prices if the crude spike continues, HSBC said in a report.
"The bigger worry for Asia is the damage that high oil prices may do to exports," HSBC said. "If consumers in the West begin to cut back, shipments will slow at a time when local households are already turning more cautious."
In other Nymex trading in May contracts, heating oil fell 0.27 cent to $3.1885 a gallon and gasoline dropped 0.58 cent to $3.1871 a gallon. Natural gas futures were down 3.5 cents at $4.111 per 1,000 cubic feet.