FACTBOX: Why oil prices are at a record high

(Reuters) - U.S. oil hit a record high $96.24 a barrel on Thursday after a steeper-than-expected drop in U.S. crude oil stocks and a further cut in U.S. interest rates.

Strong demand for crude and a weak dollar have fuelled the rally from a dip below $50 at the start of the year.

Adjusted for inflation, oil is still below the $101.70 peak hit in April 1980, according to the International Energy Agency, a year after the Iranian revolution.

DOLLAR WEAKNESS

The fall in the value of the dollar against other major currencies has helped drive buying across commodities as investors view dollar assets as relatively cheap.

It has also reduced the purchasing power of OPEC's revenues and increased the purchasing power of some non-dollar consumers.

OPEC oil ministers have noted that although prices are rising to record nominal levels, inflation and the dollar have softened the impact.

Some analysts say investors have been using oil as a hedge against the weaker dollar.

FUNDS

Since the Federal Reserve cut U.S. interest rates in mid-August and central banks pumped billions of dollars into financial markets to ease a credit crunch, oil prices have surged 37 percent and gold has risen 20 percent.

Investment flows from pension and hedge funds into commodities including oil have boomed, as has speculative trading. At the same time, the credit crunch has brought some other markets, notably the U.S. asset-backed commercial paper market, to a virtual standstill.

In the United States, the size of the asset-backed commercial paper market has fallen for 11 consecutive weeks, to $883.7 billion this week from a peak of $1.17 trillion at the end of July, according to data from the Federal Reserve.

In Europe, according to analysts at BNP Paribas, the market shrunk to $192 billion at the end of September from $297 billion at the end of July.

Some of that money has found its way into energy and commodities.