FACTBOX: Why oil prices are at a record high

(Reuters) - U.S. crude oil was trading above $87 a barrel on Wednesday, after hitting an all-time high of $88.20 the previous day.

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

DOLLAR WEAKNESS

The fall in the value of the U.S. 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.

The group's OPEC reference price in nominal terms was $74.18 in September, but was valued at $50.98 when adjusted for inflation and the weak dollar.

DEMAND

While previous price spikes have been triggered by supply disruptions, demand from top consumers the United States and China is a main driver of the current rally.

Global demand growth has slowed after a surge in 2004, but is still rising and higher prices have so far had a very limited effect on economic growth.

Analysts say the world is coping well with high nominal prices because adjusted for exchange rates and inflation, they are lower than during previous price spikes and some economies have become less energy intensive.

FUNDS

Investment flows from pension and hedge funds into commodities including oil have resumed after a hiatus early in the year due to concerns about the global economy.

Speculative trading in energy markets has boomed in recent years as investors sought to beat returns in other markets such as equities and bonds.

OPEC SUPPLY RESTRAINT

The Organization of the Petroleum Exporting Countries, source of more than a third of the world's oil, started to reduce oil output in late 2006 to stem a fall in prices.