Oil rallies to record $124 on strong diesel demand

By Matthew Robinson

NEW YORK (Reuters) - Oil rallied back from early losses on Thursday to strike a fresh record above $124 a barrel as strong diesel demand outweighed signs of rising OPEC supplies.

U.S. crude traded up to an all-peak of $124.61 a barrel in late activity, after settling up 16 cents at $123.69. London Brent crude rose $1.47 to $123.79 a barrel, after settling 52 cents higher at $122.84.

Oil rallied late on the strength of middle distillates, including diesel, on growing demand for transport fuel in Europe and power demand in emerging economies.

A recent strike at the UK's Grangemouth refinery and production problems at the Porvoo refinery diesel unit in Finland have also thinned supplies.

Shortages of alternate fuels in China, South Africa, Latin America and parts of the Middle East have also set off a worldwide boom in demand for diesel for use in electric generators.

Further strength came from a U.S. government inventory report on Wednesday that showed U.S. distillate supplies down last week.

"There's a continuation of the strength in the middle distillate market that we've seen for a while now," said Eric Wittenauer, analyst at Wachovia Securities.

"On a global scale, you have a combination of growth in industrial use and for heating purposes and for transport in Europe."