Oil surges to record over $88 a barrel

NEW YORK (Reuters) - Oil thundered to a new peak above $88 a barrel on Tuesday as investors eyeing supply concerns and tensions in northern Iraq extended the nine-dollar rally that started last week.

The administration of U.S. President George W. Bush said prices were now too high for the world's top oil consumer, which is already facing economic pressure from the meltdown in the subprime mortgage market.

"There is no doubt that energy prices are too high. They disproportionately hurt low-income families that have to spend so much of their money on energy," said White House press secretary Dana Perino.

"We watch it closely, we're very concerned."

U.S. crude settled up $1.48 at $87.61 a barrel, easing off the earlier record high of $88.20. London Brent rose $1.41 to $84.16 a barrel.

The record surge raised alarm bells for producer group OPEC, which blamed rampant speculation by big money investors rather than any shortage of supply.

"While the Organization does not favor oil prices at this level, it strongly believes that fundamentals are not supporting current high prices and that the market is very well supplied," the group said in a statement.

Oil prices, averaging $67 this year, are closing in on the inflation-adjusted high of $90.46 seen in 1980, the year after the Iranian revolution and at the start of the Iran-Iraq war.

Investors said the rally was supported by tensions between Turkey and Kurdish separatists in northern Iraq, world energy demand growth, tight inventories in consumer nations heading into winter and unprecedented weakness in the U.S. dollar.

"This market has it all right now," said Peter Beutel, president of energy trading consultant Cameron Hanover. "It has supply concerns, projected increases in demand, dollar weakness, momentum and political fears."

The Turkish cabinet asked parliament Monday for permission to launch an attack on Kurdish separatists in northern Iraq, dimming hopes for a recovery in Iraqi oil exports via Turkey, which have been sporadic since 2003. Turkey is also a major conduit for Caspian oil exports to the Mediterranean.

OPEC OIL

The U.S. Energy Information Administration said on Tuesday that the market needs additional OPEC oil, only days after the U.S. Secretary of Energy said another hike may not be needed.

OPEC officials said they had heard no discussion within the organization about raising output beyond the 500,000 barrels per day agreed in September, which takes effect on November 1.

"The market fundamentals are in balance. There is too much money coming into the market," Indonesia's OPEC governor Maizar Rahman told Reuters.

Moves by the U.S. Federal Reserve to cut interest rates and add billions of dollars of temporary reserves to the banking system have added liquidity that is finding its way into oil, seen by some as a one-way bet.

"We suspect massive long-side commitment by sidelined money has had more to do with it," said Edward Meir of MF Global.

Oil has climbed from below $70 in mid-August and surged 10 percent since October 9. The rally has also been aided by fund buying as a hedge against a weaker dollar. Gold has hit a 28-year high and platinum breached record levels.

(Additional reporting by Richard Valdmanis in New York and Janet McBride in London)