Oil peaks near $110 before easing on cenbank moves

NEW YORK (Reuters) - Oil surged to a record near $110 a barrel on Tuesday before a liquidity injection by the U.S. Federal Reserve and other central banks pared gains.

U.S. crude settled up 85 cents at $108.75 a barrel after hitting $109.72. London Brent crude LCOc1 rose $1.09 to $105.25 a barrel, off a record $105.82.

U.S. oil has touched record highs for five straight sessions as investors flock into commodities markets to hedge against inflation and the weak U.S. dollar.

Oil eased off early highs after the U.S. Federal Reserve and other central banks teamed up to get hundreds of billions of dollars in fresh funds to cash-starved credit markets.

"There is a tug-of-war on the Fed liquidity action announced today," said Mark Waggoner, president of Excel Futures in Huntington Beach, California.

"The immediate reaction has been to boost the dollar, but the move will add $200 billion to the economy and that is inflationary and will cause the dollar to go down, not up ... in the long run this move is negative for the dollar."

The Fed move sent the dollar up from an all-time low against the euro.

"Oil is definitely reacting to the reversal of the dollar, on coordinated central bank liquidity action," said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc.

Despite oil's record rally, analysts have said demand could be hurt by high prices and slower economic growth.

The International Energy Agency on Tuesday forecast world oil demand would be less than expected this year, but said only a severe recession would push oil back below $60 a barrel.

"We are in an era of higher oil prices and so if we look at $100 oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of the decade," said the IEA, adviser to 27 industrialized countries.

Some experts say fundamentals could tug down prices in the near-term, however.

Goldman Sachs warned oil was at risk from substantial fund liquidation due to cyclical demand weaknesses in the next few months, but the investment bank remains constructive on energy for the long-term.

"We believe that the combination of low economic growth in the United States and high oil price inflation will have its strongest impact on demand in the first half of the year," the investment bank said in a research note.

Analysts forecast that weekly U.S. inventory data due out on Wednesday would show crude inventories up 1.7 million barrels in the week to March 7, according to a Reuters poll.

Gasoline stocks were expected to show a small build with distillates down.

(Additional reporting by Chua Baizhen in Singapore and Santosh Menon and Jane Merriman in London; Editing by Christian Wiessner)