Analysts worry that government stimulus spending, especially in the U.S., and rising commodity prices could push prices higher by the end of the year.
Oil prices rose to near $72 a barrel on Friday amid concerns that massive U.S. fiscal spending will spark inflation down the road, making oil and other commodities attractive investment alternatives.
Benchmark crude for July delivery rose 61 cents to $71.98 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. On Thursday, it rose 34 cents to settle at $71.37.
After hitting an eight-month high of $73.23 on June 11, oil has lingered above $70 a barrel this week on investor optimism that the global economy is stabilizing from a severe slowdown.
Traders are also buying crude and other commodities as protection against possible inflation and a weaker dollar.
On Friday, the euro rose to $1.3914 from $1.3903 late Thursday in New York, while the British pound also gained, trading at $1.6424 from $1.6350 in the previous session.
"As an inflation hedge, oil is very popular right now," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. "The theme of the market is the inflation scare, and it's getting more pronounced. Crude is seen as a safe bet in this environment."
So far, inflation rates have remained low, with some countries slipping into disinflation amid deep recessions. But analysts worry that government stimulus spending, especially in the U.S., and rising commodity prices could push prices higher by the end of the year.
Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore, said in a report that he expects the inflation rate in Asia excluding Japan and China to bottom at 3 percent in September and then rise to 5 percent by year-end and 6.5 percent by mid-2010.
"A strong rise in both food and energy price inflation will push the headline rate higher," he said. "It is by no means clear that markets or policy makers are prepared for this kind of rapid reversal in inflation."
Analysts also highlighted potential risk factors in Iran and Nigeria.
"The Iranian version of the Florida vote-recount is starting to be a bit too long for comfort," said Olivier Jakob of Petromatrix in Switzerland. "The continuation of the protests in Teheran are a mounting embarrassment for the governing powers and increases the chance either a violent repression or the creation of a diversion by opening another front."
In Nigeria, Africa's largest crude producer, the main militant group said it blew up a major pipeline run by Italian oil company Agip, although there was no immediate confirmation from the subsidiary of Italian energy giant Eni SpA.
Violence has been escalating in the oil-rich southern region as the military intensifies operations to flush out rebels battling for a larger share of the Nigeria's oil revenues.
In other Nymex trading, gasoline for July delivery was up 0.64 cent to $2.0359 a gallon and heating oil rose 2.2 cents to $1.8590. Natural gas for July delivery gained 3.5 cents to $4.128 per 1,000 cubic feet.
In London, Brent prices rose 64 cents to $71.70 a barrel on the ICE Futures exchange.
