Oil prices ease below $126 a barrel

Oil prices dropped below $126 a barrel Monday in Asia after punching through to another trading record at the end of last week despite an increase in output by Saudi Arabia.

The world's leading oil producer promised an additional 300,000 barrels of crude a day as President Bush wrapped up a meeting Friday with Saudi Arabia's King Abdullah. But that and the U.S. move to temporarily stop filling government stockpiles have done little to change overall sentiment in the market.

"There's a perception that demand is going to hold up pretty strongly this year," said Mark Pervan, senior commodity strategist at Australia & New Zealand Bank in Melbourne. "This idea that the market just couldn't handle a hundred dollar oil has just gone out the window ... so there's a parallel shift at where the market will trade."

Late afternoon in Singapore, light, sweet crude for June delivery was down 34 cents at $125.95 a barrel in electronic trading on the New York Mercantile Exchange.

In Friday trade, the June contract hit a trading record of $127.82 a barrel before settling at $126.29, up $2.17 from the previous close. That record was the eighth in the previous 10 sessions, and the first time oil had topped $127.

The reason for the disconnect between the U.S. and Saudi decisions and oil prices has primarily to do with market expectations. The Saudi production increase was seen as minuscule, and no one expected the suspension of shipments to America's Strategic Petroleum Reserve to have much impact on supplies.

Goldman Sachs (GS, Fortune 500), one of the most influential investment banks, underscored that sentiment Friday when it hiked its oil price forecast for the second half of the year to $141 a barrel, up from $107 previously. Analysts at the bank argue that the oil market is undergoing a "structural repricing" that will continue to play out for some time to come.

"We would view any pullback in oil, regardless of the size or duration - although a correction could be as large as 15% - as an opportunity to re-establish long positions in oil before the summer," Goldman Sachs advised traders.

Earlier this month, a Goldman Sachs analyst predicted that oil prices could reach $150-$200 a barrel over the next six months to two years.

There has been a growing belief that the investment bank is "going to be correct again," said Pervan. "It was a contentious call when they called ... for $100 oil ... but this second call has a lot more credit," he said.

Arjun N. Murti, the Goldman Sachs analyst making the call for $150-$200 oil, had forecast in April 2005 - when oil was trading at less than $60 a barrel - that prices would rise to as high as $105.

At the time, many analysts said the market would never support such high oil prices.

"The market's sitting up and listening a lot more closely this time around," said Pervan.

In other Nymex trading, heating oil futures fell 1.5 cents to $3.6878 a gallon while gasoline prices fell 0.4 cent to $3.2195 a gallon. Natural gas futures rose 3.3 cents to $11.127 per 1,000 cubic feet.