Oil nears $126 per barrel ahead of US driving season

Light, sweet crude for June delivery rose to a record $125.98 a barrel in electronic trading on the New York Mercantile Exchange near midday before falling back to $125.75, up $2.06 on the day, by the afternoon in Europe.

On Thursday, the contract rose to a record close of $123.69 a barrel.

In London, Brent crude contracts also hit record highs before slipping and traded up $1.96 on the day at $124.80 a barrel on the ICE Futures exchange. Earlier Friday, Brent had reached $125.68 before falling back.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government, heightening chances that the U.S. could impose sanctions on one of its biggest oil suppliers as a state sponsor of terror.

Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas.

"If we put on sanctions I'm sure Chavez would threaten to cut off our oil supply," said Phil Flynn, an analyst at Alaron Trading Corp. "Obviously that would have a major impact on oil prices."

Even if Chavez cut oil shipments to the U.S., Venezuela would still pump and sell oil, Flynn said. And much of that oil would come to the U.S. via middle men, who would buy it from Venezuela and resell it to the U.S. But that new layer in the supply chain would bump up costs, he said.

The European Central Bank also indicated that it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar.

By the afternoon in Europe, the euro stood at $1.5444 compared to $1.5404 in late trading Thursday night in New York. The dollar was also weaker Friday against the British pound and the Japanese yen.