Oil prices retreat from $126 a barrel record

Investors often buy commodities such as oil as a hedge against inflation when the greenback falls, but that effect can reverse when the dollar gains against other currencies, as it has in Tokyo currency markets on Monday.

The euro around midday there was quoted at US$1.5405, down from US$1.5480 last Friday in New York. The dollar also strengthened against the yen, rising back above the 103 mark.

"That would seem to be the major reason why the oil price has lost a little of ground in U.S. dollar terms," said David Moore, commodity strategist with the Commonwealth Bank of Australia in Sydney.

Light, sweet crude for June delivery dropped 32 cents to US$125.64 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore.

On Friday, the contract broke above US$126 for the first time and settled at a record close of US$125.96 a barrel, up US$2.27.

The advance at the end of last week came after Colombia said it recovered documents from a slain guerrilla that indicate Venezuelan President Hugo Chavez has offered assistance to Colombian rebels. Some U.S. lawmakers have cited the documents to argue that the White House should add Venezuela to a list of state terror sponsors that includes North Korea, Iran, Syria, Sudan and Cuba.

Such a move would most likely spur Venezuela to cut off oil exports to the U.S., but analysts believe such a provocative diplomatic step is unlikely.

"That would be self-defeating," said Michael Shifter of the Washington think tank Inter-American Dialogue. "It might give Chavez a boost when he is in serious political trouble at home -and it would risk a further jump in oil prices in the U.S. in an election year."

Moore said in Sydney that China's trade data for April -due out later Monday -could provide another boost for oil.