Oil prices pass $135 after report of supply drop

"That's a fait accompli at this point," said Linda Rafield, senior oil analyst at Platts, the energy research arm of McGraw-Hill Cos.

Prices are already that high in many parts of the country, and the number of stations charging $4 or more rises each day. Prices are nearing $5 a gallon in parts of Alaska.

Diesel fuel rose 1.9 cents to its own record of $4.558 a gallon Wednesday. Rising prices of diesel, used to transport most consumer and industrial goods, are sending prices of food and many other goods higher.

There are signs that high prices are cutting demand for gasoline, which fell slightly over the past four weeks and has been mostly lower since January, according to EIA data. Only serious "demand destruction," a jump in supplies from Nigeria or other oil producing nations or a jump in gasoline output by U.S. refiners could stop prices from continuing to rise, Rafield said. There is little sign that demand will fall anytime soon in fast-growing China, India and the Middle East, she said.

A move by the government to shore up the dollar, or an announcement that the Federal Reserve won't cut interest rates further, could also reverse the upward momentum, Flynn said; rate cuts tend to weaken the dollar. On Wednesday, the Fed released minutes of its most recent meeting that left the impression it's not inclined to cut interest rates further.

Still, the price differences between the current, July crude oil contract and contracts for delivery of oil in later months signal a possible correction, or sharp price downturn, at some point, Rafield said. Many analysts have long argued that prices have risen well beyond levels that can be justified by supply and demand fundamentals.

"It's very difficult to call when this is going to happen, but when it happens, it's going to be quick and ugly," Flynn said.

In other Nymex trading, June gasoline futures rose 9.21 cents to settle at $3.3965 a gallon after rising to a trading record of $3.4081, and June heating oil futures rose 13.34 cents to settle at $3.9084 a gallon after setting a new trading record of $3.9187.

June natural gas futures rose 27.5 cents to settle at $11.64 per 1,000 cubic feet.

The EIA said gasoline inventories also fell and took the market by surprise, while inventories of distillates, which include heating oil and diesel fuel, rose less than analysts surveyed by Platts had expected.