Oil hits new record, then reverses on worries

Light, sweet crude for July delivery fell 25 cents to settle at $134.61 a barrel on the New York Mercantile Exchange after earlier soaring to a trading record of $139.89. Earlier, they dropped as low as $132.84.

With little in the way of news to explain oil's turnabout, analysts pointed to Saudi Arabia's weekend decision to boost production and to Tuesday's expiration of crude options, which are agreements to buy or sell futures at higher or lower prices.

Trading is often volatile in the days immediately preceding options expiration. "That could be the cause of some of the volatility today," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

Saudi Arabia, the world's largest oil producer, told U.N. chief Ban Ki-moon over the weekend that it would boost oil output by 200,000 barrels a day, or by 2 percent, from June to July. In May, the kingdom raised production by 300,000 barrels a day.

A sense that the Saudis may be getting serious about boosting output could be growing among some investors. Still, many analysts believe the boost in Saudi output is too little to make much difference.

"Saudi Arabia's proposed output addition will only go some way in offsetting the significant output losses in other OPEC nations like Nigeria," said Barclays Capital analyst Kevin Norrish in a research note.

Cordier said Saudi Arabia has "to increase by north of 1 million barrels per day" to have an impact on prices, "and the market doesn't think they have it."

According to the International Energy Agency, OPEC spare capacity fell below 2 million barrels a day in May for the first time since 2006. The majority of that--about 1.45 million barrels a day--was in Saudi Arabia.

Earlier Monday, prices rose as the dollar fell against the euro. Many investors buy commodities such as oil as a hedge against inflation when the dollar falls. Also, a weaker dollar makes oil less expensive to investors dealing in other currencies. Many analysts believe the dollar's protracted decline is a major factor behind oil's doubling in price over the past year.