NEW YORK (AP) -- Oil prices shot to a new record near $127 a barrel Tuesday on concerns that Iran may consider cutting crude oil production. Gas prices, meanwhile, rose to a new record over $3.73 a gallon Tuesday, and their advance shows little sign of slowing with Memorial Day weekend, the traditional start of the summer driving season, just 10 days away.
Light, sweet crude for June delivery rose as high as a record $126.98 a barrel in midday trading on the New York Mercantile Exchange Tuesday before retreating to settle up $1.57 at $125.80.
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill., said traders reacted to news reports that Iran's government is considering cutting crude oil production. James Cordier, president of Tampa, Fla., trading firms Liberty Trading Group and OptionSellers.com, said the news quickly made its way around trading floors.
In later news reports, Iranian officials denied that production cuts were imminent, but said a reduction has been discussed. Cordier doubts Iran will actually cut oil production. The nation's economy is in bad shape, Cordier said: "They need all the petrodollars they can get."
At the pump, meanwhile, the national average price of a gallon of regular gas rose 1.4 cents overnight to a record $3.732, according to a survey of stations by AAA and the Oil Price Information Service. Prices have now risen to the level at which the Energy Department forecasts they'll peak in June, on a monthly average basis; that means prices may still go higher, but their average will peak at around $3.73.
Many analysts have predicted prices will surge much higher, and may breach the psychologically important $4 level on a national basis within the next couple of months. Prices are already that high in many parts of the country.
Some analysts are beginning to question whether gas prices will follow their typical pattern of peaking around Memorial Day, then declining through the summer.
"Retail prices aren't going to decline as long as any part of the energy complex is heading higher," Ritterbusch said.
Retail diesel prices rose 2.9 cents Tuesday to a national average of $4.39 a gallon, according to AAA and the Oil Price Information Service. The high price of diesel has helped drive up costs for goods and services throughout the economy.
In sending crude prices higher Tuesday, investors shrugged off the dollar, which strengthened against the euro Tuesday. A stronger dollar often prompts selling by investors who had bought commodities such as oil as a hedge against inflation. Also, a stronger dollar makes oil more expensive for investors overseas.
Meanwhile, the International Energy Agency, an adviser to mostly western, industrialized nations, said high prices are cutting demand for oil and petroleum products in the U.S. and Europe. The IEA cut its global oil demand growth forecast for this year to 1.2 percent from 1.5 percent. In the U.S., the IEA said demand for oil may contract by as much as 2.1 percent this year, while demand for gasoline will drop by about 1 percent.
Energy investors are also concerned about China, which recently reported a drop in crude imports. Analysts were uncertain whether Monday's 7.9-magnitude earthquake in central China would have a significant impact on demand. The quake killed about 10,000 people and knocked power plants and other factories off-line. Strong demand from China and other fast-growing economies has underpinned oil's rise in recent years.
Also Tuesday, the Senate voted 97-1 to direct President Bush to stop adding to the nation's strategic petroleum reserve. Some lawmakers feel that these shipments, which average 70,000 barrels a day, are pushing oil prices higher. The administration argues that that amount is a pittance compared to the 21 million barrels of oil the U.S. consumes each day.
Oil prices may be more volatile in coming days as investors square positions ahead of the June contract's expiration next week.
In other Nymex trading Tuesday, June gasoline futures rose 3.58 cents to settle at $3.20 a gallon, and June heating oil futures rose 13.91 cents to settle at $3.6989 a gallon after earlier rising to a record $3.7146. Analysts said heating oil futures were boosted by reports that supplies of distillates, which include heating oil and diesel, fell last month in Europe.
June natural gas futures rose 12.1 cents to settle at $11.422 per 1,000 cubic feet.
In London, June Brent crude futures rose $1.19 to settle at $124.10 a barrel on the ICE Futures exchange.
Associated Press Writer George Jahn in Vienna, Austria, and AP Business Writer Thomas Hogue in Bangkok, Thailand, contributed to this report.