Oil surges to new highs, dealers focus on diesel

By Richard Valdmanis

NEW YORK (Reuters) - Oil prices rose more than a dollar Wednesday to over $123 a barrel, extending further into record territory as worries over tight world supplies of diesel outweighed a boost in U.S. crude stocks.

U.S. crude leapt $1.49 to $123.33 a barrel by 1:44 p.m. EDT (1744 GMT) after hitting an all-time peak of $123.56. London Brent rose $1.84 to $122.15.

Crude prices have doubled in a year and risen six-fold since 2002 on escalating worries over inventories, adding pressure to consumer economies already hard hit by a housing and credit crunch and sparking widespread calls for more output from producer group OPEC.

Wednesday's rally came after a U.S. government report showed a decline last week in distillate inventories -- which include diesel and heating oil -- that brought stockpiles in the world's biggest energy consumer nearly 13 percent below a year ago.

Power supply tightness in China, South Africa, Chile, Argentina, and parts of the Middle East have triggered a worldwide boom in demand for diesel for use in electric generators, adding to robust demand for use in Europe's passenger vehicle fleet.

There is a "bullish outlook for diesel," said Societe Generale in a research note.

U.S. retail diesel prices are running at a record $4.24 a gallon, about 40 cents higher than gasoline at the pumps.

The report from the Energy Information Administration also showed an increase in U.S. crude oil stockpiles of 5.7 million barrels and an increase in gasoline supplies of 800,000 barrels, tempering the market's gains.