Record oil may hold stocks hostage

By Kristina Cooke

NEW YORK (Reuters) - Stocks will face major obstacles to extending their gains next week if the price of oil continues to break records, as fears about inflation and the discretionary spending power of the embattled American consumer are forced into the spotlight.

The gyrating price of oil has been a significant factor in the price of stocks in the past week. Oil rose to a record $127.82 a barrel on Friday, after Goldman Sachs, the most active investment bank in energy markets, forecast a continued spike in prices through the end of the year, due to thin supply.

"The idea that oil could rise a lot further before it reaches a tipping point is really slipping into investors' psyche," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

Earnings from a handful of major retailers, including Target (TGT.N: Quote, Profile, Research), could shed more light on how much the rising costs of fuel and food and deteriorating home prices are affecting consumer spending. Investors also will be keeping a keen eye on inflation data.

"If oil prices continue to move up, with Memorial Day coming up, I think traders and investors will be very cautious," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

The Memorial Day holiday in the United States typically marks the start of the summer driving season.

For the week, the Dow Jones industrial average gained 1.9 percent, while the Standard & Poor's 500 Index .SPX advanced 2.7 percent and the Nasdaq Composite Index .IXIC climbed 3.4 percent.

At the close on Friday, the S&P 500 was within 3 percent of being in the black for the year, while the Dow needs to gain about 2.2 percent and the Nasdaq about 4.8 percent.