May 16. In global petroleum market news, oil futures ended a volatile session slightly lower Thursday as the expiration of options played havoc with prices, driving crude near record high levels at times and down by more than USD 3 a barrel at others. Light, sweet crude for June delivery fell 10 cents to settle at USD 124.12 a barrel on NYMEX after rising as high as USD 126.64 earlier in the session, and falling as low as USD 120.75 later in the day. Oil prices reached a trading record of USD 126.98 a barrel on Tuesday. In London, June Brent crude fell 61 cents to settle at $121.25 a barrel on the ICE Futures exchange. Options allow investors to bet on whether oil prices will rise or fall in the future. Oil prices can fluctuate widely on days when options expire, and yesterday was a prime example! The effect may be exacerbated at a time when prices at historic levels have drawn more investors to speculate in options, we believe. Contributing to the volatility, the June WTI crude oil contract expires next week. Oil prices tend to trade erratically as investors square positions ahead of a contract expiration, as we noted in yesterday’s Daily. Natural gas prices tumbled Thursday after the Energy Department said natural gas inventories rose by 93 bn cubic feet last week, overshooting the consensus figure. This build helped pull oil prices down from earlier highs. The dollar also reversed course Thursday, gaining strength against the euro and prompting selling by investors who had earlier bought oil as a hedge against inflation. As we have noted before, a stronger dollar makes oil more expensive to investors overseas. However, this morning oil prices rebounded to near USD 125 a barrel, led by the bullish heating oil market as China and Europe scramble for barrels, thinning global supply. Meanwhile, OPEC said Thursday that prices had more to do with financial market volatility than fundamentals. The oil cartel's Monthly Oil Market Report argues that record oil prices are slowing demand growth, lowering its forecast for world demand growth to 1.16 mn bpd, 40,000 bpd less than its previous forecast. Moving forward, we believe that right now global supply of distillates is very tight, and this factor could trigger a new move to the upside. Surging demand from developing countries, such as China, has helped bolster heating oil prices and we expect PetroChina to buy a third more diesel at 400,000 tons for June versus May's levels, following the recent deadly earthquake. We reiterate our short-term forecast that WTI and Brent will reach USD 130 heading into the peak summer driving season, which is due to kick off on Memorial Day at the end of May.