Oil prices rallied strongly this morning, pushing through the $128 a barrel level, after more than two weeks of falling prices.

The rally, which saw the price of crude climb more than $6 in after-hours trading in New York last night, was attributed to the weak dollar which tumbled against the euro yesterday, after the European Central Bank issued a surprise warning that surging inflation could force it to lift eurozone interest rates.

US light crude for July delivery was 92 cents up at $128.71 a barrel this morning, off early highs of $128.87. It surged $6.08 to $128.38 a barrel in after-hours trading on Thursday in the US, erasing two days of sharp losses triggered by worries that high oil prices were starting to dent demand.

London Brent crude rose 50 cents to $128.04.

However, oil traders said the reality was that the market had been oversold in recent days as many traders gambled that the price would fall through the $120 a barrel level.

“We may well see a follow through rally today as traders will be nervous of too much short exposure as fundamental headlines still emanate from a bullish stance,” Robert Laughlin, analyst at MF Global, said.

Marc Lansonneur, head of commodities derivatives in Asia, at Societe Generale, said the market was in a state of uncertainty after Thursday’s $6 move.

“If oil continues to rise, it could test $135 or $140 ... Today will be a key day because we’ll see whether the rebound was purely technical or not. It could set the trend for next week,” he added.

Today's rally has put paid to motorists' hopes that high diesel and petrol prices would fall, as the price of crude had fallen since May 23 when it hit an all-time high of $135 a barrel.

The dollar was steady against the euro on Friday, having fallen by more than 1 per cent on Thursday after Jean-Claude Trichet, president of the European Central Bank, suggestion that an interest rate increase was possible as soon as next month.

The International Energy Agency (IEA), an adviser to 27 industrialised countries, issues its latest forecasts next week and has said it may lower its esimates of how quickly demand will grow in 2008.

It has already more than halved its projections of demand to 1.03 million barrels per day (bpd). G8 energy ministers will meet with energy ministers from China, India and South Korea this weekend to try and forge an agreement on how the countries can address the five-year rally in oil prices.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive