Oil prices hit new record high of $146 a barrel as the Europe's Central Bank raises interest rates

Correct expectations that the European Central Bank was ready to raise interest rates weakened the U.S. dollar and driving oil prices even higher, as investors turn to commodities as a hedge against a falling greenback, traders said.

'Even though the rise of European interest rates has been priced into oil, an official announcement by the ECB will still add momentum to oil prices,' said Victor Shum, an analyst with Purvin & Gertz in Singapore.

Tough times: Traders work on the floor of the New York Mercantile Exchange yesterday as oil prices rose to a new high

Prices may also be lifted with increased buying before U.S. oil markets close Friday for the Fourth of July holiday.

'There are numerous supply side concerns that support a strong pricing. As we head into a long weekend in the U.S., it's likely that we will see pricing bubbling away at $145,' Shum added.

Early afternoon in Singapore, light, sweet crude for August delivery was up 78 cents at $144.35 a barrel in Asian electronic trading on the New York Mercantile Exchange. Earlier in the session, it rose as high as $144.57 a barrel, a trading record.

That was after setting a new closing record for floor trade Wednesday at $143.57 -- a full $2.60 above the previous close.

The latest spike means a barrel of crude has gone up by more than half since the end of last year, when oil was going for $96 a barrel.

Meanwhile, in London on the ICE Futures exchange, Brent crude futures rose to a trading record of $145.75 a barrel.

Fuelling the flames of inflation: Record oil prices are being passed on to the consumer in the form of higher petrol prices

The Energy Department's Energy Information Administration said Wednesday crude oil supplies fell by 2 million barrels last week, or about 800,000 barrels more than analysts surveyed by the energy research firm Platts had predicted.

However, the report offered a mixed picture of energy use by the world's thirstiest oil consumer.

Gasoline supplies unexpectedly grew by a considerable amount, and demand continued to slide - suggesting record fuel prices are prompting a shift in American driving habits.

Ongoing rhetoric about possible attacks on Iran, the world's fourth-largest oil producer and OPEC's second-largest exporter, also left the market jittery.

Traders are worried Tehran could try to halt shipments and seize control of the strategically important Strait of Hormuz if attacked by Israel or the United States.

About 40 per cent of the world's tanker traffic passes through the Middle Eastern choke-point.

Iran's foreign minister did not rule the possibility that Iran could try to restrict oil traffic in the strait if the country was attacked.

'In Iran we must defend our national security, our country and our revolutionary system, and we will continue to do so,' Manouchehr Mottaki said.

Mottaki said he does not believe Israel or the United States will attack, however, calling the prospect of another war in the Middle East 'craziness.'

A senior U.S. military commander vowed to ensure that the strait remains open.

'We will not allow Iran to close it,' said Vice Adm. Kevin Cosgriff, commander of the 5th Fleet based in Bahrain, after talks with naval commanders of Persian Gulf countries in the United Arab Emirates.

The saber-rattling has left energy traders on edge, as they try to ascertain the likelihood of a Middle East flare-up and the effect it could have on the world's already tight supply of oil.

In other NYMEX trading, heating oil futures added 2.05 cents to $4.092 a gallon (3.8 liters), while gasoline futures rose 1.21 cents to $3.5615 a gallon. Natural gas futures gained 10.2 cents to $13.491 per 1,000 cubic feet.