UPDATE 3-Oil rallies to new high above $127

                                
   (Updates throughout)
                                
 By Margaret Orgill
                                
 LONDON, May 16 (Reuters) - Oil climbed to a new record high
above $127 on Friday, driven upwards by a weaker dollar and a
bullish market for distillate fuels as China and Europe scramble
for diesel amid thin global supplies.
                                
 News that Goldman Sachs, the most active investment bank in
energy markets, has raised its forecast for average oil prices
for the second half of the year to $141 a barrel from its
previous forecast of $107 added to the bullish sentiment.
                                
 "Tight supply conditions continue to be the primary catalyst
for higher crude prices," the bank said. [ID:nL16867930]
                                
 U.S. crude <CLc1> for June delivery climbed to a peak of
$127.43 but then eased to stand at $126.65 at 1241 GMT, up
$2.53.
                                
 July ICE Brent <LCOc1> was $2.72 higher at $125.35 a barrel.
                                
 Chinese demand for imported diesel is expected to rise
sharply in June after this week's deadly earthquake disrupted
gas supplies to major cities and as companies build stockpiles
ahead of the summer Olympics.
                                
 "People are looking at diesel. The situation is worse since
the earthquake on Monday in China," said Robert Laughlin at MF
Global. "Demand is robust as there are so many recovery
processes going on."
                                
 Comments from Saudi Arabia's Oil Minister Ali al-Naimi on
Thursday predicting a sharp rise in Asian oil consumption over
the next 20 years added to worries about competition for fuel
supplies, Laughlin said.
                                
 Al-Naimi said Asian oil consumption was expected to rise by
20 million barrels a day, driven by strong economic growth, and
would account for 60 percent of the increase in global crude
demand by 2030. [ID:nSEO267530]
                                
 Thin gas oil stocks in northwest Europe caused by a string
of refinery outages have also prompted European players to
scramble for Asian barrels. [ID:nSP262931].
                                
 European gas oil futures <LGOc1>, the benchmark for diesel
contracts, hit record highs this week on a drop in stocks and
worries about tight supplies.
                                
 In the United States, NYMEX June heating oil <HOM8> touched
an all-time peak of $3.7228 on Wednesday.
                                
 
                                
 DOLLAR WEAKENING
                                
 The dollar weakened against the euro, adding to Thursday's
losses after data showing U.S. industrial production fell 0.7
percent in April, the biggest drop in the manufacturing sector
since September 2005. [USD/]
                                
 Oil and the U.S. currency have become closely intertwined in
recent months as investors have turned to oil as a hedge against
the falling dollar.
                                
 U.S. President George W. Bush lands in Saudi Arabia on
Friday to renew his appeal for the world's biggest producer to
help tame record oil prices. [ID:nL16814592]
                                
 Saudi Oil Minister Ali al-Naimi reiterated on Thursday the
view of OPEC's biggest producer that prices had more to do with
financial market volatility than fundamentals. [ID:nSEO267530]
                                
 OPEC smallest producer Ecuador said the group should
consider raising output because record high prices are hurting
poor nations.
                                
 "I think OPEC has to deal with this issue, because this is
hitting all the poorest countries that are oil importers,"
Ecuador's President Rafael Correa told Reuters in the Peruvian
capital, Lima.
 (Additional reporting by Felicia Loo in Singapore; editing by
William Hardy/James Jukwey)