By Nesa Subrahmaniyan and Wai Meng Lee

Nov. 1 (Bloomberg) -- Oil traders are increasing bets that crude will reach $125 a barrel this year because of record world demand and threats to supplies from the Middle East and Nigeria.

Traders held 2,526 call options contracts, each granting the right to buy 1,000 barrels of December oil at $125 in New York, as of Oct. 29. Four months ago, only one contract was outstanding. Bets on $100 oil are also surging: options on December oil at that price totaled 49,744 contracts as of Oct. 30, up from 30,055 on Jan. 2.

Crude oil for December delivery rose to a record $96.24 in New York today, the highest since the futures began trading in 1983. Prices have soared 19 percent the past month as inventories fell, the dollar weakened and violence in Iraq raised concern exports may be cut, while Iran threatened to curb supplies in its standoff over nuclear research.

Oil at $100 ``is becoming a reality,'' said Anthony Nunan, deputy general manager of risk management at Mitsubishi Corp., Japan's biggest trading company, in Tokyo. ``It's not crazy anymore, it's a reasonable target.''

Crude oil for December delivery gained as much as 1.8 percent and traded 0.8 percent higher at $95.32 a barrel in electronic trading on the New York Mercantile Exchange at 8:05 a.m. local time.

Oil rebounded above $90 after the Federal Reserve cut its benchmark interest rate for a second time in two months, prompting a drop in the dollar to a record low against the euro.

December Options

Purchases of options to buy December oil at $125 a barrel have risen 46 percent in the week ended Oct. 30, Nymex data shows. Purchases of options to buy oil for $100 a barrel rose to a record 15,709 thousand-barrel lots on Oct. 26, from 81 contracts a month ago. Options give buyers the right to buy or sell a security by a fixed date at a specific price.

Oil prices have risen more than fourfold since 2002 as political instability disrupted supplies from producers including Iraq, Nigeria and Venezuela, while hurricanes in the U.S. damaged oil platforms and refineries.

``When it gets this high, it becomes uncertain and everyone gets scared,'' Mitsubishi's Nunan said. ``Since $100 a barrel is a reality, $125 or $130 is also possible.''

Tensions between Turkey and Iraq over Kurdish militants as well as over Iran's nuclear program have also helped drive oil prices higher.

The ``Turkish-Iraq situation presents an upside risk'' for oil prices, Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., said in Hong Kong. ``The momentum is strong, and with a lot of physical risks and the supply disruption, we could move higher.''

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net ; Wai Meng Lee in Singapore at wlee17@bloomberg.net

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