14-MAY-2008: Trucker Jimmy Smith replaces a gas pump after putting $200 of diesel fuel in his truck Tuesday, May 13, 2008 in Deer Park, Texas. Oil prices shot to a new record near $127 a barrel Tuesday on concerns that Iran may consider cutting crude oil production. Gas prices, meanwhile, rose to a new record over $3.73 a gallon Tuesday, and their advance shows little sign of slowing with Memorial Day weekend, the traditional start of the summer driving season, just 10 days away. (AP Photo/David J. Phillip) [Photo copyright 2008 by AP]

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Iranian officials denied in later news reports that production cuts were imminent but acknowledged a reduction has been discussed.

Light, sweet crude for June delivery dropped 8 cents to $125.72 a barrel in electronic trading on the New York Mercantile Exchange by midmorning in Singapore. Oil prices hit a trading record of $126.98 a barrel Tuesday before settling at $125.80.

Analysts said traders reacted quickly overnight to the news that Iran's government was considering cutting crude oil production.

But James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com, said he doubts Iran will actually cut production.

"They need all the petrodollars they can get", because the nation's economy is in bad shape, he said.

In sending crude prices higher Tuesday, investors shrugged off gains in the dollar. A stronger dollar often prompts selling by investors who had bought commodities such as oil as a hedge against inflation. Also, a stronger dollar makes oil more expensive for investors overseas.

Meanwhile, the International Energy Agency, an adviser to mostly western, industrialized nations, said high prices are cutting demand for oil and petroleum products in the U.S. and Europe. The IEA cut its global oil demand growth forecast for this year to 1.2 percent from 1.5 percent. In the U.S., the IEA said demand for oil may contract by as much as 2.1 percent this year, while demand for gasoline will drop by about 1 percent.

Energy investors are also concerned about China, which reported early this week a drop in crude imports in April compared with March. Analysts were uncertain, though, whether Monday's 7.9-magnitude earthquake in central China would have a significant impact on demand. The quake killed more than 12,000 people and knocked power plants and other factories off-line.

Strong demand from China and other fast-growing economies has underpinned oil's rise in recent years.

Also Tuesday, the U.S. Senate voted 97-1 to direct President Bush to stop adding to the U.S. strategic petroleum reserve. Some lawmakers believe that these shipments, which average 70,000 barrels a day, are pushing oil prices higher. The administration argues the amount is a pittance compared to the 21 million barrels of oil the U.S. consumes each day.

Oil prices may be more volatile in coming days as investors square positions ahead of the June contract's expiration next week.

In other Nymex trading, heating oil futures fell 0.39 cent to $3.695 a gallon while gasoline prices fell 0.1 cent to $3.199 a gallon. Natural gas futures rose 36.3 cents to $11.785 per 1,000 cubic feet.

June Brent crude fell 13 cents to $123.97 a barrel on the ICE futures exchange in London.

AP Business Writer John Wilen in New York contributed to this report.

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