LONDON, March 10 (Reuters) - Oil sped to a record high above $107 a barrel yesterday, reversing earlier losses as investors sought out oil as a hedge against a depressed dollar and inflation.

A rush by financial funds into commodities and political tensions are the prime drivers of a rally that has lifted oil's average to above $95 for the year.

US crude jumped to $107.44 a barrel and was trading up $2.01 at $107.16 yesterday afternoon. It had sunk to $104.08 in earlier trading.

London Brent crude was up $1.27 to $103.65.

Fears of recession, following the biggest US job losses in five years and strains in the credit market, have depressed equities and the dollar while prompting many investors to seek safety in commodities including oil.

"The disconnect between slowing US growth and a soaring commodity/energy complex has truly been quite remarkable," said Edward Meir of MF Global.

The effect of the slowdown in top consumer the United States could start to have an impact on demand.

"What you have seen over the last few months is fantastic strength in a whole range of commodities, all of which together significantly add to inflation and erode real incomes and profits," said Michael Saunders of Citigroup.

"If it were just oil it would be more manageable, but it's not ... What you are seeing now is far more widespread and therefore more damaging."

A sharp drop in US crude oil inventories and Opec's decision last week to hold supplies steady have also boosted oil prices.

Opec president Chakib Khelil was quoted yesterday as saying that speculation and political tension would keep prices at triple digits through the year.

Some analysts think oil could go higher still, possibly breaking through $110, although there are expected to be dips below the $100 mark too.

"We certainly do see the balance for the rest of the year averaging $100," said Paul Horsnell of Barclay's Capital.

"But we are not going to say that it's going to stay above $100 for every single minute of every trading day for the rest of the year."

Khelil, also Algeria's oil minister, said prices could retreat in 2009 with a recovery of the U.S. dollar following the election of a new US president, and as fundamentals reassert themselves.

The Organisation of the Petroleum Exporting Countries, supplier of more than a third of the world's oil, has argued high prices do not reflect fundamentals and are driven by speculation.

Opec will next meet in September, although ministers could confer informally at a conference between consumers and producers in Rome on April 20-22.