COMMODITIES-Wheat extends lightning rally, oil eyes peaks

LONDON, Sept 5 (Reuters) - Wheat extended its run to record highs on Wednesday as bad news on Australia's crop ignited fresh buying interest, while oil eyed historic peaks and industrial metals rose as inventories fell.

In soft commodity markets, London white sugar futures fell to a 26-month low, pressured by a global supply glut.

U.S. and European wheat prices scaled new heights with news of damage to Australia's wheat crop magnifying worries about shrinking global stocks.

Chicago Board of Trade December wheat WZ7 hit an all-time high of $8.35-1/2 a bushel while European milling wheat futures soared to a record 300 euros a tonne on the benchmark November contract BL2X7.

Hot winds this week caused severe damage to the Western Australian wheat crop, further reducing the country's already struggling output, Kim Chance, Western Australia's agriculture minister, told Reuters. [ID:nSP91313].

Stenham Asset Management's chief investment officer Kevin Arenson said a number of factors had combined to pump wheat prices higher, including changing weather patterns, the industrialisation of Asia, changing demand patterns, and substitution issues created by the biofuels revolution.

"I think the world has an inflation problem looking ahead on basic foods," said. "You are now starting to see manufacturers of cereals, for example, talking about input prices going up." Last month the International Grains Council cut its forecast for world wheat output in 2007/08 by 7 million tonnes to 607 million, citing deteriorating crop prospects in the European Union and Canada.

OIL EYES HIGHS

Oil held above $75 a barrel, within sight of an all-time high, as investors balanced tightening U.S. crude stocks against OPEC's reluctance to boost supplies when it meets next week.

U.S. light crude CLc1 rose 18 cents to $75.26 a barrel, while London Brent crude LCOc1 rose 29 cents to $74.21.

Crude inventories in the world's top consumer were expected to decline by 400,000 barrels after bad weather interfered with imports.

"The focus is on the crude oil drawdown," said Tony Nunan at Mitsubishi Corp's risk management unit. Some analysts expect supplies to strain to match demand later this year unless the Organization of the Petroleum Exporting Countries ramps up crude production.

Prices have climbed 1.6 percent this week, towards a record high of $78.77 hit on Aug. 1, as Hurricane Felix threatened the Gulf of Mexico. But Felix weakened to a tropical storm after hitting the Caribbean coastline of Nicaragua and Honduras.

In metal markets, Benchmark London Metal Exchange Copper for delivery in three months MCU3 was up $65 at $7,375 a tonne, with dealers citing a fall in inventories and a strike in Peru as supportive factors.

Gold prices XAU= retreated from six-week peaks as investors took profits, but dealers said the metal was still fundamentally underpinned by physical buying an a firmer tone on oil prices.

London benchmark October LSUV7 white sugar futures fell to a 26-month low of $270.10 per tonne due to a huge global oversupply of the sweetener.

"People are aware that there is so much sugar and not a lot of homes for it," a trader said.

(Additional reporting by Nigel Hunt, David Brough and Peg Mackey in London)