OIL prices shot up US$6 a barrel yesterday, rebounding as fears of a spreading crisis in the US financial sector sent skittish investors scrambling out of stocks and into hard assets.
Light, sweet crude for October delivery rose US$6.01, or 6.59 percent, to settle at US$97.16 a barrel on the New York Mercantile Exchange. Prices tumbled more than US$5 to close at US$91.15 on Tuesday. In London, November Brent crude rose US$5.62 to settle at US$94.84 a barrel.
Prior to the rally, oil had fallen about US$55, or 38 percent, since hitting a record US$147.27 on July 11.
Yesterday's big rally at least temporarily halted crude's steep, two-month slide and brought prices back within striking distance of US$100. Investors were frantically buying the same commodity that until this week they shunned in the belief that the slowing global economy was eroding demand for energy.
But analysts said oil is unlikely to resume its upward climb the economic downturn has indeed sharply curtailed demand, and they noted that recent rallies often have been followed by sharp selloffs as oil market traders try to cash in.
Yesterday's oil rally was energized by the bailout of AIG. The Federal Reserve on Tuesday agreed to pump US$85 million in taxpayer money into the insurance giant in return for a 79.9 percent ownership stake. The lifeline was aimed at avoiding an AIG collapse due to massive losses tied to the subprime mortgage crisis and the credit crunch.
Oil's climb picked up speed later in the day, stoked by fears that more turmoil lay ahead. Investors raced to dump stocks and poured money into energy, precious metals and other commodities, which are often bought as safe-haven investments during rough economic times.
"We're seeing this crisis of confidence engulf the market again and oil's getting caught up in it," said Phil Flynn, analyst at Alaron Trading Corp in Chicago.
If AIG had been allowed to fail, investors feared the company would move to unwind positions in energy and other commodities to raise cash, setting in motion another big commodities liquidation. Oil's big two-day price drop this week was due in part to similar concerns that surfaced after Lehman Brothers Holdings Inc. filed for bankruptcy Monday.
"The fear was that if AIG was allowed to go down, we could be looking at a huge exit from financial instruments across the spectrum: equities, oil futures, everything," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois.
A weaker dollar also gave oil prices a boost. A falling greenback encourages investors to shift funds into commodities, which are often bought as safe-haven assets used to hedge against inflation or weakness in the US currency.
But oil market watchers doubted oil would start rising again. Worries about more tumult in financial markets have raised expectations of a prolonged economic downturn that will weaken US demand for crude.
And a host of bullish news, including OPEC cutting output by 520,000 barrels a day last week and damage to oil installations on the Texas coast by Ike last weekend, has passed virtually unnoticed by oil markets.
"The OPEC cut didn't have any impact," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "Then Ike didn't slow the market either."
Also yesterday, the US government reported a bigger-than-expected drop in crude supplies, reflecting the shutdown of virtually all Gulf Coast oil production because of Ike and Hurricane Gustav.
The Energy Information Administration said US crude stocks fell by 6.3 million barrels for the week ending September 12, much bigger than the 3.7 million barrel drop expected by analysts surveyed by energy research firm Platts expected.
Gasoline inventories fell by 3.3 million barrels to 184.6 million barrels. Analysts expected stockpiles of the motor fuel to fall by 3.6 million barrels.
Inventories of distillate fuel, which include diesel and heating oil, fell by 900,000 barrels to 129.6 million barrels for the week ended September 12. Analysts expected distillate stocks to slip by 1.7 million barrels.
Meanwhile, more violence across Nigeria's restive Niger Delta oil region helped support oil prices. Nigeria's main militant group said it destroyed an oil-pumping station and a pipeline that crosses southern Nigeria, extending a spate of violence into a fifth day.
A spokesman for Nigeria's state oil company said militant attacks are now cutting the country's daily oil production by 40 percent.
Investors were also watching for fallout from a yesterday attack on the US embassy in the capital of Yemen. Attackers armed with automatic weapons, rocket-propelled grenades and at least one suicide car bomb assaulted the embassy, leaving at least 16 people dead, including six assailants. No Americans were hurt.
In other Nymex trading, heating oil futures rose 10.5 cents to settle at US$2.8247 a gallon, while gasoline future added 6.22 cents to settle at US$2.463 a gallon. Natural gas futures gained 63.6 cents to settle at US$8.195 per 1,000 cubic feet.