OIL prices pulled back yesterday after the previous session's wild, record-setting rally, dropping below US$107 a barrel as uncertainty over the US financial bailout plan and a stronger dollar led investors to shed commodities.
It was crude's first down session in five days. Some decline was to be expected after crude soared 16 percent on Monday, the biggest one-day gain ever, partly because of a technical fluke.
Light, sweet crude for November delivery fell US$2.76 to settle at US$106.61 on the New York Mercantile Exchange, after earlier dipping as low as US$104.05. The contract jumped US$6.62 to settle at US$109.37 on Monday. In London, November Brent crude fell US$2.96 to settle at US$103.08 a barrel on the ICE Futures exchange.
Still, oil market watchers say crude is showing early signs that it may be poised for another big climb. They say tightening global supplies, weakness in the dollar and nervousness about the US government's US$700 billion financial rescue plan could soon prompt edgy investors to shift funds out of equities and send a burst of capital back into safe-haven commodities like oil, potentially pushing prices back toward record levels and causing consumers more pain at the pump.
Oil prices are up US$15 in the past week, momentarily halting a precipitous two-month slide from the all-time high of US$147.27 a barrel reached July 11.
"We could be back on the road toward US$150 a barrel," said Stephen Schork, an analyst and oil trader in Villanova, Pennsylvania. "If we can't get any stability in the dollar and there's further weakening in the economy, my fear is that it's deja vu all over again. We're going to see a lot of money piled back into commodities as an inflation hedge."
But highlighting the uncertainty in the oil market, other analysts said it's just as possible that prices could go lower. If the government's effort to absorb billions of dollars of bad mortgages and other risky assets fails to stem the US financial crisis, the resulting blow to the economy could further curtail energy demand in the world's thirstiest consumer.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson on yesterday urged Congress to quickly enact the plan, but lawmakers in both parties demanded changes in the White House-backed proposal.
"Even if this deal gets done, it's going to take time to have an impact, and the real economy is far from being out of the woods," suggesting US energy demand will remain soft, said Michael Wittner, global head of oil research at Societe Generale in London.
A slightly stronger dollar weighed on crude prices, prompting selling among investors who bought oil contracts as an inflation hedge.
The October contract, which expired Monday, surged as much as US$25.45 to US$130 a barrel before falling back to settle at US$120.92, up US$16.37, the biggest one-day gain ever.
Oil traders said the hyperbolic move was likely the result of an unusually severe "short squeeze," a trading occurrence that happens when investors who bet that oil prices would fall rush to cover positions before the contract's expiration.
Speculation grew yesterday that a big purchase of physical crude may have forced the short-selling rally. Analyst said it appears that a major energy firm faced with crude shortages after the passage of Hurricanes Ike and Gustav was forced to step in at the last minute and secure supplies before it ran out. That would have sharply limited the number of Nymex oil contracts available for short-sellers to buy, a sudden injection of scarcity that may have helped drive prices skyward.
"I think one of the majors went off long contracts because they needed the barrels. So all of the sudden there weren't as many players available to sell," Schork said.
The extent of the rise stunned veteran oil market watchers and prompted the US Commodity Futures Trading Commission to open an investigation into possible illegal manipulation.
Crude's climb over the past week comes amid a gradual shrinkage in global oil output. OPEC's decision earlier this month to cut production by 520,000 barrels a day, militant threats to Nigerian oil supplies and output shutdowns and damage to oil installations on the Gulf of Mexico coast caused by Ike and Gustav helped spark the jump in oil prices from US$90 a barrel last week.
Because of the supply squeeze, oil pricing appears to have entered a trend known as "backwardization," analysts say, a trend whereby front-month oil contracts, or oil available for purchase in the near term, is being sold for more than contracts several months out, suggesting the market is reacting to a coming supply crunch.
"The market is telling you that it's fearful about futures supplies, so it's starting to place a premium on current oil prices," Schork said.
In other Nymex trading, heating oil futures fell 5.02 cents to settle at US$3.0132 a gallon, while gasoline futures lost 10.88 cents to settle US$2.595 a gallon. Natural gas futures jumped 20.1 cents to settle at US$8.144 per 1,000 cubic feet.