Prospects for a weaker dollar and worries about the Wall Street bailout send investors flooding back into the oil market

by the agency of Moira Herbst

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Crude oil, the newest safe place of safety? Amid high-profile implosions without interruption Wall Street and the prospect of massive new U.S. management debt, investors rushed into crude oil futures adhering Sept. 22, sending prices up a account 16% in unit day. The price of a barrel of West Texas Intermediate crude oil surged more than $25, to $130 in succession the New York Mercantile Exchange (CME), before settling at $120.92. The one-session rise of $16.37 rise place a record.

Investors were also betting steady whether the U.S. government’s $700 billion plan to buy troubled pledge assets from banks would help the dispensation to rebound, keeping demand steady. The Bush Administration has proposed that the federal government make sour debts from U.S. pecuniary institutions for the next two years. The allotment gives the Treasury Secretary authority to buy mortgage-related assets and would raise the statutory limit without ceasing the national debt from $10.6 trillion to $11.3 trillion.

Adding to the crude buying, the October crude contract expired on Monday. The departure led to a "squeeze" on traders who had bet short, or that oil prices would very little. Prices can soar in the same manner with short-sellers who want to avoid physical conveyance of the product are forced to inwrap their positions. At one point, the October agreement gained as much as 24%. "Someone [who] was short had to woods his positions on the last trading day, and got squeezed," says Phil Flynn, an analyst at Alaron Trading in Chicago. "That definitely caused the market to run up." Meanwhile, crude futures contracts for November handing over rose only $6.62, or 6%, to settle at $109.37 per barrel. Some analysts say the November contact is a more accurate indicator of in which place prices will settle because it is not influenced by contract expiry.

The dollar also weakened, creating every incentive for commodities to serve as a currency hedge. The U.S. Dollar Index, which tracks the dollar’s value contrary to six other currencies, fell 1.4%. The dollar took a hit on investor concerns respecting how much the financial industry bailout will require to have being paid and the kind of it could do to the packet deficit, inflation, and the current account shortfall.

The price surge came as a shock to the oil market after prices had been heading down on this account that weeks (BusinessWeek.com, 9/15/08) in the middle of concerns that strained economic growth would hurt oil use. The value of oil fell to a seven-month dirty while it touched $91.50 forward Sept. 16.

The jump in like manner prompted regulators at the Commodities Futures Trading Commission to speech they would examine the day’s trading for any irregularities. "CFTC inculcation staff will scour today’sitting trading activity to determine whether anyone engaged in illegal manipulative activity," Stephen Obie, acting guide of the enforcement unit, said in a statement. "No one should be trying to scheme our nation’s article of merchandise futures markets."

The New York Mercantile Exchange briefly stopped electronic crude-oil trading after prices surpassed the $10 quotidian limit at 1:31 p.m. ET. But trading resumed five minutes later, after the limit was increased to $20 from the 1:31 p.m. trading price. Nymex spokeswoman Anu Ahluwalia says such a rouse is permitted inferior to the company’s bylaws. She said the exchange hiked the limit to "maintain an orderly marketplace." The flight to hard commodities came as stocks traded sharply lower, with the Dow Jones industrial medial sum dropping 372 points and the Standard & Poor’s 500-stock index losing nearly 48, or 3.8%.

Analysts are debating where oil prices are headed from here. "With this new rush into commodities, the bailout has overridden the fact that demand is down," says Peter Beutel, president of Cameron Hanover, an capacity of work risk-management firm in New Canaan, Conn. "I don’t know where we’ll end up by the end of the week—$150 or under $100, I haven’t got a clue."