Oil Prices Jump, Partly From ‘Short Squeeze’
The price of oil jumped $16.37 to $120.92 per barrel Monday, its
biggest single-day gain ever, as investors spooked by the financial
crisis sought a safe place to put their money.
At one point during Monday’s wild trading session, the price of crude
sold on the New York Mercantile Exchange soared as high as $130 per
barrel, a whopping 24 percent increase from Friday’s closing price.
Oil had been sliding since reaching its all-time high of $145.29 in
July, and that decrease brought drivers some relief from this summer’s
punishing gasoline prices, which soared above $4 per gallon. But since
bottoming out last Tuesday at $91.15 per barrel, oil’s price has risen
32 percent.
Stunned analysts blamed Monday’s jump on Wall Street’s continuing
crisis. Investors uncertain about the government’s $700 billion
financial system bailout plan flocked to oil as a relatively safe haven
for their cash.
"We were saying earlier this year that oil’s the new gold," said James
Burkhard, director of global oil market analysis at the Cambridge
Energy Research Associates consulting firm. "It has intrinsic value, if
you’re in China, Russia or the United States."
Investors also drove down the value of the dollar against the euro and
other currencies. Because oil is priced in American dollars, a drop in
the greenback’s value makes it easier for other countries to buy oil
and drive up the price.
But Monday’s record rise in the oil market also reflected a kind of trading fluke – a phenomenon called a short squeeze.
Oil sold on the New York Mercantile Exchange is traded in futures –
contracts that allow buyers to receive oil during a specific month in
the future at a specific price. The October contract for crude oil
expired at the end of Monday’s trading session.
Some traders in the market had bet heavily that the October contract’s
price would fall before the contract expired. When it rose instead,
they were forced to buy oil contracts to cover their bets, and that
pushed up the price even more.
"It was a short squeeze like we’ve never seen," said Brian Milne,
editor of DTN MarketWire, a news service for the wholesale fuel market.
"It just kept feeding off itself."
The November contract, which won’t expire for another month, also rose
Monday, but not as much. It closed at $109.37 per barrel, up $6.62 for
the day.
That the price of such a vital commodity could leap so high because of
trading issues infuriated people who believe speculators play far too
big a role in the energy market.
"No war threat, pipeline leak, ship wreck – nothing, yet up goes oil
nearly $25 a barrel," said Tim Hamilton, a petroleum industry
consultant who works with the consumer rights group Consumer Watchdog.
"Perhaps speculation is a greater factor than actual supply and demand."
Although they appear to have played a minor role Monday, there are
problems in the global oil market that could push prices higher – or at
least keep them from falling far.
Hurricane Ike appears to have caused a bit more damage to offshore oil
and natural gas facilities in the Gulf of Mexico than originally
thought. About 77 percent of the gulf’s oil production remains shut
down.
On the other side of the Atlantic, Nigerian militants have stepped up
attacks on that country’s oil pipelines and pumping stations.
So is oil poised for another bull market, like the one this spring?
Milne expects oil to trade between $90 and $110. With the American
economy stumbling, demand for oil should remain weak, reining in prices.
But he warned that drivers probably won’t see dramatic cuts in the
price of gasoline. He expects the national average for regular gas to
stabilize around $3.60 per gallon, compared with its current level of
$3.74. That’s also the average price in California, according to the
AAA auto service.
"I don’t think there’s that much downside left, at least in the near term," Milne said.
E-mail David R. Baker at [email protected]