Oil prices shot up $6 a barrel on Wednesday, 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 $6.01, or 6.59 per cent, to settle at $97.16 a barrel on the New York Mercantile Exchange. Prices had tumbled more than $5 to close at $91.15 on Tuesday. In London, November Brent crude rose $5.62 to settle at $94.84 a barrel.
Prior to the rally, oil had fallen about $55 – or 38 per cent – since hitting a record $147.27 on July 11.
Wednesday’s big rally at least temporarily halted crude’s steep, two-month slide and brought prices back within striking distance of $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.
Wednesday’s oil rally was energized by the bailout of AIG. The Federal Reserve on Tuesday agreed to pump $85 million in taxpayer money into the insurance giant in return for a 79.9 per cent 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.
Courtesy/Source: timesofindia.indiatimes.com
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