Consumer Watchdog – 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 dbaker@sfchronicle.com