The price of crude oil surged upwards by more than $6, on Thursday, climbing as high as $122.04 a barrel.
The jump was a direct result of three contributing factors. Firstly, Wednesday saw the largest slump in the dollar against the euro in more than a month. This week’s signing of a missile-shield agreement between Poland and the US - added to already significant fears that Russia may further disrupt the flow of oil. And, as the dollar fell it renewed concerns over the credit crunch and subsequently motivated investors to move their money back into commodities.
“A real anti-Russian potential,” was the Russian Foreign Ministry’s description of the missile-shield. Russia is the world's second-biggest producer of oil and eager to play a significant role in energy producing regions, as we have seen just recently in South Ossetia.
In the markets on Thursday, crude oil for October delivery had risen by $5.13, (4.4%), to $120.69 a barrel by 1:19 pm on the New York Mercantile Exchange, the biggest increase since June 6. Oil rose by as much as $6.48 to $122.04 a barrel, the highest since August 4. Futures were down 18% from a record $147.27 reached on July 11.
Additionally, Brent crude oil for October settlement rose $5.23, (4.6%), to $119.59 a barrel on London's ICE Futures Europe exchange.
The government's weekly energy supply report, released on Wednesday, showed a much bigger-than-expected increase in crude oil stockpiles, by 9.4 million barrels, and a surprise drop in gasoline supplies, by 6.2 million barrels.
Two consecutive weeks of tumbling gasoline stockpiles may have worked to prop the price of oil up.
With regards to the strength of the currency itself, Kevin Kerr, President of Kerr Trading International in Wilton, Connecticut, said: “The dollar has been the big driver of both the rally and the pullback.”
The dollar fell by 0.8% to $1.4866 per euro, from $1.4747 yesterday, and touched $1.4896, its weakest since August 14.
In recent weeks the dollar has seen a revival and has gained in price against the both the yen and the euro before its drop on Thursday.
John Kilduff, Senior Vice President of risk management at MF Global, said: “The dollar’s rise was too swift to have faith in.
“The resumption of the currency’s fall has increased the appeal of hard assets,” he added.
When the dollar weakens, investors like commodities as a hedge against inflation.
Phil Flynn, senior market analyst at Alaron Trading said that investors were: "running back to gold, running back to oil.”
A declining currency makes dollar-based commodities, including crude oil and gold, cheaper to buyers holding other currencies. Those buyers are the ones that in turn tend to bid up crude oil prices.
