Oil Spikes on Iran,
Price Outlook

Could Go To $150

HYUN YOUNG LEE / Wall Street Journal 6jun2008

Crude-oil futures smashed through record after record Friday, springing past $139 a barrel in the biggest single-day jump ever.

Funds barreled into the commodity markets as the dollar plumbed fresh lows and tensions in the Middle East resurfaced, shrugging off worries over U.S. demand.

Light, sweet crude for July delivery settled up $10.75, or 8.4%, at $138.54 a barrel on the New York Mercantile Exchange, and powered to an all-time high of $139.12 a barrel just after the close.

Brent crude on the ICE futures exchange settled $10.15 higher at a record $137.69 a barrel, after hitting an all-time high of $138.12 a barrel.

Nymex crude has shot up more than $16, or 13%, in just two sessions, and Friday's rally pulled oil products higher across the board. This forced the Nymex to take the rare step of halting electronic trading across all energy contracts for three minutes starting at 1:12 p.m. EDT to double trading limits on crude oil to $20.

"I find it a little bit unsettling," as the higher limits could spark yet further dizzying gains, said Gene McGillian, broker and analyst at TFS Energy Futures. "There's a combination of factors today ... but it shows that all the things that have driven the rally this year are still in place."

Investors have once again sought the refuge of crude oil as the dollar plunged against the euro, and oil prices have surged in the past two sessions as a result.

The dollar has fallen sharply since Thursday, when European Central Bank President Jean-Claude Trichet signaled a hike in euro zone interest rates was possible. Weak U.S. jobless figures Friday morning continued the dollar's rout, and as another ECB member, Bundesbank President Axel Weber, alluded to possible rate hikes, crude oil decisively smashed through the previous record of $135.09 a barrel set May 22.

"A thing like that's got to trash the dollar," said Tony Rosado, a broker with GA Global Markets LLC, referring to Trichet's comments. "It was like a tsunami, it was quiet and then all of the sudden ..."

After fading into the background recently, the dollar's leg down in the past two days has re-established its connection to oil, which traders have bought as a hedge against the weakening currency.

This helped the market shrug off the ramifications of the big jump in the jobless rate. The Bureau of Labor Statistics reported Friday the U.S. unemployment rate notched up the biggest monthly increase in 22 years, to 5.5% from 5.1%.

Higher unemployment is correlated with lower gasoline demand, as fewer people drive to work. Concerns whether Asian demand, which has fed the crude-oil rally in the past few years, have trickled into the market in the past fortnight as several Southeast Asian countries scaled back fuel subsidies.

But Friday's rally has wiped out suggestions the market was headed for a deeper correction, reinforced by the brief shutdown on the Nymex, the first since electronic trading began in 2006.

The 25-cent spike in heating oil futures prompted the move, said Nymex spokeswoman Anu Ahluwalia.

Front-month July heating oil settled 29.32 cents, or 8%, higher at $3.9740 a gallon. July reformulated gasoline blendstock, or RBOB, settled up 21.35 cents, or 6.4%, at $3.5480 a gallon.

A Morgan Stanley report, in which analyst Ole Slorer said oil prices would spike to $150 a barrel by July 4, was also feeding this momentum.

Asian countries are taking "an unprecedented share" of the world's oil, he said, which, coupled with stagnant supply growth, "appears to be pricing out Atlantic basin consumers while at the same time driving Atlantic inventories to critically low levels."

However, other market observers played down the currency movements and "bank hyper-forecasts."

"While those recurrent factors might have had a hand in the rally, as they have had in earlier spikes, the latest price gains are of unprecedented scope and that is unlikely to be the whole story," said Antoine Halff, deputy head of research at Newedge USA LLC, in a note to clients.

He pointed to renewed tensions in the Middle East as Israel's deputy prime minister Shaoul Mofer warned Iran Thursday against continuing its nuclear enrichment program.

"If Iran continues its nuclear weapons program, we will attack it," Mr. Mofer told the daily newspaper Yediot Aharonot. "Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear program."

Oil markets often move on news related to Iran because it's the second-largest crude exporter in the Persian Gulf.

--Brian Baskin in New York contributed to this article

source: 6jun2008