Record oil jump blamed on more than short-term factors - FT

What explains Monday's record one-day $25 jump in the price of the oil? One factor was certainly a technical one - a need by financial investors who had bet on falling oil prices to cover their positions ahead of the expiry of the Nymex October West Texas Intermediate contract. The problem has been been exacerbated by a drop in oil market liquidity in New York, with some market-makers curtailing their operations. This has led to a sharp increase in price volatility, traders and bankers say. But fundamentals also played a role. A shortage of oil for immediate delivery in the US because of hurricane-related disruptions has created tensions in energy markets. Although there is a consensus that Monday's oil price spike does not reflect a dramatic and overnight change in the supply and demand balance, traders say that the recovery of Nymex November prices to above $106 a barrel from last week's low of $90 does signal that fundamentals are tightening. Supplies are lower than expected - not only in the US Gulf of Mexico after the damage of hurricanes Ike and Gustav, but also from Nigeria, Mexico and Saudi Arabia. At the same time, China's oil imports remain strong. The market was yesterday trying to understand why oil prices moved so much at the expiry of the October contract. Some traders pointed to participants unwinding previous bets on falling prices. If their short positions had not been closed, they would have had to deliver physical barrels to their counterparties. Other traders said, however, that physical end-users of oil, such as refineries, were behind the price rise because they were trying to secure physical supplies Howard Gruenspecht, head of the statistical arm of the US Department of Energy, said that Monday's spike was likely to have been the result of a "squeeze where some trader had a short-term position he needed to get out of and started buying a little too late". Buyers yesterday continued to scuttle for spot oil, leading to further price tensions: the difference between the Nymex new front-month contract - November - and the second month - December - widened sharply. The spread jumped above $1.40 a barrel by the New York opening, up from 40 cents in earlier London trading. "The strength of the November-December spread shows there is actual tightness in the US oil market," said Nauman Barakat, vice-president of Macquarie Futures in New York. The Nymex November WTI spot price, however, fell $2.50 to $106.85. Traders said the scarcity was particularly acute at the delivery point for the Nymex contract in Cushing, Oklahoma, after weeks of supply disruption caused by hurricanes Ike and Gustav. Washington estimates that about 995,000 barrels a day in crude oil supplies in the Gulf of Mexico, or 76.6 per cent of the normal production level, remains shut down. Losses to supply are now higher than in 2004 when hurricane Katrina struck the Gulf of Mexico. Rob Laughlin, of MF Global in London, said it was taking much longer to restart Gulf oil production than "anyone had forecast". Washington has eased the shortage by lending oil from its Strategic Petroleum Reserve to refineries, but they are scrambling for more. ConocoPhillips has taken a 1m barrels oil loan from the US Department of Energy to cover for lost supplies. Marathon, another US refiner, has taken 750,000 barrels.