Oil jumps $6 on US-Russia tensions, sliding dollar

Thursday August 21, 11:35 am ET By Stevenson Jacobs, AP Business Writer
Oil jumps $6 on growing US-Russia tensions, sliding dollar, worries of OPEC output cut
NEW YORK (AP) -- Oil prices shot up $6 a barrel Thursday, rising to the highest level in over two weeks as escalating tensions with Russia stoked fears of a disruption of energy shipments to Western countries.
Crude's rally mimicked the wild price swings seen last month and have at least temporarily halted oil's slide back toward $100 a barrel. A weaker U.S. dollar and worries about tightening output from OPEC countries are also supporting prices.
Tensions with Russia about a deal between Washington and Poland to install a missile defense system in Eastern Europe -- seen as a threat by Moscow -- and the continued presence of Russian troops in Georgia contributed greatly to the bullish mood.
Light, sweet crude for October delivery jumped $6.32 to $121.88 a barrel on the New York Mercantile Exchange. It was crude's highest trading level since Aug. 4.
"The sellers are backing away for now," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "If military activity heats up again, pipeline flows into Europe could be disrupted and that would affect the United States as well."
The price jump came as retail gas prices continued to fall, shedding more than a penny overnight to a new national average of $3.702, according to auto club AAA, the Oil Price Information Service, and Wright Express. Prices have now fallen 10 percent from record highs above $4 a gallon set July 17, but the pace of the drop off could slow if oil holds onto Thursday's gains.
"This is probably about it in terms of a retail gas drop. We may be a few cents away from the August bottom," said Tom Kloza, publisher and chief analyst at the Oil Price Information Service in Wall, N.J.
Oil's jump came a day after the U.S. government report a huge rise in U.S. crude inventories. But other supplies were less abundant.
Gasoline inventories shrank by a larger-than-expected 6.2 million barrels to below-average levels in the week ended Aug. 15, the U.S. Energy Department's Energy Information Administration said Wednesday. Meanwhile, distillate inventories -- which include heating oil and diesel fuel -- rose by less than expected, the EIA said.
That was enough to offset a hefty 9.4 million barrel rise in U.S. crude stocks last week when the average analyst forecast had been for a 1.7 million barrel increase, according to energy information provider Platts.
"That report had something for everyone," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "On the one hand, the crude inventory buildup was quite strong, but the gasoline draw was also very prominent."
But growing concerns over Russia's standoff with Georgia and NATO grabbed the attention of most oil traders Thursday.
On Wednesday, Secretary of State Condoleezza Rice and her Polish counterpart signed a deal to build an American missile defense base in Poland. Last week, a top Russian general warned Poland was risking an attack, possibly a nuclear one, by developing the base.
JBC Energy in Vienna said the "political risk premium of oil prices" had widened to more than $10 a barrel, which could be attributed at least in part to the Russian angle.
Investors are also trying to anticipate the outcome of the next Organization of the Petroleum Exporting Countries meeting in early September, as supply concerns could rise further if members of the cartel decide to lower their output in response to slower demand. Venezuelan Oil Minister Rafael Ramirez said he might propose an output cut at the next OPEC meeting.
U.S. energy consultancy Cameron Hanover noted in its daily market report that some members of the oil group were "terrified of allowing Western countries to build any kind of cushion for the unexpected, because it has the potential to return prices to normal or sustainable economic levels" and interfere with OPEC's ability to keep building massive foreign currency reserves.
Oil prices have rebounded after falling about $35, or nearly a quarter, from their all-time trading record $147.27 on July 11. Many investors expect that high gasoline prices and slowing economic growth in the U.S., Europe and Japan will undermine global energy demand.
Prices were supported Thursday by a weaker dollar compared to the euro. A falling greenback encourages investors to seek commodities such as oil as a hedge against inflation and a weaker dollar.
"The slide in the dollar has taken some of the wind out of the bear's sail in the energy complex," said The Schork Report, edited by analyst and trader Stephen Schork.
In other Nymex trading, heating oil futures rose 17.75 cents to $3.3421 a gallon, while gasoline prices gained 15.15 cents to $3.0618 a gallon. Natural gas futures increased 27 cents to $8.355 per 1,000 cubic feet.
In London, October Brent crude rose $5.57 to $119.93 a barrel.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.