MARKETS
Oil prices take biggest jump in history
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Oil prices had their biggest gains ever on Friday, jumping nearly $11 to a new record above $138 a barrel, after a senior Israeli politician raised the specter of an attack on Iran and the dollar fell sharply against the euro.
The unprecedented gains on Friday capped a second day of strong gains on energy markets, and fueled suspicions that commodities might be caught in a speculative bubble.
Oil futures surged $10.75, or 8 percent, to $138.54 a barrel on the New York Mercantile Exchange. The record gain followed a jump of 5.5 percent on Thursday, bringing total two-day gains to $16 a barrel.
Stocks fell sharply. The Dow Jones industrials fell 394.64 points, or 3.1 percent, to close at 12,209.81. The S&P 500 Index plunged 43.37, or 3.1 percent, to 1,360.68, and the Nasdaq composite index sank 75.38 to 2,474.56. Chevron Corp. was the only stock that rose on the blue-chip index.
"This market is going to shoot itself in the foot," said Adam Robinson, an analyst at Lehman Brothers. "It is searching for a price that will build a safety cushion in the system — either as inventories or as spare capacity. But this takes time. The market has gotten extremely impatient and is not willing to wait."
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Even as uncertainties abound about the fundamentals of the market, geopolitical tensions in the Middle East regained center stage after Israel's transportation minister, Shaul Mofaz, said Friday that an attack on Iran's nuclear sites looked "unavoidable." Iran is the second-largest oil producer within the OPEC cartel and any interruptions in its exports could push prices higher levels.
"The return of the Iranian risk premium calls for a careful assessment of the potential oil supply impact of military strikes on Iran," said Antoine Halff, an analyst at Newedge, an energy broker.
The strong volatility in energy markets in recent weeks have continued to puzzle investors and traders. Prices keep rising despite a lack of shortages in the market, and strong evidence of lower consumption in industrialized countries. But investors seem to be caught in a bullish mood, focusing instead on perceived risks to future oil supplies and continued growth in oil demand from emerging economies that subsidize fuels.
The latest jump in oil prices also came as the dollar lost almost 1 percent against the euro amid bleak economic news that fanned recession fears on Friday. The unemployment rate surged to 5.5 percent last month, the government said, the biggest increase in more than two decades.
Investors reacted to the latest forecast by a large Wall Street bank that oil prices would spike to $150 a barrel in the next month because of strong demand from Asian economies. Morgan Stanley said "an unprecedented share" of Middle East oil exports are headed to Asia.
Some analysts also said that the threat of a strike by Chevron's workers in Nigeria could lead to "considerable" shutdowns of Nigerian production. A similar strike by Exxon Mobil workers last April, which lasted a week, reduced Nigerian output by 800,000 barrels a day, or nearly a third of the country's daily exports.
A strike might delay the start of Chevron's 250,000 barrels-a-day Agbami project, the country's largest offshore venture, which is slated for June 15.
One view that has been gaining ground in recent months is that the commodity market is caught in a speculative bubble akin to the housing or technology bubble of the late 1990s. The notion is buffered by the fact the oil prices have doubled in 12 months despite a slowing economy.
That theory was raised by politicians in Washington and a slew of OPEC producers, who blame speculators for the staggering rally in oil prices. Speaking before Congress recently, George Soros, a prominent hedge fund investor, said the current oil markets presented some characteristics of a bubble.
"I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance, which led to the stock market crash of 1987," Soros said earlier this week. But he cautioned that an oil market crash was not imminent. "The danger currently comes from the other direction. The rise in oil prices aggravates the prospects for a recession."
Jeffrey Harris, the chief economist at the Commodity Futures Trading Commission, who was speaking before another Senate committee last month, said he saw no evidence of a speculative bubble in the commodity market. Instead, Harris pointed out to a confluence of trends that have contributed to the oil price rally, including a weak dollar, strong energy demand from emerging-market economies, and political tensions in oil-producing countries.
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