NEW YORK Oil prices shot up more than $5 a barrel Thursday, rising to the highest level in over two weeks as escalating tensions with Russia stoked fears of supply disruptions to the West.
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.
After days of brushing off geopolitical flare-ups and a tropical storm, oil spiked above $122 a barrel as traders became rattled over increasingly hostile Russian rhetoric toward a U.S.-Poland deal to install a missile defense system in Eastern Europe a move Moscow views as a threat.
The continued presence of Russian troops in Georgia a key conduit for Western-bound oil shipments injected even more bullish sentiment into a market that had appeared to be losing momentum on the idea that high energy prices were curbing demand.
Oil watchers said the market's sudden reaction to the standoff reflects a growing acknowledgment of Russia's bear-like influence over world energy supplies.
"People are finally realizing that this Russian situation has the potential to be bad for a very long time," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn. "The Russians have shown evidence that they're willing to cut off energy supplies to advance their aims. There is concern that they are now going to be much more assertive in that area."
Light, sweet crude for October delivery jumped $5.62 to settle at $121.18 a barrel on the New York Mercantile Exchange after earlier rising as high as $122.04, crude's highest trading level since Aug. 4. Crude prices have settled higher for three straight sessions.
Russia is the world's second largest oil exporter after Saudi Arabia. It supplies a quarter of the European Union's oil and half of its natural gas. If those shipments were cut off, EU countries would be forced to seek supplies elsewhere at a time when spare crude capacity is already stretched to an extremely thin margin of about 2 million barrels per day, analysts say.
"If military activity heats up again, pipeline flows into Europe could be disrupted and that would affect the United States as well," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.
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.
Prices were supported Thursday by a weaker dollar compared to the euro. The 15-nation currency rose to $1.4874 in afternoon trading in New York from $1.4768 late Wednesday. 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," oil analyst and trader Stephen Schork said in a note.
Oil's rise came despite a huge increase in U.S. crude inventories reported Wednesday. 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.
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 anxious about the next Organization of the Petroleum Exporting Countries meeting in early September. 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.
In other Nymex trading, heating oil futures rose 13.71 cents to settle at $3.3006 a gallon, while gasoline prices gained 13.49 cents to settle at $3.0452 a gallon. Natural gas futures increased 17.5 cents to settle at $8.252 per 1,000 cubic feet.In London, October Brent crude rose $5.83 to $120.19 a barrel.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.