Oil ends trading over $121 amid Russia tension

updated 7:03 p.m. ET Aug. 21, 2008

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Oil jumps $5 on US-Russia tensions, sliding dollar

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By STEVENSON JACOBS

AP Business Writer

NEW YORK (AP) — 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 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. In after-market trading, prices rose $6.17 to $121.72 a barrel.

Crude’s rally lifted other commodities, with everything from gold to copper to heating oil trading sharply higher.

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.

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