The rise in oil prices turned into a stampede on Friday with futures jumping a staggering $11 a barrel to set a record above $138 a barrel. The unprecedented surge came as the dollar fell sharply against the euro and a senior Israeli politician once again raised the possibility of an attack against Iran.
Friday’s jump capped a second day of strong gains on energy markets, and fed suspicions that commodities might be caught in an investment bubble.
Oil prices have doubled in the last 12 months, and are up 42 percent since the beginning of the year. Oil futures surged $10.75, or 8 percent, to $138.54 a barrel on the New York Mercantile Exchange, their biggest jump since contracts began trading in 1983. The record rise brought a two-day jump of more than $16 a barrel, after Thursday’s 5.5 percent gain.
“This market is going to shoot itself in the foot,” said Adam Robinson, an energy 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. This takes time. But the market has gotten extremely impatient and is not willing to wait.”
The latest jump came as the dollar lost more than 1 percent against the euro amid bleak economic news that fanned recession fears. The unemployment rate surged to 5.5 percent in May, the government said, the biggest increase in more than two decades.
Friday’s negative news pricked a budding sentiment on Wall Street that the financial system was on the mend, and stocks fell sharply. The Dow Jones industrials lost 394.64 points, or 3 percent, to 12,209.81, with financial stocks showing the biggest declines. The broader Standard and Poor’s 500-stock index fell 3 percent, its biggest drop since February.
The pronounced volatility in energy markets in recent weeks continued to puzzle traders. Prices kept rising despite a lack of shortages in the market and strong evidence of lower consumption in industrialized countries. But investors are caught in a bullish mood, focusing on the perceived risks to future oil supplies and the growth in oil demand from emerging economies, where fuel prices are subsidized.
Even as uncertainties abound about the fundamentals of the energy market, geopolitical tensions in the Middle East regained center stage after Israel’s transportation minister and a deputy prime minister, Shaul Mofaz, said Friday that an attack on Iran’s nuclear sites looked “unavoidable” if Iran did not abandon its nuclear program.
Iran is the second-largest oil producer within the OPEC cartel and exports nearly two million barrels a day. Because the world has few supplies to spare, any interruptions in Iran’s exports could push prices to higher levels. The world currently has about three million barrels a day of spare capacity, and consumes 86 million barrels a day of oil.
“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 “comments bring home the point that the dispute over Iran’s nuclear program remains unresolved and that the risks of military confrontation are indeed increasing.”
Investors also reacted to the latest forecast by a large Wall Street bank that oil prices would keep rising. Morgan Stanley predicted that prices would spike to $150 a barrel in the next month because of strong demand in Asia.
The threat of a strike by Chevron’s workers in Nigeria also raised concerns that some production could be shut down. 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 may delay the start of Chevron’s 250,000 barrels-a-day Agbami project, the country’s largest offshore venture, which is to begin June 15.
One view gaining ground is that the commodity market is caught in a speculative bubble akin to the recent housing bubble or the technology bubble of the late 1990s. That theory was raised by politicians in Washington and by OPEC producers, who blame speculators for the staggering oil rally. 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,” Mr. Soros said 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.”
But many analysts say that fundamentals, not speculation, are driving prices.
“I don’t know how else to say it, this is not a bubble,” Jan Stuart, global oil economist at UBS, said. “I think this is real. There is a whole bunch of commercial buyers out there who are spooked and are buying. You are an airline, right now, you’re scared. I don’t see who would buy at these prices unless they need to.”
Jeffrey Harris, the chief economist at the Commodity Futures Trading Commission, who was speaking before a Senate committee last month, said he saw no evidence of a speculative bubble in commodities. Instead, Mr. Harris pointed to a confluence of trends that has contributed to the oil price rally, including a weak dollar, strong energy demand from emerging economies, and political tensions in oil-producing countries.
“Simply put, the economic data shows that overall commodity price levels, including agricultural commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand,” Mr. Harris said. “Together these fundamental economic factors have formed a ‘perfect storm’ that is causing significant upward pressures on futures prices across the board.”
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