Crude-oil futures jumped Thursday to their highest level in four months, as traders considered the combined effect of new economic stimulus by the Federal Reserve and continuing turmoil in the Middle East.
Light, sweet crude for October delivery settled at $98.31 a barrel on the New York Mercantile Exchange, up $1.30, or 1.3%; that is the highest settlement price since May 4. Brent crude on the ICE futures exchange settled at $116.90 a barrel, up 94 cents.
The gains followed the Federal Reserve's announcement of a new round of bond buying to stimulate the economy.
In its Thursday announcement, which had been telegraphed for several weeks, the Fed's policy-making committee said each month it will buy $40 billion of agency mortgage-backed securities on an open-ended basis, and said it would extend those purchases and buy additional assets if the jobs market doesn't improve.
The measure, known as quantitative easing, is designed to stimulate economic growth and thereby boost demand for oil. Past rounds of quantitative easing have also boosted oil prices, which are denominated in dollars, by weakening the value of the dollar, making the commodity cheaper for consumers who use other currencies.
"What is noteworthy is the open-ended nature of this," said Greg Priddy, an analyst at consultant Eurasia Group. "It makes the worst-case [oil] demand scenarios less plausible."
Matt Smith, analyst at Summit Energy, called the Fed's measure "an espresso shot with the promise of continued espresso shots."
Messrs. Priddy and Smith said the Fed's move could boost the chances for a release of oil from the Strategic Petroleum Reserve. Mr. Priddy said the market's awareness of this possibility is one reason oil didn't rally even higher.
Phil Flynn, an analyst at the Price Futures Group, predicted the Fed's move would soon push WTI prices above $100 a barrel. He said the Fed's move had tilted the dynamics against betting on a drop in oil prices, known as "going short."
"You definitely don't want to be short oil because you'll be fighting an economy with a lower dollar and you'll be fighting an economy with stronger demand," Mr. Flynn said.
Market participants Thursday also were fixated on headlines of new turmoil in the Middle East following the death of the U.S. ambassador to Libya in a violent attack Wednesday and on news of anti-U.S. protests in Egypt and Yemen Thursday.
Ray Carbone, president of Paramount Options, a brokerage company, said he has seen an increase in recent days of transactions to purchase options for higher oil prices in November and December, a sign of "real fear" of greater Middle Eastern turmoil.
While oil prices don't yet fully reflect the recent Middle East problems, that could soon change, Mr. Carbone said.
"I don't think we've seen oil really react to these geopolitical events, but there is the potential," Mr. Carbone said.
He added that markets are focused squarely on the Fed's action and the Middle East, leaving supply-and-demand fundamentals as a lower priority.
"Inventory numbers at this point go to the back burner," Mr. Carbone said.
Front-month October reformulated gasoline blendstock, or RBOB, settled at $2.962 a gallon, down 3.94 cents. Heating oil settled at $3.211 a gallon, down 0.39 of a cent.
Copyright (c) 2012 Dow Jones & Company, Inc.
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