Oil settles above $104 after bailout

Report: Oil could spike again

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NEW YORK (CNNMoney.com) -- Oil prices zoomed back above $104 a barrel Friday as hope grew on Wall Street that a government bailout could help ease the credit crisis putting a stranglehold on the U.S. economy.

U.S. crude rose $6.67 to settle at $104.55 a barrel. It was the second-largest rise of oil prices in dollar terms on record, bested only by a $10.75 rise on June 6.

Oil's rally was boosted Friday as the government drafted a program to restore much-needed liquidity to the financial markets.

Treasury Secretary Henry Paulson said Friday he will continue to work with lawmakers through the weekend on the details. The plan will include a federal bailout of financial institutions by taking on tens of billions of dollars in untradable mortgage assets.

"The bailout took some of the pressure off the market, allowing some of the fundamental buying to come back in," said Peter Beutel, oil analyst at Cameron Hanover. "People began to do some long-term hedging, even though the overall trend in this market is lower."

After falling more than $10 Monday and Tuesday on fears that the crisis on Wall Street would further reduce demand for petroleum products, crude has gained back all of its losses - and then some - from earlier in the week. Oil prices rose by $6.01 - the second-largest margin ever - Wednesday, followed by a near $1 rise Thursday as initial end-of-the-world fears continued to ease.

"The bailout is supporting oil prices in the short run, but the question is about the long run," said Phil Flynn, senior market analyst at Alaron Trading. "The market is torn - on one hand, a bailout may save the financial sector, but on the other hand, it's unclear if that will result in higher demand for oil."

Despite the recent rise, crude oil prices still remained about $43 a barrel lower than where they were two months ago, when they hit an all-time trading record of $147.27 on July 11.

Since then, fears that high oil prices and a crumbling global economy have reduced demand for the commodity resulted in a 2-month slide that took away a third of oil's value.

Still some analysts believe that traders' eased of fears of global economic collapse may inspire a new run on oil prices. Furthermore, the oil contract for October delivery expires after the market close on Monday, and prices tend to fluctuate wildly in anticipation of the termination.

"There's an increased willingness to take on risk after bailout," said Rachel Ziemba, an oil analyst with RGE Monitor. "People are also moving up their positions in anticipation of the contract expiration."

Also sending oil prices rising Friday were reports that a militant group in Nigeria bombed an oil conduit controlled by Royal Dutch Shell (RDSA).

The Gulf of Mexico oil region was still struggling to get back on its feet after two hurricanes - Gustav and Ike - pummeled the production and refinery rich area.

As of Thursday, 15 refineries in Texas and Louisiana were shuttered or running on reduced capacity, according to the U.S. Department of Energy. Meanwhile, 89% of crude production in the Gulf of Mexico remained closed.

According to a report from the Minerals Management Service, 49 of 3,800 offshore platforms were destroyed by Hurricane Ike. Personnel from 268 out of 838 - or 32% - of the production platforms and rigs remained evacuated, according to MMS as of Friday.

Though some activity has been restored, it could take another week for normal operations to resume. On Wednesday, a weekly supply report showed a much-larger-than-expected drop in crude and gasoline stockpiles, boosting crude in its meteoric rise in that session.

The National Hurricane Center is reporting more tropical activity forming in the Caribbean. Though the likelihood that the activity could form into another large tropical storm is slim, traders were reminded that hurricane season isn't over yet.

"It's just one crisis after another," Flynn said.