Oil jumps as investors flee Wall Street

Crude settles $6 higher, staging a late-day rally along with gold and bonds, as plummeting stock prices sends investors scrambling out of Wall Street.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices jumped $6 a barrel Wednesday - staging the second largest one-day surge on record - as Wall Street's precipitous decline sent investors scrambling to find other places to park their money.

The falling dollar and a government report of falling energy supplies also supported oil's late rally.

U.S. light crude for October delivery settled $6.01 higher to $97.16 a barrel on the New York Mercantile Exchange, after trading as low as $91.36.

The largest one-day dollar-jump occured June 6 when oil rose $10.75 a barrel when tensions between Iran and Israel over nuclear weapons escalated.

"Oil jumped along with the gold market" prompted by the falling dollar and a flight to safer investments, said James Cordier, Portfolio manager of OptionSellers.com. "Right now it is market rotation - [money] coming out of the stock market and looking for a home. While oil has not been a good investment lately, some are willing to take a risk on it."

Government Treasury prices also rallied Wednesday.

Wall Street: The plummeting stock market had dragged on oil prices earlier in the session as worries over eroding energy demand had gripped the market.

The Dow plunged another 400 points Wednesday after the Federal Reserve Board said it would lend as much as $85 billion to troubled insurer American International Group (AIG, Fortune 500).

Oil prices had tumbled $10 to a 7-month low after Monday's more than 500 point Dow meltdown - sparked by Lehman's bankruptcy - sent shivers through the oil market.

"As the stock market weakens, the idea is that the demand for oil is going to weaken," said James Cordier, Portfolio Manager of OptionSellers.com. "There is no longer supply risk. It is all about demand," he added. "And demand is just falling off the table."

But were it not for the government's AIG intervention some think the selloff in the oil market could have been much steeper.

"There is a domino effect," said Phil Flynn, senior market analyst at Alaron Trading, and if AIG had been allowed to topple, commodity prices could have been pushed lower in the ensuing selloff.

While oil prices rallied Wednesday they were still significantly off the record high of $147.27 a barrel set July 11.

"We got down almost $10 in 3 days," said Andrew Lebow, a broker at MF Global in New York. "Some recovery is not totally out of the question."

Supply report: In its weekly inventory report, the Energy Information Administration said gasoline supplies fell by 3.3 million barrels. The drop was a less severe drop than the 3.6 million barrel decline analysts were expecting, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.

At 184.6 million barrels, gas inventories were at the lowest level since 1990, when the weekly supply data became available.

This report covered the week ended Sept. 12 after Gustav and before Ike, when production facilities were shut in or working at a limited capacity.

Crude stocks fell by 6.3 million barrels, where analysts were only looking for a drop of 3.7 million barrels of crude oil, according to Platts. At 291.7 million barrels, oil inventories were in the lower half of the average range for this time of year.

Distillates, used to make heating oil and diesel fuel, fell by 900,000 barrels and were in the middle of the average range for this time of year. Analysts were looking for a larger drop of 1.7 million barrels in distillates.

Demand: Demand for gasoline averaged 9.2 million barrels per day, which was 2.6% lower than the same period last year and further evidence that Americans were clocking less miles on the road as gas prices remained higher than the same time last year, according to the Energy Information Administration.

Jet fuel demand was 7.6% lower over the last four weeks compared to the same four-week period last year, according to the report. Demand for distillates dropped by 2.7% from the same period last year.

Refineries operated at 77.4% of their capacity last week, which was slightly less than the 77.8% that analysts were expecting. Due to the limited refinery capacity, gasoline and distillate production both fell last week, according to the report.

Ike: Hurricane Ike which hit the Texas Gulf Coast on Saturday resulted in a decrease of 3 million barrels per day of refinery capacity. As of Wednesday, 12 refineries in Texas and Louisiana were shuttered, according to the Department of Energy. Two refineries that had been closed for Ike were restarting as of Tuesday.

Refineries process crude oil into usable products, such as gasoline. Kevin Kolevar, assistant energy secretary, told reporters Tuesday the refineries in Texas will be out for another week, but that Ike caused less overall damage than was feared.

Meanwhile, 97.2% of crude production and 84.2% of natural gas production in the Gulf of Mexico remained shuttered, as of Wednesday. Due to the drop off in crude in the Gulf, the Energy Department said Tuesday imports have increased to compensate.

According to a report from the Minerals Management Service on Tuesday, 28 of 3,800 offshore platforms were destroyed by Hurricane Ike. Personnel from 425 out of 717 - or 59.3% - of the production platforms remained evacuated, according to MMS as of Wednesday.

Energy bill: On Tuesday, the House of Representatives passed a bill that would permit offshore oil drilling by a vote of 236-189. The bill would allow drilling between 50 and 100 miles offshore. The Senate will vote on a drilling bill as early as this week.

Flynn said he doesn't expect the energy bill to affect the oil market in the near term. To top of page

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