Oil Caps Biggest Weekly Gain Since 1986 on Geopolitical Concern

Jan. 2 (Bloomberg) -- Crude oil rose, capping the biggest weekly gain since 1986, as the conflict in Gaza increased concern that Middle East supplies would be cut and Russia curbed natural- gas shipments to Ukraine.

Israeli warplanes conducted fresh attacks against Hamas on the seventh day of a bombing campaign in the Gaza Strip, raising the prospect of violence in the region, source of one-third of the world’s oil. Russia’s dispute with Ukraine over natural-gas prices deepened after no new talks were scheduled. Oil futures have traded in a range of more than $5 a barrel today.

“A lot of the volatility we are seeing is a result of the wild geopolitical news,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “The news from Gaza and Ukraine scares some people and not others.”

Crude oil for February delivery rose $1.74, or 3.9 percent, to $46.34 a barrel at 2:52 p.m. on the New York Mercantile Exchange, the highest settlement since Dec. 11. Prices climbed 23 percent this week, the most since August 1986. Oil prices tumbled 27 percent in the week ended Dec. 19, the biggest decline since trading began in 1983.

Oil fell 54 percent last year, the first annual drop since 2001 when crude slipped 26 percent, and the biggest loss since trading started.

Israel struck at least 35 targets in the Gaza Strip and Hamas militants launched more rockets today as hopes for a truce dimmed. Oil surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab- Israeli war in October 1973.

OAO Gazprom boosted gas supplies to Europe through Belarus, avoiding Ukrainian pipelines. Talks between the two sides on the price of gas deliveries to Ukraine for 2009 and transit fees for Russian gas to Europe through the country broke down on Dec. 31, and Gazprom cut supplies of the fuel to Ukraine yesterday.

Stocks Rally

Agricultural futures also rose and equities rallied on speculation that government stimulus efforts will curtail the recession. The Dow Jones Industrial Average increased 258.3 points, or 2.9 percent, to 9,034.69. The Standard & Poor’s 500 Index rose 28.54 points, or 3.2 percent, to 931.79.

“Equities and commodities are tracking each other,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “The outsized moves we are seeing are in part due to very thin trading volume.”

Commodity prices may be more volatile this week because many traders are taking time off for the New Year’s holiday.

Volume in electronic trading on the exchange was 255,932 contracts as of 3:10 p.m. in New York. Volume totaled 357,359 contracts on Dec. 31, down 24 percent from the average over the past 3 months.

$60 Oil

Oil may rebound this year to average $60 a barrel as the Organization of Petroleum Exporting Countries makes record production cuts to counter the deepest economic slump since World War II, according to the median of estimates by 33 analysts surveyed by Bloomberg News. That would be a 29 percent gain from today’s price.

OPEC will cut daily shipments of crude oil by 1 percent in the four weeks to Jan. 17 as the group enacts supply reductions, according to industry consultant Oil Movements. Members will load 23.75 million barrels a day in the period, down from 24 million in the four weeks ended Dec. 20, the Halifax, England-based company that tracks oil shipments said.

Brent crude oil for February settlement climbed $1.32, or 2.9 percent, to settle at $46.91 a barrel on London’s ICE Futures Europe exchange.

Houston Ship Channel

The Houston Ship Channel, which serves the largest U.S. petroleum port, is closed to tankers and other large vessels because of fog at the mouth of Galveston Bay, the U.S. Coast Guard said. Pilots who guide vessels stopped operations at 10:05 p.m. local time yesterday for safety reasons, Coast Guard spokesman Martin Montes said today in a telephone interview.

The area’s eight refineries have a combined processing capacity of 2.22 million barrels a day, which represents 13 percent of the U.S. total, according to their owners and the National Petrochemical and Refiners Association.

“The closure of the Houston Ship Channel at the end of this week is a sign that we will see a drop in crude-oil supplies in next week’s inventory report,” Strategic Energy’s Lynch said.

The Energy Departments will release its weekly petroleum supply report at 10:30 a.m. in Washington on Jan. 7.

Gasoline futures for February delivery climbed 4.85 cents, or 4.6 percent, to $1.1105 a gallon in New York. Heating oil for February delivery increased 3.82 cents, or 2.6 percent, to $1.4803 a gallon.

Regular gasoline at the pump, averaged nationwide, rose 0.8 cent to $1.626 a gallon, AAA, the largest U.S. motorist organization, said on its Web site today. The fuel has dropped 60 percent from the record $4.114 a gallon reached on July 17.