http://money.cnn.com/2008/08/21/mark...ex.htm?cnn=yes

Oil surges $6 - crosses $121 mark
Crude futures rally as dollar weakens and fears of credit turbulence send investors back to commodities.

NEW YORK (CNNMoney.com) -- Oil surged more than $6 a barrel on Thursday to touch $122 a barrel, as a falling dollar and renewed concerns over the credit crunch motivated investors to move their assets back to commodities.

U.S. crude for October delivery rose $5.66 to $121.22 a barrel, having reached as high as $122.02. Wednesday's $114.98 settlement price ended active trading for the September contract.

The last time oil traded above $120 was Aug. 8, when it touched $120.08. Oil settled at $120.02 on Aug. 7.

"The investor class is buying back oil as a hedge because the value of the dollar is weak," said Phil Flynn, senior market analyst at Alaron Trading.

Another analyst echoed the same sentiment. "All else equal, people would think that in a stable commodity market and a negative financial market - people would have more faith in the commodity place," said Neal Dingmann, director of equity research at Dahlman Rose.

Weaker dollar: Oil prices were supported by the declining value of the U.S. dollar. The dollar was down against both the euro and the yen on Thursday.

Crude oil is traded in U.S. currency around the globe and so when the dollar weakens, crude oil becomes cheaper for foreign investors.

"If the dollar does fall off, a lot of these guys [foreign investors] are able to consume more and buy more on a pure dollar-per-dollar basis," said Dingmann.

In addition, when the dollar weakens, investors move their assets to commodities as a hedge against inflation.

Investors were "running back to gold, running back to oil, so it seems we are seeing some of the running-back-to-safe haven" behavior, said Flynn.

With Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) stocks near historic lows and rumors of a federal bailout making Wall Street jittery, investors were "running back to oil as a hedge against this risk again," said Flynn.

"The risk factors are back on the rise with the latest fears about Fannie Mae and Freddie Mac and that seems to have captured the imagination of the market," said Flynn.

Supply report: The government's weekly energy supply report, released Wednesday, showed a much bigger-than-expected increase in crude oil stockpiles and a surprise drop in gasoline stockpiles.

The U.S. Energy Information Administration reported that crude oil inventories climbed by 9.4 million barrels. Gasoline inventories fell by 6.2 million barrels, which came on the heels of a 6.4 million barrel drop in the prior week.

Two consecutive weeks of tumbling gasoline stockpiles may work to prop the price of oil up, as well. But Flynn does not think the fall off in gasoline inventories is the main reason for this most recent runup.

With the summer driving season nearly finished, "the reason why gas supplies are so tight is because refineries are not making any - demand is not there," said Flynn.

"The summer driving season is coming to an end, and if the refineries chose to, they could ramp up the production of gas because they have plenty of crude, but there is no desire to ramp up," said Flynn.

Hitting $120: The last time the market watched crude futures race up to a record-high price of $147.27 on July 11, the market was fueled by fears of economic weakness.

"We are going up for the same reasons we went to the highs - concerns about the dollar, the economy, the Fed's ability to raise interest rates," said Flynn.

"It looks like we could potentially test the $120 area - that would be the big number that everybody would be looking at," added Flynn.

First Published: August 21, 2008: 9:20 AM EDT