The price of oil has jumped by more than $16 to $120.92 a barrel, the biggest one-day gain on record.

There is uncertainty about how the government’s financial bail-out plan will work, causing investors to switch to perceived safe havens such as oil.

Others believe that the US government’s bail-out plan will help the economy, increasing demand for oil.

Concerns also persist about supply as production in the Gulf of Mexico is still affected by Hurricane Ike.

However, analysts said the US rescue package was key.

“[It] has changed sentiment in the oil market,” said analyst Paul Harris from Bank of Ireland.

At one point during trading, the price of oil rose by more than $25. The volatility in the price has been exacerbated by the fact that the contract for the supply of oil in October expires on Monday.

The contract for oil to be delivered in November was not up as sharply. It rose by $6.62 to $109.37 in New York.

Last week oil traded as low as $91 a barrel. It had fallen from the peak of $147 a barrel it reached in July.

News reported by The BBC

The US House of Representatives has approved legislation which would lift a 27-year-old moratorium on drilling for oil in US coastal waters.

Drilling would be allowed between 80km (50 miles) and 160km (100 miles) of the coast, but not inside that limit.

The House voted 236 to 189 in favour of the extensive energy package, which was drawn up by the Democrats, who had previously opposed coastal drilling.

Republicans denounced the bill as a political ruse.

President George W Bush lifted an executive ban on drilling for oil in most US coastal waters in July, urging lawmakers to follow suit in order to reduce US dependence on oil imports.

The move came as high oil prices pushed US petrol prices above $4 per gallon (£0.59, or 0.79 euro, a litre).

Political ruse?

Democratic House Speaker Nancy Pelosi said the bill marked “a new direction in energy policy” because of its emphasis on alternative energy.

Until recently, Democratic leaders had opposed ending the drilling ban, pointing out that oil companies already have 68m acres under government leases they can drill.

Official estimates show that nearly 90% of the oil believed to lie off the US coast would remain off limits because it is located within 80km of the shore.

Petrol prices are part of the wider US energy policy debate

Republicans say the bill is a ruse to provide political cover for Democrats who have felt under pressure to show support for more drilling at a time of high oil and fuel prices.

A White House statement said “this bill purports to open access to American energy sources while in reality taking actions to stifle development”.

The Senate will consider a similar bill later this week.

US energy needs are set to be a key issue in November’s presidential election.

Republican John McCain is in favour of offshore oil drilling, whereas his Democratic rival, Barack Obama, opposes it.

Environmentalists say offshore drilling would take at least a decade to have any effect on oil supply and would exacerbate climate change.

Since 1981, a congressional moratorium has prohibited oil and gas drilling along the east and west coasts and in the eastern Gulf of Mexico, an area accounting for some 80% of the US’s outer continental shelf.

The executive drilling ban was issued in 1990 by the current president’s father, President George H W Bush, and then extended by President Bill Clinton.

Since then offshore drilling and exploration have only been allowed in the western and central regions of the Gulf of Mexico plus parts of Alaska.

The federal bans were enacted in part to protect tourism and lessen the chance of oil spills washing on to beaches.

News reported by The BBC

Crude oil prices have fallen sharply, after oil facilities in the Gulf of Mexico were spared by Hurricane Gustav.

US crude fell to a five-month low of $105.46 a barrel before closing down $5.75 at $109.71 while London’s Brent crude fell $1.07 to close at $108.34.

While still high in historical terms, crude is now significantly below the record $147 a barrel hit in early July.

Analysts said the fall in global demand for oil caused by economic weakness in the US and Europe was another factor.

The sharp fall in prices initially led to a strong rally on US stock markets although this later petered out.

The Dow Jones opened more than 240 points higher in early exchanges but this enthusiasm quickly petered out, leaving the benchmark index down about 30 points by mid-afternoon.

This reverse came in the wake of less positive economic news, with closely-watched reports indicating that activity in US factories contracted last month while construction spending fell by 0.6%.

“The speculators, hedge funds, and other investors are getting out of this market on a major scale” Jim Ritterbusch, oil analyst

Figures from the Institute for Supply Management for factory activity were weaker than expected, prompting one economist to say the US was on the “precipice of a recession”.

“It tells us that the manufacturing sector remains essentially stalled,” Mr Resler added.

Hurricane Gustav weakened as it hit the US Gulf of Mexico coast south-west of New Orleans and was downgraded to a tropical storm after hitting Fourchon, a port in Louisiana.

Initial checks by some US refiners reported no damage from Gustav, which had originally been classed as the biggest threat to the sector since devastation from Hurricane Katrina in 2005.

Falling demand

Fears of lower global demand for oil also pressured crude prices.

Oil traders speculated that slowing global economic growth would dampen demand for crude, even in booming China and India.

“The magnitude of this pullback suggests the market is fully focused on demand destruction,” said oil analyst Jim Ritterbusch.

“The speculators, hedge funds, and other investors are getting out of this market on a major scale.”

Opec, the association of oil producing countries, holds its regular meeting next week in Vienna, amid speculation some of its members – such as Iran and Venezuela – would like it to tackle falling oil prices.

Opec members produce about 50% of the world’s oil supply.

News reported by The BBC