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Oil's wild ride
Crude looks set to finish a volatile year with the biggest yearly price gain since 1999.

By Steve Hargreaves, CNNMoney.com staff writer

December 31 2007: 11:23 AM EST

Crude looks set to end the year up nearly 60 percent, its biggest yearly price gain since 1999.

Oil-rich national investment funds are buying big stakes in U.S. companies. Fortune's Andy Serwer says stay tuned.

NEW YORK (CNNMoney.com) -- Oil prices look set to end 2007 with the biggest gain this decade, climbing nearly 60 percent since the start of the year. But the ascent has been anything but steady.

Crude prices are on track to notch their biggest yearly gain since 1999 and end the year around $96 a barrel. Gasoline has followed suit, and is currently up over 30 percent from a year ago to over $3 a gallon.

The rise in prices has been dramatic and volatile. Energy prices tumbled at the start of the year, largely due to a swell in supplies amid an unusually warm winter and concerns over the health of the economy. Speculative investors also bailed out of oil futures.

Crude prices briefly dipped below $50 a barrel in the early part of 2007, falling to to nearly a 2-year low. Meanwhile, retail gasoline prices tumbled to a national average of $2.10 a gallon.

The drop in oil prices spooked the Organization of Petroleum Exporting Countries, which continued production cuts started in October 2006 over the next few months, eventually taking about 1.5 million barrels a day off the market - or nearly 2 percent of the world's daily output of about 85 million barrels a day.

By spring, the summer driving season was back in focus, and tension mounted over Iran's nuclear program, sending oil prices back into the range of $60 a barrel. Refinery production continued to lag, and gasoline supplies dwindled.

The combination of strong demand and refinery problems ahead of the summer driving season caused nationwide average gas prices to hit an all-time record high of $3.227 May 24, according to the motorist organization AAA. In some parts of the country, gas prices surpassed $4 a gallon. However, prices began to fall back as consumers finally began to cut back on their gasoline use.

Oil, however, kept rising as tensions overseas, an expected uptick in crude use due to greater refinery output and the looming hurricane season pushed prices into the range of $70 a barrel.

But by summer's end the hurricane season had failed to materialize and oil began following gasoline lower. By the end of August oil was again hovering around $60 a barrel and gasoline was down to about $2.70 a gallon.

Then began what is one of the biggest run-ups in crude prices in recent memory. Throughout September and October, one event after another caused oil prices to rally.

The production cuts OPEC had begun at the start of the year began showing up in inventory reports - supplies were falling. The dollar sank as the housing market tanked in the U.S. and the Federal Reserve cut interests rates to shore up economic growth. Investors bought commodities as a hedge against U.S. stocks, and a series of reports pointed to tightening supplies as strong demand from developing countries swallowed up new production gains.

In September crude prices passed $80 a barrel for the first time ever. A month later they crossed $90, making oil just as expensive as it was in the early 1980s when adjusted for inflation. In November came the headlines of $100 a barrel. Although crude didn't break that triple- digit mark, it came pretty close, hitting $99.29 a barrel during trading on Nov. 21.

As the year comes to an end, crude is trading around $96 a barrel. The year-over-year price gain marks crude's biggest price jump since 1999, when prices doubled from $10 to $20 a barrel. Gas prices are again over $3 a gallon, although fortunately for motorists, weaker demand has kept gas prices from rising as rapidly as oil in recent months.

For 2008, most analysts expect crude to keep rising, but they don't expect the kind of heady gains 2007 brought. John Kilduff, an energy analyst at MF Global in New York, expects prices to top out around $110 a barrel early in the year.

"We'll certainly see $100 a barrel, and perhaps go beyond that," he said. But then "you could see a significant pull back [if the economy slows and] that speculative angst runs out," he said. Kilduff expects prices to average around $80 to $85 a barrel in 2008.

As for the price of gas, that depends on the direction of oil prices when traders turn their attention in early spring to the start of the summer driving season.

"$3 gasoline in this market is unavoidable," Stephen Schork, publisher of the industry newsletter the Schork Report, recently told CNNMoney.com. "At this rate, we're going to see $4 a gallon."

http://money.cnn.com/2007/12/31/markets/oil_wrap/index.htm?eref=rss_topstories