NEW YORK – Oil shot up more than $2 on Tuesday after touching two-and-a-half month highs as big money funds flooded commodity markets and consumers feared a row over Russia's natural gas price to Ukraine could crimp European supplies.
U.S. crude closed up $2.06 to $63.10 a barrel after reaching $63.80, the highest level since mid-October and the biggest daily jump since mid-September.
The gains extended a three-day rally that lifted prices 5 percent at the end of 2005, when oil averaged $56.70 a barrel-- 37 percent more than the previous year. London Brent crude traded up $2.47 to $61.45 a barrel on Tuesday.
"It's the new year and money is spilling over," said Steve Bellino of Fimat USA. "Commodities are in strong demand worldwide, whether it's copper, oil, gold. There are a lot of dollars chasing a limited amount of commodities."
Money managers were a driving force behind rallying energy prices in 2005 as they favored commodities over the less attractive equities market, and appear set to continue bolstering oil prices this year.
Adding support, Russian state-controlled producer Gazprom cut natural gas supplies to Ukraine briefly after the former Soviet republic rejected demands to pay four times more for its gas -- a break with subsidized prices rooted in Soviet times.
An immediate crisis was headed off just before markets opened after the New Year holiday when Moscow agreed to restore gas supplies through a pipeline that transits Ukraine.
But the underlying commercial dispute was still brewing, raising concerns over Europe's long-term dependence on Russian energy amid a lack of readily available alternatives.
"Whilst the immediate impact on European energy prices has been negligible, the dispute has served to emphasize the dependence of Western Europe on Russian gas supplies and the issue has the potential to keep European gas consumers on edge for some time," said Kevin Norrish of Barclays Capital.
Russia, owner of the world's biggest gas reserves, turned up the heat on Tuesday by accusing Kiev of stealing gas from the pipeline.
"Ukraine continues to steal gas...Gazprom will once again compensate its European consumers but it cannot continue eternally...," said Sergei Kupriyanov of state-run Gazprom.
Kiev has denied taking Russian gas, but said it would do so if temperatures fell below freezing.