NEW YORK (TheStreet) -- Oil prices rallied Tuesday in reaction to rumors that Goldman Sachs (GS) - Get Report has purchased a massive quantity of oil and signs that the Federal Reserve may implement additional stimulus measures.
Brent crude oil for October delivery was gaining $2.11 to $113.99 a barrel and the October West Texas Intermediate (WTI) light sweet crude contract was adding $1.66 to $88.93.
Goldman Sachs is rumored to have bought 3 million barrels of Feb. 2012 WTI oil at a strike price of $88 as it sides with the camp of economists with a more bullish macroeconomic outlook.
"This could provide for high volatility the next six months," said SEB chief commodities analyst Bjarne Schieldrop.
"If Goldman is long oil ... and the rest of the market is short ... everyone else will have to run after the price ..." he explained.
The analysts added that many traders think the fair value of Brent is at $125 a barrel. "If this is indeed the right and balanced price level, the oil price will float towards this level unless there are any disruptive events or situations like Euro-zone debt eruption or U.S. debt ceiling and downgrade."
ChartLab founder Greg Troccoli says the driver behind oil prices for the day is the Goldman rumor.
More hopes of additional U.S. economic stimulus ahead of the release of the Federal Open Market Committee minutes at 2 pm ET also fuelled oil prices. Federal Reserve Bank of Chicago president Charles Evans reportedly said, "we need to do more" for the economy.
"This feeds optimism for QE3," Schieldrop pointed out. "This gives support to both gold and oil -- oil on growth optimism as a result of possible liquidity stimulus."
The Goldman Sachs rumor and Evans' remarks were more than offsetting Tuesday's
and weak European data. On Tuesday, eurozone economic sentiment was reported to have declined to a 17-month low in August, while weak demand was reported for Italy's bond auction.
"The products and Brent are the strongest and it appears that the market may be looking for some sort of easing measures from the Fed or even European leaders that may ultimately be inflationary," optionsXpress analyst Michael Zarembski agreed.
"Gold's strong performance would also give credence to this conclusion."
Tom Kloza, chief oil analyst for the Oil Price Information Service thinks that oil may have also been taking a cue from higher gasoline prices.
"Higher refined products prices can sometimes be the tail wagging the dog
for crude," he explained.
New York harbor spot prices for gasoline and diesel were being bid higher on fears that downtime at
Bayway refinery and
Philadelphia refinery could persist into next week in the aftermath of Hurricane Irene, said Kloza.
Meanwhile, there are worries that it will be a while before oil production resumes at prewar levels in Libya.
Oil and gas stocks were trading mixed.
was adding 0.6% to $5.46;
( SUG) was rising 0.6% to $42.25;
was up 0.9% to $7.88; and
was down 0.3% to $39.15.
-- Written by Andrea Tse in New York.
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