Updated from 12:10 p.m. EDT
Traders who never expected oil prices to come close to $50 a barrel were on edge Friday amid the expiration of the September crude futures contract.
With the contract expiring and violence in Iraq intensifying, some short players were forced to cover positions, creating upward pressure on prices, analysts and traders feared.
As it happened, oil closed $1.10 lower at $47.60, although not before going above $49 earlier in the session.
"It's a war between the bulls and bears," said Phil Flynn, vice president and energy analyst at Alaron Trading. "There have been a lot of people who never thought crude would get this high in the September contract and have been selling short, betting prices would fall.
"Now it's the last trading day, it's put up or shut up time. If you carry it into tomorrow, you have to make delivery."
Not only were shorts under fire, but buyers were slow to sell their long positions on the belief prices had farther to run, Flynn said. "It's not uncommon for us to hit a new contract high on the day of expiration for just that reason."
The New York September contract settled about $1 above the October contract, meaning that crude oil prices could open lower on Monday, barring any more clashes in Iraq over the weekend.
"If we don't lose exports from Iraq over the weekend, we might see some relief in price, at least near term," Flynn said.
Ed Silliere, vice president of risk management at Energy Merchant in New York, said he isn't sure how big an impact Friday's expiration had. He believes the main reason behind the run-up is the "tremendous surge" in buying from mutual funds.
"The new big money coming into this market is coming from stock portfolio managers," he said. "They are hedging the ultimate risk against their portfolios, which is high oil prices."
Some fund managers are buying futures directly while others are getting exposure through the Goldman Sachs Commodity Index, Silliere said.
While technical considerations no doubt influenced the price of oil, the tight supply-and-demand situation is clearly the biggest cause of concern. Rising consumption around the world has prompted the International Energy Agency and the Organization for Petroleum Exporting Countries to boost their forecasts for oil demand this year and next. Although supply also has been increasing, investors worry that OPEC has little excess production capacity to cushion against any supply disruptions, such as those out of Iraq.
Shiite Muslim cleric Moqtada al-Sadr has been leading an insurgency against Iraq's provision government in the city of Najaf. According to Al-Jazeera television, a number of oil installations in southern Iraq have been attacked and threats have been made to torch oil wells across the country.
Meanwhile, Flynn noted that Iran has made "scary warnings." Iranian defense minister Ali Shamkhani has warned that the country might launch a pre-emptive strike on U.S. forces in the region to prevent an attack on its nuclear facilities.
"Any strike of this nature will be the beginning of the end of Iran," Flynn said. "Is it just talk? Is there substance to back up the threats? The energy markets will remain on edge."