New York's main contract, light sweet crude for October delivery, soared $16.
37 a barrel, or 16 per cent, to close at $120.92.
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Earlier the New York futures contract had raced past the $110 mark for the first time since August 29 and traded as high as $30.00
The scale of the New York market rally was massive. Monday's dollar gain was 62 per cent bigger than the prior record rise of $10.75 on June 6.
“It's an unprecedented increase,” said Antoine Halff, analyst at Newedge Group.
In London, Brent North Sea crude for November delivery jumped $6.43 a barrel to settle at $106.04
The rally also was driven by technical factors linked to the New York contract's expiration at the close of trade, analysts said.
Light sweet crude for November, the next benchmark contract, gained a far more modest $6.62, to settle at $109.37
Before the October contract expired, “market players were forced to pay an exorbitant price to liquidate their positions,” Halff said.
Global credit crunch
He said the rally had been exaggerated by thin market liquidity because of the global credit crunch.
Another factor bolstering the October contract, which will deliver oil in the short term: US crude oil stockpiles are significantly lower after the production disruptions in the Gulf of Mexico from the hurricanes Gustav and Ike, Halff said.
“A considerable amount of Gulf of Mexico production remains offline after Hurricane Ike,” said Mike Fitzpatrick at MF Global.
On Friday, oil prices jumped more than six dollars in New York and four dollars in London on news of a broad US plan to bail out the sinking financial sector.
Fears over financial bail-out plan
According to analysts, the $700-billion bailout, which requires approval by Congress, has eased fears that the world's largest economy was on the brink of collapse.
“Many are hoping that the plans, which still have to be passed by Congress, will help stabilise financial markets and rescue the US economy from further gloom, thus supporting US oil demand growth,” said Michael Davies, analyst at the Sucden brokerage in London.
WTRG Economics analyst James Williams said: “The uncertainty over the bailout plan will probably dominate oil prices for most of the week. The results might be more palatable to the market if we didn't have to watch Congress make the sausage.”
Oil prices also were underpinned Monday by a weakening dollar as investors worried that the US government bailout would severely burden the world's largest economy. A weaker dollar makes dollar-priced oil more attractive to buyers using stronger currencies.
Oil and other commodities traditionally are seen as safer investments when the US currency weakens.
“Leverage is gone from the banking system and so will return back to the commodity exchanges as we should see a lot more cash come our way,” said Phil Flynn, analyst at Alaron Trading.
Concerns about tight supply are “always lurking in the background,” he said.
The oil market also was focused on militant attacks against oil companies in Nigeria, the second-largest oil producer in Africa.
The Movement for the Emancipation of the Niger Delta (MEND), the most prominent armed group in the country's south, declared a ceasefire on Sunday in its week-long “oil war”.