The $16 rise takes the price to $120.92 a barrel, the biggest one-day gain on record.

This is thought to be due to investors switching to perceived safe havens such as oil, as well as uncertainty about how the government’s financial plan will work.

Many think that the US government’s bail-out plan will help the economy, increasing demand for oil. Another major supply concern is production in the Gulf of Mexico still being affected by Hurricane Ike.

Analyst Paul Harris from the Bank of Ireland said the US rescue package was key: “[It] has changed sentiment in the oil market.”

At one point during the day the price of oil rose by more than $25.

The price volatility has been worsened by the fact that the contract for the supply of oil in October expires on Monday.

Last week oil hit a low of $91 a barrel. It had fallen from the peak of $147 a barrel it reached in July.

This comes not long after analysts warned of a serious supply crisis, which a think tank has advised could push the price of oil over $200 a barrel, raising concerns for domestic and business electricity and gas customers alike. The Chatham House Report said a “supply crunch” will affect the world market within the next 5 to 10 years.

Companies and governments were failing to invest enough to ensure production, despite there being plenty of oil in the ground, it added.

Report author Professor Paul Stevens said only a collapse in demand can hold back the looming crisis: “In reality, the only possibility of avoiding such a crunch appears to be if a major recession reduces demand – and even then such an outcome may only postpone the problem”.