The sharp rise in oil prices and subsequent drop was caused by investment funds speculating in the market, a new U.S. report says.

The report by Masters Capital Management and White Knight Research & Trading said prices rose as investment funds poured money into the market early in the year, and fell as they withdrew their investments.

"These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices," the report said.

It said big investors put $60 billion US into oil futures markets early this year, but then pulled out $39 billion.

The investment corresponded with a rise in oil prices to a peak of $145 US a barrel in July. As the money was withdrawn, prices fell. Oil futures closed down 68 cents at $102.58 on Wednesday.

"We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down," said Michael Masters of Masters Capital.

The report was released by U.S. politicians who have been pushing to crack down on speculators.

"What we do know from all of this is that energy speculation exists, it has hurt consumers, and the Congress needs to pass legislation immediately to stop oil speculation,” said Senator Byron Dorgan.

The U.S. Commodities Futures Trading Commission, which regulates commodities, and senior administration officials have said supply and demand, not speculation, caused the price swings.

With files from the Associated Press