Oil Climbs Above $73, Nat. Gas Rallies as Equities Fly High

Jumping toward $74 a barrel on an American holiday, crude oil rallied more than $1 from last week's closing price, bolstered by a weaker dollar and a rise in the equities market. Also gaining today, natural gas closed 12 cents below $5 as the energy commodity continues to strengthen despite bearish fundamentals.

After rallying to an intra-day high of $73.84, the price of crude oil settled slightly lower to $73.27 on the NYMEX Monday, a gain of $1.50 from Friday's close. Additionally, the US dollar eased against a basket of foreign currencies, helping to spur a rally in today's commodity prices.

"The price of crude gained today primarily because of what happened in outside markets," said Bill O'Grady, chief markets strategist at St. Louis-based Confluence Investment Management firm.

"You had the dollar weaker and you had equity markets stronger, and that has been the pattern for the past several months; when you get stronger prices in those markets, then oil prices tend to move up," O'Grady explained.

Investors turn to riskier markets such as commodities when the greenback's value is low to hedge against inflation. Moreover, when the dollar is devalued, international investors and their respective currencies are able to purchase oil at better prices.

What Fundamentals? Equities, The Big Story

Last Friday, the International Energy Agency raised its expectations for increased future oil demand led by a recovering economy.

Although they play a role in affecting commodity prices to some extent, "fundamentals can be easily overwhelmed by flows coming in from financial investors," O'Grady revealed.

In fact, while market fundamentals remain bearish, the price of crude oil has continued to bounce back to levels above $70 in spite of them.

"With grave fears of higher future inflation, there's just a lot of money heading toward the commodity markets, and oil is a beneficiary of that" O'Grady said.

While the analyst does not think that economic optimism necessarily buoys short-term commodity prices, he admits that this optimism for future economic growth is helping equities rise, which in turn encourages investors to buy energy commodities.

"The fact that you still have supply overhangs and critical fuels would suggest to me that the economic optimism might be there for the future; however, you're going to need a lot of economic growth just to bring inventories back to normal," O'Grady contended.

Natural Gas Picks Up Rally, Edges Closer to $5

Pushing toward last week's high of $5, natural gas closed at $4.880 per thousand cubic feet during trading on the NYMEX Monday, or 11 cents higher than Friday's close. Recently, natural gas prices have doubled from the past month's seven-year lows.

According to O'Grady, the natural gas market is less driven by financial flows. Above all, the winter weather is supporting a recent rally for the energy commodity despite record stockpiles.

Furthermore, O'Grady predicts that the market will likely see an industrial recovery, which will help boost future demand for natural gas.