Oil surges on strong stock showing

Crude futures end near $54 a barrel as investors bet that demand for energy will increase as the economy recovers.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices rose Monday to a nearly 4-month high after Treasury Secretary Timothy Geithner unveiled the details of a government plan to buy up banks' bad assets.

Crude for May delivery ended the day up $1.73, or 3.3%, to $53.80 a barrel, after reaching as high as $54.05 earlier in the session.

That was the highest settle price of oil since Nov. 28, nearly 4 months ago, when oil settled at $54.43.

Even as oil prices rallied on the expectation of higher demand in the future, analysts were cautious about the massive inventories of oil still to burn through.

Geithner's bank plan: Oil prices rose as Wall Street surged, with investors cheering Geithner's plan to support the banking industry. The economy has been struggling in recession for more than a year, and oil prices sank more than $100 a barrel from their summer highs as companies and individuals cut back on their consumption of energy.

"The reason [oil] is up specifically today is because people think the economy is going to recover," said Mark Waggoner, president of Excel Futures. "People are getting a more clear picture of what the government is going to do - having a clearer picture gives them the idea that something is actually going to happen."

The Treasury Department unveiled the new so-called "Public-Private Investment Program" Monday. Under the long-awaited plan, taxpayer funds will be used to create partnerships with private investors to purchase toxic assets backed by mortgages and other loans. The goal is to buy up at least $500 billion of existing assets and loans, such as risky subprime mortgages.

The Dow Jones industrial average (INDU) surged Monday as investors were relieved to finally get details about the Treasury's plan. The government had outlined the plan in broad strokes back in February, but investors were largely disappointed by the lack of specificity.

"What they are saying is that they are going to have the private sector help the banks out. That will relieve pressure and essentially help the economy," said Waggoner. "Confidence comes back, money starts moving, demand [for oil] gets better."

Supply still a factor: Meanwhile, even as demand for oil recovers, there are large inventories of supply that the market has to work through. "We do have a glut of crude oil so that is going to temper the rally we see in crude oil," said Waggoner.

According to the most recent Energy Information Administration weekly report, stockpiles of gasoline increased by 3.2 million barrels and crude supplies increased by 2 million barrels.

Another analyst echoed the concern.

"A lot of the investors that poured into oil recently have probably been a little over optimistic that oil demand will rebound that briskly," said James Cordier, founder of OptionSellers.com. "We have just a huge supply of oil in the US, which is by far the largest consumer and we have futures that expire every 30 days."

The stock market can respond more immediately to a change in investor sentiment than a commodity market. "The fundamentals in oil are not ready to make this market take off just yet," said Cordier.

At the pump, retail gas prices have been on the rise. The national average price for a gallon of regular unleaded gasoline increased to $1.956, up 3 tenths of a cent from the previous day's price of $1.953, according to motorist group AAA's Web site.

Oil prices have been supported in recent sessions as the value of the dollar has weakened. Crude oil is traded in U.S. dollars around the globe. When inflation fears rise, the dollar loses value, pushing the price of oil higher. Monday, the dollar was holding mostly even with other major currencies.

Last week, crude broke the $50 threshold for the first time in nearly 4 months on the back of a significantly weaker U.S. dollar.

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