Oil Soars: Is the Rally for Real?

Oil prices skyrocketed today by more than $25 a barrel to $130, the single-largest intraday gain ever, before falling back to close up $16 a barrel— still the biggest one-day gain since oil began trading on the New York Mercantile Exchange in 1984.

The jump is even more striking because it comes on the first trading day following this weekend's move to craft a $700 billion financial sector bailout.

Whether you think this rally will continue says a lot about how you see the current economy.

A few thoughts:

Bailout spurs demand—in theory. If investors believe $700 billion will be enough to keep the economy on track, an increase in the price of crude makes sense. But if you believe the government bailout is just the start of more problems for the economy as Wall Street's woes spread, this rally looks a little less convincing.

Oil as a safe haven. Naysayers are having their say, too, as investors flock to safe havens. Gold is up more than 5 percent today, and a host of other commodities are rallying. Buyers were flooding into bonds on worries that deflation—another long-term negative for oil—might be on the horizon.

The dollar dips. The bailout plan means higher U.S. debt and weaker credit. That's bad for the dollar, which now appears to be reversing its recent rally, with the U.S. Dollar Index off 1.4 percent today. A weaker dollar makes a barrel of dollar-priced crude cheaper, which spurs demand among buyers (that is, until economic slowing overtakes the dropping-dollar discount).

Fundamentals. It's the last day of trading in contracts for some big buyers who've been waiting to make winter purchases on hopes of locking in future supply at lower prices. They got them, and now they're buying again. Also, some analysts note that the recent fast fall in oil prices may simply have gotten ahead of itself, and the jump today represents a combination of the unprecedented bailout, short sellers covering positions, and some short-term demand from a few big buyers.

Lastly, green stocks may be hinting the rally in crude is really a head-fake. Alternative energy stocks that normally move in tandem with crude prices are falling fairly hard today, notes Jon Ogg at 24/7 Wall St.