Stocks Find Energy for Late Rally

Major averages end off their lows but what if the long-awaited correction in energy prices isn't in the cards?
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There has been one constant factor in an overall frustrating investing environment this year: Energy prices have been calling the shots. So much so that investors now tend to wait for the close of commodity markets at 3 p.m. EDT to go shopping.

And so it was again on Wednesday, when investors went bargain hunting in the final stretch of the trading day. The final hour flurry helped major averages overcome a midday swoon amid another sharp gain in energy prices but did not bring them back to their morning highs. Not surprisingly, a lot of the stocks aiding major averages were in the energy patch while the tech-heavy

Nasdaq Composite

didn't make it back above breakeven.

The Amex Oil Index gained 1.2%, fueled by strong gains in the likes of

Valero Energy

(VLO) - Get Report

,

BP

(BP) - Get Report

and

Amerada Hess

(AHC) - Get Report

.

Crude closed up $1.33 at $66.40 on Nymex but it closed off earlier highs, paving the way for further buying in nonenergy stocks.

After trading as high as 10,512.10 and as low as 10,423.98 intraday, the

Dow Jones Industrial Average

finished up 16.88 points, or 0.2%, at 10,473.09. The index was helped slightly by

Exxon Mobil

(VLO) - Get Report

, but more so by the likes of

IBM

(IBM) - Get Report

,

Coca-Cola

(KO) - Get Report

,

Microsoft

(MSFT) - Get Report

and

Verizon

(VZ) - Get Report

.

The

S&P 500

rose even more modestly, adding 1.23 points, or 0.1%, to 1216.89, while the Nasdaq lost 1.02 points, or 0.05%, to 2115.40 after trading as low as 2109.75 and as high as 2127.49 intraday.

The late rallying spree couldn't reverse the overall lack of buying enthusiasm, however. Gainers barely outpaced declining stock on the

Big Board

where more than 2.1 billion shares changed hands; losers led winners 17 to 13 in Nasdaq trading, where 1.7 billion shares were exchanged.

Besides crude, a spike in natural gas prices that caught traders' attention. Natural gas soared 15% to a new record high of $14.60 per million British thermal units on Nymex. The move came after the Natural Gas Supply Association issued a statement saying: "Hurricane Rita and an anticipated increase in heating demand are expected to stretch natural gas supplies even further, likely resulting in higher wholesale costs this winter."

The relief that followed Rita, which proved to be less disastrous than Katrina, is now being reconsidered as energy production is still halted in the Gulf of Mexico.

According to the U.S. Minerals Management Service, oil production in the Gulf of Mexico, roughly 1.5 million barrels per day, remained completely shut while 78% of natural gas productive was off line as of Tuesday. Furthermore, 11 refineries in Louisiana and Texas are still closed after Rita and Katrina.

Things could get worse. On Wednesday, the National Hurricane Center reported that yet another "vigorous" tropical system was gathering strength in the Caribbean Sea.

At least while production is not restored in the Gulf, Jason Schenker, an energy analyst and economist at Wachovia Securities, does not believe that a long-awaited correction in energy prices is in the cards. One may have to wait for the end of hurricane season, which sometimes extends until November, to at least lose the "hurricane premium."

Even then, "I'm not one of those expecting a major correction," Schenker says, believing the emergency measures by the Organization of Petroleum Exporting Countries, the International Energy Agency and the U.S. government to boost supply after Katrina's hit, have only capped the upside of oil prices.

"We're expecting crude oil prices to remain elevated in a $55 to $65 range until the end of the year," Schenker says. This forecast, of course, is absent any more disruptions to production or refining operations.

Even if crude oil prices only remain in this trading range, there is an increasing belief that they and other energy costs will fuel inflation. Partly due to those concerns,

gold rallied again on Wednesday. An ounce of gold for December delivery gained $6.60, or 1.4%, to $472.80 on Nymex.

But reflecting the currently cloudy economic outlook brought by surging energy prices, bond pits seemed to take another bet. The benchmark 10-year Treasury bond gained 5/32 in price, and its yield dropped to 4.26% amid expectations that high energy prices will cut into economic growth vs. fueling inflation. (To be sure, the

Federal Reserve

seems intent on additional rate hikes, which could have the bond-friendly result of curtailing

both

inflation and growth.)

According to Schenker, both weaker growth -- as consumers cut spending -- and inflation -- as companies pass on higher costs -- are a likely to be a dominating theme until the end of this year. Not a great prospect for equities players, even if oil remains in its current range.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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