OTTAWA -- Investors are abandoning the U.S. dollar and plowing their money into oil, creating a disconnect between crude prices and demand for oil.

Crude oil prices shot up a stunning $5 (U.S.) to a new closing record of $104.52 a barrel yesterday as investors dumped U.S. dollars and fuelled a broad commodity market frenzy.

Despite signs of a slowdown in U.S. oil consumption, several factors drove prices sharply higher, including a decision by members of the Organization of Petroleum Exporting Countries not to boost production, a steep drop in U.S. crude inventories and the threat of war between Colombia and oil-rich Venezuela.

But a broader trend is fuelling the rise of oil prices and overtaking the crude market's fundamentals.

(Article continues below)

Even as signs emerge that demand for fuel is weakening in the U.S., investors are bailing out of the U.S. dollar and moving into commodities. Gold and metals are soaring along with oil as investors seek to hedge against the slumping greenback and rising inflation that has resulted from the devalued currency and high energy costs.

"A great portion of the buying from $80 [per barrel] to now close to $105 is from investment people who wouldn't know a barrel of oil if it rolled over them," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy risk management firm. "A lot of it has been done by people who are trying to protect against inflation and against the declining U.S. dollar."

Currency traders are moving out of the recession-battered U.S. dollar and into commodities, which benefit from strong economic growth in Asia and other emerging markets, said Mary Novak, energy analyst with Global Insight Inc.

Full article here.