The media makes far too much of the relationship between the dollar and oil prices. Although dollar strength can influence crude prices, the relationship is dubious over all but the shortest of time frames. For example, currencies cannot explain how crude oil rallied from December lows under $70 a barrel to recent highs around $83 a barrel; the US dollar has consistently strengthened over that period.

From a trading perspective, as I explained on Clean Skies TV this morning, crude prices have encountered some technical resistance around $84 a barrel–roughly the January highs. It’s only natural for a bit of profit-taking to occur at that level. Although the next few weeks could bring added volatility, the general trends are positive: Oil demand in emerging markets is on the rise, inventories are normalizing and US demand is recovering gradually. Once oil prices eclipse $84 a barrel, expect crude to surge above $90 a barrel in short order.

In recent issues of The Energy Strategist, I’ve compared the current cycle in the oil services stocks to that of the late 1990s. The pattern remains consistent despite the occasional bout of volatility; the industry’s fundamentals continue to improve, and I expect these stocks to yield impressive gains in 2010. Readers should regard any dips as an opportunity to buy my favorite names; many had rallied above my buy targets in recent weeks.

Weatherford International (NYSE: WFT) was hit by an analyst downgrade today–downgrades often have more impact in weak markets than strong markets. I reiterate my buy recommendation on the stock. Execution issues and concerns about the firm’s projects in Mexico have weighed on shares in recent months, but these challenges are more than priced into the stock–Weatherford International’s shares are cheap relative to its peers and don’t reflect the company’s superior growth prospects.

Outside the model Portfolio’s services names, Anadarko Petroleum (NYSE: APC), Petrobras (NYSE: PBR) and EOG Resources (NYSE: EOG) are all leveraged to crude oil prices.  The latter has a major analyst meeting just a few weeks away that should provide an upside catalyst, a prospect I highlighted in The Explorers. Finally, refiner Valero (NYSE: VLO) is a buy under 20 as a play on improving crack spreads–a short-term trade I outlined in the Feb. 17, 2010, issue A New Dark Age for Refiners.

Also remember that oil and natural gas are not the same markets; investors should not expect the two commodities to march in lockstep.

As I noted in the first issue of 2010, The Crystal Ball, I don’t expect natural gas prices to soar this year because US drilling activity is increasingly focused on natural gas shale plays such as the Haynesville Shale and the Marcellus. The best shale plays in the US are economic even with gas prices between $4 and $5 per million British thermal units.

The best measure of activity in the shale is the US horizontal rig count; producers must use horizontal rigs to drill most of these plays. The horizontal rig count has soared from around 560 at the beginning of this year to over 700–a new record high and more than double last year’s low.

Meanwhile, the vertical rig count–a measure of activity in conventional plays–stands at 489, off its lows but still down roughly 50 percent from the highs recorded in 2008.This is clear evidence that the shale plays are the most economic in the US today.

Expect natural gas prices to be volatile over the next couple months because the winter heating season is over and the summer cooling season has yet to begin. Some fear that gas in storage will build quickly and a surge in shale production will swamp any recovery in demand for gas.

Although I expect storage levels to increase at a faster-than-normal pace in the coming months, gas prices around $4 per million British thermal units are unsustainably low. And many commentators ignore several upside catalysts for gas-related stocks, including coal-to-gas switching in electric power generation; the potential passage of legislation that encourages gas use; further consolidation in the gas exploration and production (E&P) industry; rising services costs relating to shale production; and a robust recovery in industrial demand for gas as users substitute cheap gas for expensive oil whenever possible.

I see gas prices recovering to above $6 per million British thermal units by year-end. Over the long term, gas prices between $6 and $7 per million British thermal units will be required to balance supply and demand.

The Energy Strategist’s model Portfolios focus on producers with access to lower-cost plays such as the Haynesville Shale of Louisiana and the Marcellus Shale in Appalachia. Petrohawk (NYSE: HK) is a direct play on the Haynesville, while Range Resources (NYSE: RRC) is well placed in the Marcellus. Both remain buys.

Gushers Portfolio recommendation Nabors Industries (NYSE: NBR) is a land-focused contract driller and has significant exposure to gas drilling activity. However, three qualities distinguish Nabors from its peers: Robust demand for its high-quality rigs in shale plays; the company’s strength in oil-levered international markets; and its market share in the Bakken Shale, an oil-focused unconventional play. Nabors continues to rate a buy.