Crude oil trading on the New York Mercantile Exchange fell slightly from an 8-month high yesterday to settle above $72 a barrel. Based on reports from OPEC and a strengthening US dollar, the price of oil fell after a four-day rally.
With intra-day trading nearing $71 Friday, the price per barrel on the NYMEX ultimately fell 36 cents from Thursday's high. Settling at $72.32 a barrel, crude remained steady despite worries that the market’s belief in the economic recovery may be premature.
Furthermore, the 13-member oil cartel OPEC reported today in its monthly oil report that production rose in May and global oil demand has been reduced. Also, the dollar gained strength against the euro.
London Brent crude settled at $70.92 Friday, a loss of 87 cents or 1.2% lower than yesterday’s high.
Echoing a familiar take on the market, senior commodities analyst with optionXpress in Chicago Mike Zarembski commented that the recent trend in oil prices is due more to the strength of the dollar than actual demand.
"That combined with some signs that maybe the worst of the whole recessionary environment has passed us has definitely shot money into the oil market, which has probably been keeping it at prices that are maybe a little bit over-justified compared to where we are with the supply and demand situation currently," Zarembski reported. "But of course markets are forward looking, and we are definitely seeing that here in oil."
Despite yesterday's increase, the price of natural gas seems to have recommenced its recent losing streak. Falling 7.5 cents lower, natural gas dropped 1.9% to $3.857 mmBtu.
Citing a surplus in supply and dwindling demand, Zarembski said that fundamentals have taken the reins in the natural gas market.
"The speculators are continuing to short this market, though not nearly as short as they were," the analyst said of natural gas. "It's a situation where natural gas does seem exceptionally cheap to crude oil, but that situation may continue unless we get some sort of weather situation in the Gulf with hurricane season or speculators start not wanting to be short going into the fall here, and prices go up.
Zarembski reports that the natural gas market may have to wait another quarter to see an increase in prices.
"Even though the fundamentals may not start to pick up then, it may be speculators that start to drive that market a little bit higher," he said. "Maybe we're starting to see a little bit of a bottom right now, but I think third quarter probably is the earliest before we start seeing any significant pick up in natural gas."
Zarembski does foresee potential for $5 or $6 gas in the future, should production be shut-in or demand pick up.
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