With choppy trading throughout the day, crude oil settled above $62 on the New York Mercantile Exchange Thursday. After a more than $2 rally yesterday, the price of crude oil was on the rise again today.
With a gain of 42 cents on Thursday, crude oil settled at $62.02 a barrel on the NYMEX, mirroring strong trading on the stock market late today.
While weak fundamentals helped to push the price of crude oil down from its high of near $73 in June, the market is responding to positive economic data and has been able to rally.
“This is a really well-supplied market: There’s plenty of crude, there’s really plenty of product, especially middle distillate,” explained Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “OPEC has cut back production, and that is holding the price up.”
If the price of oil was simply determined by supply and demand, the price may still be dropping she said.
“The supply-and-demand fundamentals would warrant a slowly declining price,” Emerson added. “It warranted the correction from $70 back to $60, and probably it warrants a slow move down, not a dramatic move – maybe to $55, maybe even below $55.”
Yet the fundamentals are not the only factor affecting the price of oil.
“All of that is counteracted by the fact that we’re getting positive economic news,” Emerson said. “As soon as positive economic news comes out, or the stock market rallies, or the dollar weakens, or something like that happens, the fundamentals just don’t matter anymore. And the market starts back up.”
‘Two Different Sets of Fundamentals’
“It’s a funny market,” Emerson explained. “We talk about it having two different sets of fundamentals: the fundamentals of physical supply and the fundamentals of paper market. You have two different markets shaping the price.”
In other words, there are the traditional fundamentals that include supply and demand, and the fundamentals that are determined by the futures market, the buying and selling of paper contracts.
“There’s the big physical market that we all know well and we all track supply and demand,” she said. “That market is saying, ‘You know what, this is a soft market.’ OPEC’s keeping it from collapsing, but it is still a soft market.”
The futures market on the other hand is more concentrated on commodities in the context of financial news than traditional fundamentals. This market is focused on economic recovery, unemployment numbers and earnings reports.
“So traders, investors, speculators could go in and say, ‘You know what, I like oil. I see an upside because I think that when the economy recovers, prices are going to go back up,’” Emerson explained. “So you have these two different markets competing for control of the price.”
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