For the second day in a row, crude oil was able to stay above $72 a barrel on the New York Mercantile Exchange. Making slight gains Thursday, oil traded higher, spurred by economic optimism.
With the September contract expiring today, crude oil traded 12 cents up to settle at $72.54 a barrel on the NYMEX Thursday, following an intra-day peak of $72.88 -- the highest the market has reached in two months. Crude for October deliveries settled down nearly a dollar at $72.91 a barrel.
Despite less than stellar US employment numbers, investors kept oil trading positive on the hopes that the global economy is turning around and energy demand will recover.
"Crude oil has been rising, along with the equities markets, over the last few months, but specifically in the past week, you saw a bullish inventory draw yesterday and that was lead by the first draw in Cushing, Oklahoma, in a few weeks," said David Popowich, an analyst in institutional research with Tristone Capital in Alberta, Canada.
"I think you're starting to see signs of industrial demand improve," Popowich added. "Overall the economy is just improving, so I think people are feeling a little bit more bullish on crude."
While underlying supply and demand fundamentals have not yet switched from bearish to bullish, the sentiment about the crude market has begun to change.
"I think the fundamentals have changed enough to make people have a bias on the upside of crude," Popowich explained. "It's easier to see that the economy is going to recover sometime soon, that it's not going to stay bad forever."
A materializing fear of inflation is further fueling the bullish leanings in crude oil, prompting investors to buy hard commodities, such as oil.
"If the American dollar starts to weaken, you're going to see money flood back into crude and hard commodities as an inflationary hedge," Popowich advised.
$100 Oil Not Here -- Yet
Although the price of oil is within striking distance of this year's high of $73.38 achieved in mid-June, this analyst does not foresee $100 oil in the near future.
"I think we're range-bound; it's hard to see much more upside in crude," Popowich stated. "You might see it get up into the low $80s or something like that, but I don't see crude going back up to $100 anytime soon."
While the price of oil may be able to rally to a new high for 2009, the fundamentals should keep investors range-bound.
"There's just too much oil inventory out there, and until we see tangible signs of demand recovery, it's hard to get above that range, though I don't think it's collapsing either," Popowich explained.
Natural Gas Falls Below $3
Despite a slight rally yesterday, the price of natural gas fell to a new low of $2.945 Thursday on the NYMEX. Losing more than 17 cents in the days trading, bearish fundamentals have squelched the price of natural gas for months.
"On gas, the story has been the same for the last few months: There's too much gas, and there's no where to put it," Popowich said.
"Storage is going up -- even though we had a relatively bullish inventory build today, where inventory built less than expected, over the next month gas is definitely looking sloppy."
Further weakening the market, a contango has built itself into the natural gas spreads. Natural gas closed at $5.052 today for December deliveries and at $5.342 for January deliveries.
"What producers are seeing is the forward strip is still staying relatively high," explained Popowich. "You've still got winter gas prices in the $5 range. Guys can drill, and their supply costs are in the $4 range; so it's still profitable to drill these wells."
While an increase in demand would help the price of natural gas, decreased supply is necessary, as well.
"I think what you need is forward gas prices to come down big time," Popowich concluded. "We might start to see that happen when storage builds up here in September, and that's what is really going to roll the rig count over, and then you're going to see gas recover then. But I think as long as winter prices stay above $5, guys are going to keep drilling through the gas price drops."
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