The price of oil dropped drastically on the New York Mercantile Exchange Monday, closing below $70 for the first time in nearly two weeks. Reflecting weakness in the stock market, the price of oil slid on news that the Chinese economy may turn bearish.
In trading Monday, the price of crude oil fell $2.78 to settle at $69.96 a barrel on the NYMEX. After achieving this year's high of $75 last week, the price of crude oil dropped on weak data coming out of China.
"Today, what we saw was overnight China's stock market really took a hit; and so that raised doubts about whether or not their economy was quite as robust as what had been talked about because this is what was going to start pulling on our supplies again, this is what was going to increase demand for crude oil," explained Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska.
According to the EIA, China is the third largest importer of crude oil, and recent data emerging from the Far East encouraged investors that the economy in the massive country was picking up. Investors in crude oil have been buying the commodity based on the hope that the global economy is on the mend and that worldwide demand for energy will increase.
"China had ramifications across many different commodities, but when crude oil got wind of it, saw the stock market under pressure, it quickly gave up," said Newsom. "There was a lot of room for it to go down after its push to $75 last week, a lot of air underneath this market where there simply weren't the buy orders to support it."
Expectations of an economic turnaround have buoyed the price of crude oil beyond what the supply and demand fundamentals support.
"The fundamentals are still bearish, and now all of a sudden you've got the possibility of whatever Chinese demand had been building going away for a while," Newsom said. "You've a bearish domestic supply and demand situation; it just leads to a quick sell-off, particularly with the Dow under pressure."
"Despite the fact that the dollar was under pressure, crude oil came back down on fears that the supply and demand situation is going to turn more bearish again," Newsom added.
'Something Is Going to Have to Happen'
While the price of oil dropped dramatically, that doesn't mean that the market will continue slipping. There is bullish hope that the price of oil may continue climbing through the end of the year.
The market's key support level of around $64 or $65 hasn't yet been crossed, and Mondays are notorious for volatile trading, offered Newsom. Renewed buying interest could come back into the oil market, based on the Dow Jones and the US dollar.
"If the Dow indeed is going to go up to 10,300, which is what it indicated in June, July, that it wants to do, then crude oil should go to $90," Newsom predicted. "But if, indeed, we're turning around a bit here, and we're actually going to an October low, then underneath this crude oil market, you're looking at $45 to $50."
"We're kind of at that point where something is going to have to happen," Newsom stated. "Ultimately I think we're going to see some buying come back into crude oil, but underneath it all is still this bearish underlying supply and demand situation that once we really do turn this market down, it's going to come down fast."
Natural Gas Continues Slipping
The price of natural gas fell more than 5 cents on the NYMEX Monday, slipping to $2.977 on the October contract. Bearish supply and demand fundamentals have overshadowed any potential in the natural gas market to rally.
"It's an incredibly bearish supply and demand situation; still nobody wanting to buy it," Newsom concluded. "It still wouldn't surprise me to see the spot month contract go below $2."
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