Crude oil on the New York Mercantile Exchange Thursday dropped just below $68 on weak fundamentals. While positive economic news helped to push the price of oil up to $69.40 early in the day, the price ultimately fell because of bearish supply and demand.
In trading Thursday, the price of crude oil slipped 9 cents lower to settle at $67.96 on the NYMEX. While intra-day trading saw the price rally, the commodity could not hold onto the gains because of weak fundamentals.
Finding strength from a rally on the stock market and a drop in the value of the US dollar, crude oil initially rose on economic optimism.
Investors have been buying the commodity on the hope that the global economy is rebounding and energy demand will amplify, as well as using the commodity as a hedge against inflation.
Despite reaching the year's high last week of $75, crude oil has fallen since then because of weak fundamentals.
"We've got some bearish underlying fundamentals despite the recent up tick in gasoline demand," explained Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "Longer term, crude oil is still bearish, and that's one of the things we keep dealing with this week -- it just has the market trading below $70 and has it under a bit of pressure."
As the market transitions from the summer driving season into a winter heating season, demand historically wanes in the autumn months.
"Seasonally, we should already be in the time of year where people slow down on their driving; kids are back in school; vacations are over," Newsom continued. "You don't have a great deal of heating oil demand going on right now. Forecasts are still warm weather."
Furthermore, the analyst contends that supply levels are simply too high.
"We've just got so much crude oil on hand that supplies are pretty high, and the demand isn’t there," Newsom said. "The bottom line is: The fundamentals are bearish, and they have been for quite some time."
The price of crude oil has been range-bound for the last couple of months, experiencing a number of rallies, but never breaking through to another range.
"The reason why we can see those pops in the market is because people might want to take a shot at it, but really trading between $65 and $75, that $10 range doesn't mean what $10 used to mean," Newsom stated. "We're seeing $3, $4 a day, so a $10 range isn't as big as what it used to be."
Newsom contends that last week's high of $75 was caused by non-commercial traders watching economic data, rather than the market's fundamentals. He argues that the market probably needs to sell-off a bit, but that the recent rally reveals something else about the potential of the market.
"I think what it shows us is that the money is still willing to come in if it's getting signs from the economy that things are actually turning around, starting to get better, and demand is going to pick up," Newsom disclosed.
While the fundamentals may not support the price of oil, non-commercial traders are willing to invest in the commodity anyway, based on economic factors.
"If gas really starts to turn around and come back down, then I think crude oil is probably going to break through $65," Newsom said. "If, on the other hand, economic reports start turning a bit more bullish, here in September, early October, maybe they take one more shot at this market, see if they can't push it back to $75, possibly up toward $90."
Natural Gas Falls Even Lower
The price of natural gas reached a new low today on the NYMEX, settling at $2.508 in trading Thursday. With overly bearish fundamentals, the price of natural gas has tested seven-year lows.
"The non-commercial side is short; they're very comfortable being short," Newsom stated. "We've got plenty of natural gas, and there are no hurricane threats going on out there. We look at spreads; we've got a $1.20 contango."
"Really there's just no reason to believe that we won't ultimately drive ourselves below $2 in natural gas," Newsom concluded.
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