The price of crude oil slid more than $2 on the New York Mercantile Exchange Monday to settle below $70 a barrel again, giving back gains the market had earned last week. Natural gas, on the other hand, bobbled a bit, but held onto its recent gains to settle above $3.50 per thousand cubic feet.
In trading Monday, the price of crude oil fell $2.33 on the NYMEX to close at $69.71 a barrel. Spurred by a strengthened dollar, the price drop reflects an uncertainty about the economic recovery and long-term energy demand.
Fundamentally, the crude oil market remains the same. The price has been buoyed beyond underlying supply and demand by positive economic data pointing to an economic recovery and a potential upturn in energy demand.
"The only difference today was that we had some buying coming back into the US dollar index -- so we had a commodity-wide sell-off," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "Basically, all commodities came under pressure; very few showed any backbone whatsoever."
Oil Price Pinned on Economic News
Because the crude oil market has been bolstered beyond the underlying fundamentals, daily economic news has taken center stage as a predictor of the price of crude oil, among other commodities.
"Fundamentally, we've still seen crude oil strengthened a bit over the last couple of weeks -- demand coming from who knows where because it really isn't coming from gasoline," Newsom continued. "The gasoline market is really coming down, and it's not really coming from heating oil yet; but regardless of where it's coming from, we've had that support in the crude oil market."
With the passing of the Labor Day holiday in the US, the summer driving season ended, and the winter heating season has not yet started.
"We've tested up to the $72, $73 mark again, and we just couldn't hold, and we came right back down and moved below $70," Newsom explained. "We're just very content with this trading range, which is tightening up a bit now; it's between $67 and $75, and still the comfort zone is right around that $70."
The price of crude oil has been locked in a trading range for a number of months now, not able to break out to the top or the bottom of the range. Analysts agree that the market is waiting for a clearer sign that the economy is in recovery before rallying higher.
"We're going to continue to see these wild swings until we get a very clear break-out one way or the other," Newsom added.
Effect of the US Dollar
The price of crude oil and the value of the US dollar have been inversely related as of late, as investors have used the commodity as a hard asset to protect against the potential of inflation.
"Everyone talking about as much money as the government is throwing into the system through stimulus packages, it was going to create inflation," Newsom said. "But if we look at crude oil, and we look at gold, and we look at the actual economic reports that are out there, we aren't moving into inflation yet."
Because the US government has spent so much money in an effort to stimulate the economy and keep the country out of an even more drastic recession, many foresee the dollar experiencing inflation.
"You're going to have those periods of time where the dollar is still viewed as a safe haven," Newsom continued. "It's also interesting that over the weekend, there were news stories that stock market bears are really starting to faunch at the bit, as the Dow gets closer to $10,000. So what this does is it makes many of the markets nervous."
Despite a firm trading range, the price of crude oil has been vacillating based on these fears and the economic data fueling them.
"I think what we saw today was some non-commercial spec money getting nervous with these ideas that when we get to these October time frames, something normally happens to the Dow," Newsom added. "They may have jumped the gun a bit getting out in front of the $10,000 mark, and so they started getting out -- and when they do that, of course they run back to the safe-haven of the dollar, regardless of what government programs are."
Natural Gas Remains High Despite Drop
In trading Monday, the price of natural gas dropped 20 cents on the NYMEX to settle at $3.576 per thousand cubic feet. Despite this drop, the price of natural gas remains $1 higher than it was at the start of September.
"Over the last two weeks, natural gas has moved $1.50 higher with very little fanfare," Newsom commented. "Now it still has some bearish underlying fundamentals, but it looked like we did see some commercial buying coming into this market."
The underlying fundamentals in the natural gas market have been dogged by over supply and weak industrial and domestic demand. These fundamentals have not changed much, despite the looming winter heating season and a wet corn crop that may spark industrial demand to dry it out.
"We saw the supply and demand tighten up a bit over the last couple of weeks," Newsom said. "We were able to rally the market back up through some resistance around $3.50 or so, make a run at $4 -- it really didn't get through there. It's back down today, but that's no surprise given everything that's going on."
Nonetheless, the rally is not expected to be long term. Many feel that the rally has been spurred by short-covering in the market.
"Because non-commercial traders are holding such a huge net-short futures position, almost 175,000 in contracts, we're going to run into these periods of a few days to a couple of weeks where they liquidate or they cover some of that position, they buy those contracts back; and that pushes the market higher," Newsom explained. "With really not much new selling in here at these low price levels, it allows the market to make some really quick rallies."
Even though the market has been able to accomplish such a major rally, the analyst does not foresee a great price spike in the natural gas market.
"If the winter turns out to be colder than normal, it could certainly bring in some commercial buying; but right now, it doesn't look like it's going to be that critically cold yet, and it doesn't look like it's really bringing that much buying in," Newsom concluded. "It could certainly change. We could certainly see some higher prices, but I'm not anticipating anything overly dramatic at this point."
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