After falling Friday, the price of crude oil managed a late-day rally Monday to climb above $70 a barrel spurred by a strong day on Wall Street. Natural gas also rallied, closing a few cents shy of $5 per thousand cubic feet.
Early trading saw the price of crude oil drop to an intra-day low of $68.05 on the New York Mercantile Exchange Monday, but a late rally shot the price of crude oil back up to close at $70.41 a barrel, supported by gains in the Dow Jones and a tightening of the gasoline contango.
"It was a very interesting turnaround, where we had the crude oil down almost $2 early, and then it posted a late rally," commented Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "To me, there really wasn't anything fundamental in the market; it did look like there was some commercial buying that we continue to see pop up rather unexpectedly."
Helping to bolster the stock market today, the US services sector grew at a faster rate than expected, expanding in September.
"Most of it seemed to be spill-over from the Dow, with the Dow posting a solid triple-digit gain here in October," Newsom added.
US Gasoline Demand Rises
"Other than that, it could again have come from gasoline," Newsom explained. "As I look at the gasoline spreads and what they did today, this market just continues to mystify, but there seemed to be some demand."
Following the summer driving season, typically this time of year sees gasoline demand slip. Contra-seasonally, last week's Department of Energy EIA report showed a draw in US gasoline inventories.
"I don't think it is tight supplies, but again we see these spreads reacting, we see the contango weakening in the gasoline market, and it's giving us every indication that there is some demand coming in from gasoline," Newsom said. "It may be just from low prices, but I find that one hard to believe because the gasoline market does tend to continue to working lower during this point in the year."
Despite Rally, Oil May Still Be Headed Down
For the last several months, the price of crude oil has been locked in a trading range between $65 and $75. While there have been a number of attempts to break out of the range to the top and bottom, the price has remained steady up to this point.
Despite this, some analysts contend that the price is destined to drop out of the current range, based on weak fundamentals.
"I think that the overall tendency for the crude oil market would be for it to come down to somewhere in the $54 to $61 range," Newsom predicted. "It still looks like it should at least move down and test that area -- probably not soon, particularly when we post as solid of a rally as we did today, that would probably be through late January, early February. Until then, we'll just continue to hang around this $67, $71 area."
Lately, the price of crude oil has been bolstered beyond supply and demand fundamentals by strong economic news pointing to the end of the economic recession and hope for renewed energy demand.
"Whatever the case might be, we're still seeing some demand come into this market, supporting crude oil and slowly tightening those spreads," Newsom added. "In fact, we've moved to about a 16-cent contango today, about as narrow as we've been since early October 2008."
Natural Gas Flies High
Gaining nearly 27 cents on the NYMEX Monday, the price of natural gas settled merely 2 cents below $5 at $4.987 per thousand cubic feet.
"Fundamentally, it's not overly bullish yet, but we did see some pretty good commercial buying today," Newsom explained. "The spreads all out through the Nov., Dec., Jan. all tightened up a bit."
After trading at seven-year lows on overly bearish supply and demand, the price of natural gas has rallied substantially in the last few weeks, nearly doubling in price.
"Basically, since early September, this market has started to see some buying coming in from the commercial side," Newsom added. "It's still bearish, but it's still coming in."
According to a report from the EIA last week, US inventories of natural gas reached an all-time high of 3.589 trillion cubic feet. Despite this, buying has been coming in from both the non-commercial and commercial sides of the market.
"This market still looks like it may be trying to turn around longer term; and if it does, it'll be the first time in a long time that we could actually start building a bullish argument in natural gas," Newsom concluded.
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