Ending a 10-day rally on the New York Mercantile Exchange Thursday, U.S. crude futures retreated closer to $82 as a concerned market turned its attention to emerging economic growth abroad.
Although the price of light, sweet crude oil for February delivery fell by 52 cents to a final price tag of $82.66 a barrel, teeth-chattering weather throughout the Northern Hemisphere helped stymie the energy commodity's losses. Also closing its session on the downside, natural gas spot prices at the Henry Hub withdrew by a slight 20-cent loss to $5.806 per thousand cubic feet.
"Despite the weather, there hasn't been any dramatic improvement in [domestic] underlying fundamentals," noted Bill O'Grady, the chief markets strategist at St. Louis-based Confluence Investment Management LLC. "Where you are seeing some growth [on a global scale] is in heating oil, which is probably helping to boost demand a bit more."
Weather Whips Market into Heating Frenzy
Citing private forecaster DTN Meteorlogix, Reuters reported today that weather forecasts across the U.S. will remain "below normal" until moderate weather moves eastward.
"We're getting bitter cold snaps not just in the United States, but almost in the entire Northern Hemisphere," O'Grady commented. "Beijing, China and Seoul, Korea both had the heaviest snowfall in more than 50 years." The analyst continued, "Although we mainly use natural gas for home heating in the U.S., other parts of the world still use a lot of oil, which is causing either a pickup in demand or expectations thereof to give this market a lift."
Outside of the weather, O'Grady pointed to still-bearish supply-and-demand fundamentals. "Refinery runs still remain depressed, OPEC production is higher than I would expect -- but the market seems to be shrugging off all of these other factors," he said.
China's Central Bank Raises Rates
"Another factor that may be helping the market is the issue of emerging economic recovery," O'Grady contended. "It seems as if Europe and the U.S.'s recessions have ended, but the recovery is going to be really slow, and I think there's already good evidence of that."
Echoing this belief, the Federal Reserve recently underscored the fragility of the recovering economy on the domestic front. Investors are now eyeing the economy's strengths and weaknesses, as well as the status of interest rates, when betting on commodities, rather than heeding an oversupplied oil market.
Today, China's central bank unexpectedly increased the interest rate on its three-month bills for the first time since August to help ease its own excess liquidity.
"Emerging markets tend to be much more energy intensive, and so if [China and India] are growing even if the West isn't, that's going to bode well for commodities in general, and oil in particular," O'Grady concluded.
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