Oil Drops to $70, Natural Gas Rises


The price per barrel of crude oil fell today in trading on the New York Mercantile Exchange. Tumbling below $70 during intra-day trading, a stronger US dollar dispersed speculators from investing in oil.

"We've been thinking that oil was going to come back in primarily on the return to some fundamentals," said Brian Uhlmer, research analyst with Prichard Capital in Houston. "Nothing has really shown that global demand is improving, and there's also some reaction to China discussing how it can't rely on exports to fuel its stimulus plan and is going to have to require more internal spending to generate and grow its economy."

As the second-largest consumer of oil, the Chinese economy directly affects the price of crude.

"China has been kind of the backbone for support for oil, buying oil into storage and limiting imports into the US," Uhlmer continued.

"So, if we believe there's some form of demand destruction in China, or it's not really as positive as people think it's going to be, oil should pull back."

Down $1.42 from Friday's close of $72.04, trading of crude settled at $70.62 a barrel on the NYMEX on Monday. Last week saw the highest prices for oil in seven months, close to $73 per barrel.

London Brent crude fell in trading today, as well, with a drop of $1.48 to $69.44 on ICE Futures.

"We were expecting it to stay in the $55-65 range," Uhlmer said. "It hit $70, but we didn't ever up our estimates to say, a $70-80 range -- we still think that's fairly unreasonable in the short-run, in the next couple months."

Prices for natural gas, on the other hand, rose by 33 cents to settle at $4.18 for July delivery.

"There's enough drilling to support ongoing storage builds and a bearish long-term outlook," Uhlmer said of the natural gas market. Prichard Capital foresees gas staying in the $4 to $5 range.

Uhlmer notes that potential for international LNG being imported into the US has also kept the market bearish.

"The biggest reason for the bearish outlook to say that natural gas is going to $2 was that storage would be filled and LNG would be coming to the US en masse, which would fill our storage; and then we'd have no choice but to sell it for $2 or shut-in," Uhlmer explained.

"But we've seen a lot of shut-ins, a lot of inventories and wells not being completed. So it appears that production is plateauing; and if we can keep supply flat even in a poor-demand environment, we should have some price stabilization."