Oil Falls Below $70 on Fundamentals

Despite a spike based on Nigerian violence that saw intra-day trading reach above $71,

The New York Mercantile Exchange settled Friday at $69.16 a barrel, a drop of $1.07 from Thursday’s close. London’s Brent crude fell 86 cents to close at $68.92 a barrel on the ICE Futures. 

“The rally this week was just on headline chasing, and we see that every year,” said Darin Newsom, senior analyst with market information service DTN in Omaha, Nebraska. “Nigeria has problems every year, and a few traders will jump in, saying ‘Oh my gosh, this is something incredibly bullish.’ No, the underlying fundamentals of this crude oil market are still bearish.” 

Newsom contended that the present contango situation with multiple tankers storing oil rather than selling it has helped to increase the current bearish environment. 

“The contango in the nearby spreads is strengthening, indicating plenty of supply to meet the demand regardless of what the headlines scream,” he added. “Traders can sit up there and look at it and say, ‘If I hedge this crude oil out six months, I can make a lot more than I can right now, even if I’m paying storage to hold it on a tanker out in the Gulf of Mexico.’ So that’s what they’re doing.” 

Ultimately, Newsom argued that small spikes in the market may appear, but the current fundamentals of crude oil are bearish. 

“We’ve got plenty of crude oil; we’ve got more crude oil than we probably know at this point,” Newsom said. “Gasoline demand is starting to turn down at this point. We’re going to get some interest now and then, but overall, the market should have a very difficult time rallying.” 

Additionally, the analyst foresees the market dropping further, possibly to the $50 range. 

“If gasoline really decides to break, and it’s getting close to doing that, we could easily pull back to around $50,” Newsom said. “But this is going to take some time; this isn’t anything that’s going to happen immediately.” 

In order to become a long-term bullish environment, the spreads in the crude oil market must reverse, turning from contango to backwardation, and the Dow Jones will have to increase to gain speculative interest. 

“We’re going to have to see both sides of the market turn more bullish than they are right now, and there really aren’t any signs that that’s going to happen,” Newsom added. 

Natural Gas 

Natural gas gained slightly on the NYMEX Friday, trading at $3.949 for July delivery, a rise of more than 10 cents. 

“We’ve moved into a bit of a sideways pattern,” Newsom said of natural gas. “It’s like we’re waiting for something to happen, but with no interest coming from the spec side of the market and little to no interest coming from the commercial side of the market, there’s just no reason to push this higher.” 

Nonetheless, the analyst foretold of a potential for a burst in trading activity, should the right conditions enter the market. 

“These non-commercial traders are short this market, so if they see a reason to cover that position, they could begin buying and pushing this market higher on that alone,” Newsom said of natural gas. “The market is indicating it could rally, it just isn’t yet.”