Oil Stays Low, Can't Seem to Rally

Despite a rally to nearly $72 earlier in the day, crude oil again dropped below $70. With mixed indicators stemming from decreased oil and increased petroleum product inventories, traders today stayed away.

Wednesday on the New York Mercantile Exchange, crude oil dropped another 58 cents to settle at $69.31 a barrel for the day. Although the price per barrel had some initial strength boosting it above $71, ultimately the market is anxious about demand and the economic recovery.

"Everyone's looking for a resting point, where the prices will stop moving around and move sideways, and I think we've gotten to one of those," explained Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. "Right now, everyone's reading their tea leaves trying to find the next move."

Mixed Signals

The oil analyst points to conflicting news about inventories as the reason for today's decline. Both the EIA and API reported this week that crude oil inventories had slipped, yet gasoline and distillate stockpiles grew.

"There's been this waiting with bated breath for things to turn around," Emerson continued. "When you have an increase in product inventories at a time when typically demand for certainly transportation should be seasonally high, it makes everyone stop and say, 'Uh-oh, maybe we really aren't at the bottom. Maybe we aren't really in recovery.' It's one of those signals that everyone's trying to determine whether it's a strong signal or a weak signal."

With bullish news out of China, Iran and Nigeria, as well as crude inventories dropping, the price of oil remains in the $70 range.

"I would argue that the market was a little schizophrenic today," Emerson commented. "It came down on this information, but it didn't come down significantly. I think we are at this stable sideways move right now, where we're just looking for more information."

Summer Stay

Ultimately, traders are waiting for economic predictors, recessionary data, the strength of the US dollar and inventory information. All of these factors are affecting the price of oil daily.

"I don't think we're going to have a whole lot of upside in the price," she revealed. "We've had a pretty significant contraction in oil demand, and that's not going to turn around over night. It's still a weak market. What saved the market from staying at $30 or $40 is that OPEC came in and cut production.

Emerson believes that the market has hit a lull where prices will oscillate and potentially drop. Barring a production disruption, such as a hurricane or terrorist attack, Emerson believes that OPEC will keep production steady, and prices will remain.

"At the end of the summer, I think we're going to be in the $60s,"she said. "I do think we may bounce around a bit. We could bounce up to $75; we could bounce down to $60; we could bounce around a lot. I don't think we're going to lack volatility."

The OPEC Factor

"In my opinion, the producers that really matter are OK with $70, even if they won't say that publicly," Emerson added of OPEC.

The analyst doesn't see production changing from OPEC. With an upcoming meeting in September, the oil cartel should keep production steady at currently reduced numbers. There are two main reasons for this: Iran and the US.

"Here we have the United States, still an important consumer for most OPEC countries, on the verge of writing one of the most far-reaching environmental pieces of legislation ever," she explained. "Do you really want the price to go to $90 while they are debating that? I don't think so."

Adding, "Here we have all kinds of conflict in Iran, where I would argue most of the Gulf producers are on the Saudi opposition. Do you really want to give a boon to the Iranian government after its crackdown? Probably not."

Emerson concluded, "I just don't think there's enough reason to push the price."