Oil Falls to $64, May Continue Slide on Seasonal Demand

Crude oil fell more than $2 today on the New York Mercantile Exchange to just over $64 a barrel. With bearish fundamentals, waning seasonal demand and weakness in the Dow Jones, the price of crude oil may continue to slide through December.

Three Main Factors

"We continue to have fundamental pressure in this market; in other words, supply and demand is bearish," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "As long as this is the case, we are going to have a very difficult time to find anyone that's willing to step in and buy this market long-term.

The futures contango continues in the crude oil market, with almost a dollar increase from August to September and another nearly dollar increase to October.

"Now, we also have bearish seasonal indexes," Newsom pointed out. "In other words, this is just the time of year when we start to see demand coming down for gasoline. Demand itself for crude oil is also in a seasonal downturn, which puts additional pressure on the market."

As summer vacations wind down, seasonal demand for gasoline also declines. Additionally, recent weakness in the stock market has resulted in declines in crude trading.

"Last but not least, we saw some early weakness in the Dow Jones over the last few weeks," Newsom added. "This has been growing, and this is pulling some money out of commodities in general."

'Normal Slide'

These three factors have combined to take a big bite out of the price of crude, which saw a seven-month peak of nearly $73 in mid-June. Despite this, crude continues to trade at nearly double the lows of March 2009, when crude traded in the low-$30s.

"There are just so many things lined up right now saying that crude oil is a bit high at this point," explained Newsom. "Seasonally, it starts to come down, and there's no reason why this year should be any different."

In the past, the "normal slide" in crude oil prices from the first week in July through the first week in December average approximately 30%, Newsom revealed.

"So if that's the case, and let's just go back to the high of a couple of weeks ago of $72, I would say we should get back down to about $50, a little bit below $50, if we see a normal seasonal decline in this market," he predicted. "Which looking at the spreads, looking at the way non-commercial traders are acting, there’s no reason why we won't see a normal seasonal decline."

Natural Gas

Natural gas continued to trade below $4, settling for a slight drop to $3.487 mmBtu, caused by weak demand and oversupply.

"Basically, natural gas is just still dragging along the bottom, no reason to rally, reason to push it much lower," Newsom concluded.

"Fundamentals remain bearish but stable; there's just no real reason to get too excited about this market."