Oil Continues Slide, Drops Below $63 on Fundamentals
Crude oil on Tuesday fell more than $1 to settle on the New York Mercantile Exchange below $63 a barrel. Traders continued to sell the commodity on weak fundamentals and fears that the global economy is not as upbeat as previously believed.
While the oil market attempted to rally in overnight trading on stronger European numbers, those gains were quickly decimated on lower S&Ps in the US. Additionally, selling pressure increased as the market slid past yesterday's low, resulting in further liquidations.
Crude oil persisted in its week-long downturn with a drop of $1.12, to settle in NYMEX trading at $62.93 a barrel on Tuesday.
Non-commercial investors as of late have helped to push the price of oil on hopes that the global economy was improving, doubling prices during 2009. Despite near $73 highs in mid-June, the price of crude oil has been dwindling on weak fundamentals.
"The market rallied from basically below $50 up to $73 on the hopes that slightly improving economic conditions would combine with some of the measures taken by the US government and other foreign governments in conjunction with the different central banks of the world and the Federal Reserve to re-stimulate the global economy," explained Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "But it seems as if in the last two weeks, that as oil prices got above $70 that the emphasis has returned to the underlying fundamental picture in the market. That doesn't point to stronger oil prices as of yet."
While just last week the price of oil traded above the $70 mark, the market seems to have dimmed its hopes for a further rally.
"I think the next level now people are going to be watching is $60," McGillian predicted. "The question really comes down to what is the new economic numbers coming out in the next few weeks going to show? Because the market doesn't seem to be able to ignore negative numbers like it did when it started the rally back three months ago."
With a report expected tomorrow from the DOE, all heads are turned toward the new inventory numbers in the US. While crude storage has dropped over the last weeks, gasoline and distillate inventories have been gaining, pointing to waning demand for the fuel. Based on these fundamentals, this analyst believes that the price of oil will continue to drop.
"It does look like we have further slides coming in front of us," he said. "I think that ever since the market's turn from this year's highs, it has been trading very technically. Today, you saw further evidence of that."
Continuing to poke along below $4, natural gas fell slightly to settle at $3.429 mmBtu on the NYMEX Tuesday. While natural gas has not seen the peak that oil has, the energy commodity has also stayed relatively steady in the last few months of trading. Waning demand and over supply have stymied the market from growth.
"Natural gas, because it's a domestic market, is really subject much more readily to its underlying fundamentals, and the underlying fundamentals for the gas market have probably been the weakest of all the energy markets," McGillian continued. "Right now we're looking at a record level of storage by the end of this year's injection season of gas; we have yet to see any sustained nationwide cooling demand show up; and industrial demand levels according to the latest report from the EIA are going to drop by 8.2% this year, which is slightly above their last estimated decline."
These weak fundamentals have kept the price of natural gas steady -- and low.
"Natural gas prices seem a little more stable than the other side of the energy complex," McGillian said. "In particular, because its rally never really lived up to quite the hype that the oil side of the market did."