Oil Stays Above $65, Natural Gas Continues to Rise

Crude oil for September delivery fell slightly to settle above $65 Wednesday on the New York Mercantile Exchange. The price of oil today was tempered by less than stellar numbers coming out of the EIA.

Crude oil for September delivery closed at $65.40 Wednesday on the NYMEX, a drop of 21 cents from yesterday’s close. While August deliveries expired yesterday, closing at $64.72, the price of September deliveries closed higher on Tuesday at $65.61.

"This is more expectations for future economic growth as opposed to what's actually happening right now," said Brian Uhlmer, a research analyst at Pritchard Capital Partners in Houston. "International growth and some decent economic indicators helped to maintain the price because the oil numbers today were not good by any stretch."

According to the EIA report today, distillates are well above the five-year high, gasoline implied demand is below the five-year average, and crude inventories drew less than the consensus was expecting. Despite this, the price of oil remained fairly steady.

Economic Recovery Hopes Spur Higher Prices

"You would expect that if you draw down 25% less than expected in distillates, storage grew more than expected, and implied gasoline demand is down, that oil should pull back in; but I think traders and potentially larger buyers are getting ahead of potential economic recovery," said Uhlmer.

Pointing to positive news coming out of China and some recent acquisitions in the market, the analyst believes that hope of an economic recovery is helping to keep the price of gas relatively high.

"If someone's willing to pay $40 a barrel for reserves, than they must be assuming that the selling price is going to be higher and remain higher for a long time," he explained. "Possibly M&A activity in the oil sector is helping maintain the oil price."

Strike a Balance

While the market seems to be ignoring negative fundamental news, the price of oil is in a balanced state.

"Right now, the price is within our range; it's barely within the range -- but it's within it," revealed Uhlmer. "This is a level that works out for consumers, as well as producers. Gasoline is at a price that people can afford, and we can still have economic development at these levels."
In addition to being within the reach of most buyers, the price of oil is currently sustaining the producers as well, according to the analyst.

"The producers are actually selling oil that is fairly low cost to produce," he explained. "The high-cost producers are just not doing it; they’ve shut down spare production capacity. So these producers can still make money."

Natural Gas Continues to Rise

In trading on the NYMEX Wednesday, natural gas settled at $3.793 per mmBtu, which is an increase of nearly 9 cents over yesterday. Through the most recent rally, the price of natural gas may crest the $4 mark soon.

"Right now, gas is actually acting well within the fundamentals," Uhlmer said. "I am expecting a little bit of a rise as we work out some of the automotive bankruptcies and reopen some of the plants, which imply an increase in industrial demand."

Weak fundamentals of oversupply and waning demand have plagued the natural gas market recently. These fundamentals may be gaining strength.

"Chrysler just reopened a facility, and GM is scheduling reopening a facility," Uhlmer concluded. "So you've got the metal shops that use natural gas to fire furnaces, and that demand should help stabilize gas somewhere between $4 and $5."