Oil Climbs Above $68 on Economic Recovery Hopes

Crude oil prices on the New York Mercantile Exchange rose again in trading Friday to close above $68 a barrel. Hope that the economic recession is on the mend has helped to spur investments in the energy commodity.

The price of crude oil on the NYMEX Friday settled at $68.05 a barrel. Continuing a recent recovery from below $60, the price of crude oil has gained more than $4 in trading this week.

"There isn't a lot of evidence in the energy data yet to get excited about, but there are hopes that as we exit recession and start the recovery phase that energy demand will pick up, and the market is starting to prepare itself for that," explained Bill O'Grady, the chief markets strategist at St. Louis-based Confluence Investment Management LLC, an investment advisory and management firm.

Despite growing inventories and waning demand, positive news reflecting a turn in the economy has been able to encourage investing in crude oil recently.

"We know that demand is slow and inventories are high; what we don't know is how long that condition is going to persist; and the greater the likelihood that the economy is turning, the greater the likelihood that those conditions will start to change," O'Grady said. "That's what the market has been focusing on more than anything."

The market strategist revealed that this economic optimism and subsequent oil buying is most likely coming from the investment community rather than the commercial side of things.

"Investors are worried that if the economy recovers that inflation will become a problem, so they are buying instruments that will allow them to protect themselves from that event, and buying oil is one of the ways to do that," he added.

Where is the Market Headed?

With the oil market being buoyed by economic data rather than ture fundamentals, the direction of the price of oil is dependent on this news.

"As the economic data scrolls out, we're going to have to see if the numbers continue to improve, but if they do continue to improve, then yes, the prices will start to go up," O'Grady said. "At this time, oil prices and equity prices have been positively correlated, which means that they're both focusing on an improving economy."

That relationship is destined to reverse if the price of oil continues to climb.

"At some point, they will fall into the more traditional role, where they become inversely correlated, which means as oil prices go up equities will fall on fears that higher oil prices will dampen growth and increase inflation," O'Grady said. "We're probably a ways from that happening, but at some point that will occur."

Nonetheless, O'Grady believes the price of oil is currently in a sideways motion until optimism about the economy turns into a recovery reality.

"My hunch is prices will try to make an assault on $70," he predicted. "I think we're setting up a trading range between $55/$60 at the bottom and $70/$75 at the top, and we're just going to range bound between those two levels until we get very clear evidence that the economy is starting to improve."

What exactly will those clear indicators of an improving economy be?

"Probably for the media it will be when the unemployment rate falls, for the economics community it will be when GDP turns positive," he conjectured. "That could be this quarter. If it is positive, it won't be highly positive, but it's not out of the question that we could start to see positive numbers in the second quarter. If we don't, we'll for sure see them in the third."

Natural Gas Rises

The price of natural gas increased in trading Friday on the NYMEX to settle 14.5 cents higher than yesterday at $3.695 per mmBtu.

Weak fundamentals -- namely diminished demand and too much inventory -- have plagued the natural gas market lately, keeping prices below the $4 mark.

"The demand fundamentals are not really very good there, either," he said. "We're very likely going to go into the winter with 4 Tcf of storage, which is an all-time record."

Because the price of natural gas hasn’t been able to crest above $4, O'Grady believes that the energy commodity is establishing a bottom in the market.

"The price action is acting like its trying to bottom, but I think it's a little bit premature to get excited about this market from the long side," O'Grady explained. "The longer it can stay above $3, the greater the odds that we're probably in the bottom process."

In other words, natural gas can only go up from here.