Oil Rises, But Will Rally Continue?

Crude oil on the New York Mercantile Exchange Monday rose again continuing its recent rally. Closing above $68 today, the increase in the price of oil was spurred by positive economic news about US home sales.

Settling 33 cents above Friday's close, the price of crude oil rose to $68.38 a barrel in trading Monday on the NYMEX. Just two weeks ago, the price of oil was below $60 in a correction that brought prices down from a high of near $73.

Encouraging investors to buy oil, the US Commerce Department reported today that the number of single-family new homes sales in the country rose by an unexpected 11% in June. Positive economic news has been supporting the price of oil on the market, fueling the hope that the economic recession is coming to a close and demand for oil will increase soon.

"Short term, our fate is going to be determined by the stock market," said Phil Flynn, the vice president in charge of research for PFG Best in Chicago. "I think that we're being supported on oil because we're seeing better than expected earnings and better than expected housing numbers."

Another Correction Expected

Nonetheless, the expert predicts another drop in the price of oil based on weak fundamentals.

"I think it's going to be harder and harder for the market to endure the ample supplies, as we move closer to the weakest demand periods of the year, as we get out of the summer driving season and before winter starts," Flynn said. "That's going to keep us pretty well balanced on the down side. If we can get a little bit of a correction on the stock market, I think we can see oil prices really fall out of that."

Flynn points to the stock market, the value of the US dollar and the impending debt auction later this week as factors in defining the price of oil.

"There's so much that’s pumping up the price of oil that I think is on shaky ground that if you just get a little bit of a recovery in those markets, either a recovery in the dollar or a little bit of a break in the stock markets, oil could get hit really hard," he continued. "It's a bear market waiting to happen, and I think it's just a matter of time."

Being ignored in the market right now, bearish fundamentals will ultimately prevail Flynn advised.

"There's a possibility that we could see oil get into the $30s by the end of the year," he predicted. "We could get a major move to the downside. Obviously there are a lot of variables that could change that, but I think long term the fundamentals are bearish."

Ultimately, Flynn believes that the Federal Reserve's exit from the market will weigh heavily on the oil market.

"This market, like a lot of markets, has been propped up by the Federal Reserve," Flynn explained. "The Federal Reserve giveth; the Federal Reserve taketh away. At some point when it's clear that the economy is getting better, after we have an initial surge, we will sell off because we know the Feds are going to have to extricate themselves from all this economic stimulus. When they do that, it's going to be very bearish for energy prices. Before we can really move a lot higher, I think we need to go lower first."

Upside Potential: Future Outlook Bullish

The 2008 rally that pushed the price of oil to nearly $150 a barrel was followed by a dramatic correction that brought the price per barrel down to the low $30s by the close of the year. That price has been rallying through 2009, but the affect this rollercoaster ride has had on the industry is long term, explained Flynn.

"There's been significant damage to the production side, and we'll be very bullish a couple of years down the road," said Flynn. "But to get a healthy rally, you need a healthy correction, and I think that is going to happen."

Natural Gas Drops Again

Natural gas on the NYMEX fell more than 9 cents in trading Monday to settle at $3.604 for the day.

"Natural gas is locked in a trading range right now," Flynn advised. "Obviously, the fundamentals are very bearish. The market is just having a hard time moving."

The heat of the summer hasn't done much to buoy the price of natural gas in the US, although the threat of the hurricane season may spur some short-term investments.

"I do think we put a little bit of a weather premium back into the market, but I would expect that natural gas is going to go down to $3 again, especially as we get closer to the end of the summer and when it becomes apparent that we're going to have plenty of storage and production capability to meet any demand we have this winter," Flynn said. "It's hard finding a reason to be too bullish on natural gas right now -- it just isn't there in the foreseeable future."