Oil Drops to $67 on Waning Consumer Confidence

After a nine-day rally, crude oil dropped more than a dollar in trading on the New York Mercantile Exchange Tuesday to settle just above $67 a barrel on weakening US consumer confidence.

In trading Tuesday, the price per barrel of crude oil fell $1.15 from yesterday's close to settle at $67.23 a barrel. After a nine-day rally, today's drop represents nearly a 2% decrease.

While supply and demand fundamentals have been overlooked on the market, positive economic news has been spurring the recent crude oil rally that brought prices back up from the mid-$50s. Investors have been buying oil on the hopes that the global economic situation is on the mend. However, negative news surfacing today about US consumer confidence deflated the recent optimism.

In the news today, the index on US consumer confidence fell to 46.6 in July, exceeding analysts' expectations. The consumer confidence number for June was 49.3.

"The falling equity prices really took a lot of the wind out of the sails of the rally, but we have rallied nine out of the last 10 days, and the market has been overdue for some profit taking," said Gene McGillian, analyst with Tradition Energy in Stamford, Connecticut. "I think that today's S&P sell-off with the consumer confidence numbers that came out prompted that."

The analyst points to investors' expectations about an economic recovery as the reason why the price of oil has been so volatile lately.

"The real thing is the same battle that's being waged in the oil markets since basically the spring -- about how the current outlook is for energy versus what we expect to see happen in six to 12 months continues to be fought," McGillian explained. "That's why we keep swinging around $12 to $15 every six to seven weeks."

Trading on Optimism

Positive news about the economy encourages investments in the crude oil market because investors believe that with this improved economic situation comes an increased demand for oil.

"Some of the things that we saw happening early in the spring about how things were supposed to recover so quickly, I thought was really premature, but the market still managed to go up from basically $50 up to $73," said McGillian. "This rally seems to have washed $4 below that area, and that might be a sign that some of the people that were looking forward to a recovery don't want to get caught again with this."

While the price of oil has made two stabs at cresting above $75, there are some contributing factors that must be present to convert investors' optimism into an economic recovery reality.

"The real thing is that everything is pretty highly correlated, and we have to keep watching the broader financial markets because of some factors that can really push oil prices along," he added. "Primarily, if you start to see Asian demand start to pick up, that’s good to support the oil prices here; and if you start to see signs that the European economies and the United States economy start to pick up, that will definitely help."

Natural Gas Dips Again

The price of natural gas fell again today, continuing a losing streak that has prevented the energy commodity from reaching above $4. Natural gas on the NYMEX Tuesday settled at $3.535, which was a drop of nearly 7 cents.

With the NYMEX option expiration nearing, the price of natural gas is being watched carefully to determine is the bottom of the market has been reached.

"Natural gas, of course, has really been range-bound this month between the year's lows or a little bit above it and then it got up to where we came in at the beginning of July," explained McGillian. "It's really been whippy in there, and that's why people have been watching if we can get an expiration settle that's above $3.50. Then that's a sign that maybe the risk reward is really slight enough that the sell-off for this year is pretty much done, as we head into the second half of the year."