Oil Reverses, Makes Gains Toward $67

Reversing a dismal descent yesterday, crude oil rallied more than $3.50 on the New York Mercantile Exchange Thursday to close just below $67 a barrel. In addition to a positive day for trading on the Dow Jones, a renewed demand in both gasoline and heating oil helped to boost the price of crude oil.

In trading Thursday, the price of crude oil settled at $66.94 a barrel on the NYMEX, a gain of $3.59 -- or a 5% increase. This rise in price nearly erased Wednesday's drop of $3.88.

"There was pretty strong commercial buying in both gasoline and heating oil, and that certainly looked to spill over into the crude oil market," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska.

Despite the rally, the analyst does not believe that the fundamentals in crude oil have started to change their tune.

"It does not mean that we have bullish underlying fundamentals in the crude oil market," he explained. "We did see some commercial buying today, but the commercial buying was tied to what is really shaping up to be stronger-than-expected demand coming from gasoline and heating oil."

Additionally, the Dow Jones performed well today, and crude oil typically follows Wall Street's lead.

"We had another strong rally in the Dow Jones, and you've got that side of the market bringing in money as well," Newsom added. "With crude oil being one of the key commodities, they ran this market back up."

Unsupported Gains, Weak Fundamentals

Ultimately, the fundamentals remain weak for the crude oil market. Oversupply and diminished demand have kept the market bearish, signaling that the price of crude oil should be dropping. Nonetheless, crude oil continues to rally.

"Now, longer term, if I'm looking at the fundamentals of crude oil and the type of supply and demand that we're facing, it would certainly seem that this market should be coming under pressure," Newsom said. "But what's most interesting to me is when a market does not do what it should -- and that is the case in crude oil right now."

The fact that the market has been able to maintain the current price is contrary to its supply and demand fundamentals.

"That means there's something out there that we don't know," Newsom said. "The market is reacting to something."

Fundamentals keep the market grounded, and an unsupported market results in volatility -- something that the market experienced after the drastic rise in the price of crude oil during the summer of 2008.

"When we got to about $120, we moved those futures spreads from a backwardation into a contango," Newsom explained. "In other words, the premium shifted from the nearby contract to the differed contract, indicating the fundamentals had gone from bullish to bearish."

Despite this shift in the market, the price of crude oil continued to gain another $20 to $25 on forward momentum and from the non-commercial side of the market, the analyst said.

"So we had that divergence, and once the market started to break, there was absolutely nothing to throw those brakes on, there was nothing to slow it," Newsom said. "The fundamentals continued bearish, they were growing more bearish because of the supplies we had on hand; and before we knew it, by the time winter came we were down in the $30s."

Natural Gas Climbs, Stays in Range

In its first day of trading for the September deliveries, natural gas gained more than 19 cents to settle at $3.743 per mmBtu on the NYMEX Thursday. Despite the end-of-month rally, natural gas fundamentals have not changed.

"It's still a very bearish market," Newsom said. "It still has very few friends. Its fundamentals are getting more bearish. It really has nowhere to go but lower."

The analyst points to non-commercial short-covering at the end of the month as the reason for the gains in natural gas today, not a shift in fundamentals.

"There's really no reason for it to rally," he continued. "It's still stuck in a range between about $4.35 and $3.25, somewhere in there -- not really showing that it wants to go very far either direction, particularly with the fundamentals as bearish as they are."