Oil Holds Steady Above $71, Poised to Surpass 2009 High

Crude oil remained high today on the New York Mercantile Exchange, holding onto yesterday's 3% gain and steadying above $71. Despite a slight drop from yesterday's close, the commodity's potential to surpass this year's high is ever present.

Crude oil on the NYMEX Tuesday was able to hold onto Monday's major gain, settling at $71.42 a barrel. With a stronger dollar, the day's slight drop of 16 cents did nothing to dampen bullish hopes that higher oil prices are around the corner.

"The combination of economic sentiment and the dollar under pressure has driven oil prices back to within striking range of this year's highs very quickly," commented Gene McGillian, market analyst with Tradition Energy in Stamford, Connecticut.

While the recent price rally has not been based on supply and demand fundamentals, optimism about the state of the global economy has helped to push the price of oil from the mid-$50s to above $70 in the last couple of weeks.

"As far as the oil complex is concerned, unfortunately you can't say that domestic demand levels have shown any signs of increase yet," McGillian said. "A lot of the hopes seem to be based on reports coming out of China that you're going to see activity pick up as we go into the end of the year, and that's already started."

Will Oil Keep Gaining?

Market indicators have been appearing in the market, foretelling of crude oil's potential to rise even higher.

"We have a test of this year's highs coming," commented McGillian. "One of the things that might be indicative that we have higher levels coming is that the heating oil market is really starting to take the lead again."

On the NYMEX, the 2009 high in crude oil of $73.38 was achieved in mid-June. Currently, the price of oil is less than $2 below that figure.

"From a technical perspective, if we cross through this year's highs, it opens the chart up to the lower-half of the $80 range," McGillian predicted.

The crude oil market's potential to rise into the $80s is dependent on a number of different factors, he continued.

"One thing you have to keep in mind is that the first time up above $75, that all of a sudden, some of the factors that were slightly improving at $50, $55 and $60 and gave a boost to the oil market, at $75 they have much less of a punch to them," McGillian explained. "So you're going to have to see a much clearer signal that there is improvement in the global economy."

While an improved US unemployment environment would be a certain sign that the economy is on the mend, the analyst said that continued weakness in the greenback could also spur additional investment in crude oil.

Natural Gas Stays Above $4

Performing the strongest it has in months, natural gas managed to hold onto Monday's gains, as well. Settling 3 cents below yesterday's close, natural gas came in at $4.001 per mmBtu at the end of trading Tuesday.

"Natural gas has been short and hovering above six-year lows between $3.15 and the $3.60 level," McGillian commented. "It's been hovering there for the last few months, and every time it tries to move above $3.60, it's basically vulnerable for some pretty quick short-covering, and that's where that price spike came from yesterday."

The rally in the whole commodity complex, and namely crude oil, has helped to spur investment in natural gas, as well.

"Natural gas can march to the tune of a different drummer for a while, but any kind of really conservative move over a time period will eventually spill over to natural gas," McGillian said.

Additionally, natural gas fundamentals, which have been plagued by weak demand and over supply, may be turning soon.

"With cooling demand on the increase for the first time of the summer, and the start of the prime hurricane season, gas prices very quickly have some underlying fundamental support," explained McGillian.

In fact, there is currently a tropical wave off of the coast of West Africa that has the potential to develop into something more serious if it meets the warm waters of the Gulf of Mexico.

"As we get into the latter part of August and September, which is the real active times of the hurricane season, the natural gas market is very volatile, and in years past, any type of storm that seems to be strengthening, heading toward the Gulf will cause quick price spikes," said McGillian. "I think that because the market has been biased on the short side for the last six to eight months, the market is going to be overly vulnerable to that kind of stuff in the next six to eight weeks."