Oil Looks to Top $75 Soon, Natural Gas Sees Stronger Fundamentals

Crude oil climbed more than 50 cents today on the New York Mercantile Exchange, closing near $72 a barrel. While optimism about an economic turnaround has helped to spur investment in the commodity, increased demand in China has strengthened the fundamentals for oil.

In trading Wednesday, crude oil rose another 55 cents to settle at $71.97 a barrel on the NYMEX. This is the third day in a row that the commodity has been able to stay above $71, and experts expect the price of oil to continue to rally.

"I don't see any reason why oil can't hit $75," said Brian Uhlmer, a research analyst with Pritchard Capital in Houston.

Improved Demand for Oil

Improved demand coming out of China has strengthened the underlying fundamentals for oil, and thus signaled the potential for the commodity to continue rising.

"From an oil perspective, the Chinese auto numbers on auto sales were up and in-line with what the US is buying," explained Uhlmer. "There's real demand for gasoline in China."

While auto sales in the United States are higher, those numbers are bloated by the current stimulus program "Cash for Clunkers." In an effort to stimulate growth as well, China has not increased the price of gasoline as drastically as in the US and other areas of the world. In fact, in the last year, the price of gasoline in China has only increased 25% while RBOB in the US has doubled.

"They've artificially kept a ceiling on the price of gasoline, which has increased the demand for it," said Uhlmer. "Since demand is relatively inelastic, demand could continue upward in China because of this."

This increase in demand for gasoline in China is definitely boosting oil demand and helping to fortify the price of oil on the market.

Natural Gas Fundamentals Finally Turn Bullish

Natural gas fundamentals have strengthened, buoying the price of the commodity above $4 for three days in a row. The price of natural gas increased more than 4 cents from Tuesday's close to settle on the NYMEX Wednesday at $4.042.

While the "Cash for Clunkers" program currently ongoing in the US has not done much to help the price of oil, demand for natural gas has increased because of it.

"With the auto numbers, we're talking about increased auto sales in the US, 'Cash for Clunkers' and other real demand; that increases manufacturing in the United States," Uhlmer stated. "That helps push up natural gas."

Additionally, the analyst points to reports foretelling an increased fertilizer demand in the US in the second half of 2009, further sparking demand for natural gas.

"There is demand; we have more and more evidence that production is plateauing and possibly beginning to decline," Uhlmer continued.

"Storage injection numbers were below consensus last week again, and there are sources of demand that are beginning to increase. So fundamentally in the $4 to $5 range, it's a good buy for the end users."