Oil Holds Near $72, Economic News May Push It Higher

While crude oil topped $72 during intra-day trading, the commodity ultimately settled just below that mark on the New York Mercantile Exchange Thursday. With a dismal day on Wall Street and gains against other currencies by the greenback, crude oil stayed put.

Crude oil settled at $71.94 a barrel on the NYMEX today, a slight drop of 3 cents from Wednesday's close. With intra-day trading peaking at $72.42, this is the fourth day in a row that the energy commodity has been able to settle above $71 a barrel.

"Crude oil has held up remarkably well given the weakness in the dollar and the weakness in equity markets," commented Bill O'Grady, the chief markets strategist at St. Louis-based Confluence Investment Management LLC, an investment advisory and management firm.

With more telling data emerging Friday, the market held steady for another day.

"I think to a great extent, all the markets today have been kind of sloppy, consolidating and doing things like that because we've got the payroll numbers and the unemployment rate tomorrow," he continued.

Oil Gains Made on Economic Hope, Inflation Fears

While the price of oil has been able to rally above $70 this week, O'Grady stressed that the underlying fundamentals remain weak and that the gains in the price of oil are based on economic optimism.

"The fundamentals really haven’t changed a whole lot," he said. "We've got another three to four weeks of driving before the summer ends; inventories of distillate fuels remain remarkably high; the gasoline situation is more than adequate to get us through the rest of the year; and it looks like we're not going to have much of a hurricane season."

While the typical events that would drive up the price of oil are falling flat, positive economic news has helped to push the price of oil higher.

"The preponderance of the economic releases we've had for the past month has been stronger than expected -- that's raising hopes of economic recovery," O'Grady said. "In addition, global economic numbers have started to improve."

The market's belief that the economic downturn is lifting has helped to push the price of oil. The thought is that with a better economy comes an improved demand for crude oil.

"If we get a better-than-expected number tomorrow in payroll, I would expect oil prices to climb higher."

With this optimism about an improved economy comes a fear of inflation.

"At the same time, with that same growth there's great fear out there that the Central Banks will be too slow to withdraw their stimulus, and that raises inflation concerns," O'Grady continued. "In fact, China came out yesterday and warned us of significant inflation risk if the stimulus is left in place too long, which was primarily directed at the United States. And then this morning, we had the Bank of England extending their bond purchase program, which is a form of monetary easing and supporting the price. These factors have encouraged investors to own all commodities."

Natural Gas Drops Below $4

After a three-day run above $4, natural gas slipped nearly 30 cents to settle at $3.743 on the NYMEX Thursday. With an increase in injections reported, the inventory of natural gas is simply too high for the current demand.

"Barring a significant tropical disruption, you're going to end up going into this refill season with probably something close to 4 Tcf in storage, and you're going to need a really, really cold winter just to bring that number down to a level that works," O'Grady explained. "Otherwise, you're going to be sitting on a huge inventory bubble."

The two factors that will help the fundamentals of natural gas are the weather and industrial activity.

"It's going to be really tough for natural gas to find its feet until you get that overhang burned off," O'Grady said. "It's going to take a combination of favorable weather and improvement in industrial activity."