Oil Drops $1, May Continue Slipping
After four days of trading above $71, the price of crude oil on the New York Mercantile Exchange fell more than a dollar on Friday despite better-than-expected US unemployment numbers.
With intra-day trading peaking at $72.84, the price of crude oil ultimately fell $1.01 on the NYMEX Friday to settle at $70.93 a barrel. Because the US reported the best unemployment numbers in more than a year, the value of the greenback rose, and the price of oil dropped.
While fundamentals for crude oil remain weak, the price of oil has been able to rally based on positive economic news, spurring a belief in renewed demand and a fear of inflation.
"The reason why oil prices are where they are at is because of all the economic stimulus that we’ve seen,” explained Phil Flynn, vice president in charge of research for PFG Best in Chicago. “Obviously, recently oil has been following the stock market a bit, but when you start to get into good economic data, you have to wonder if at some point that we’re going to have to start slowing down some of the stimulus because of inflationary fears.”
The analyst continued that the price of oil may start to disconnect from positive economic news because the exit strategy for the stimulus will put pressure on oil.
Has Oil Reached Its Peak?
“We’re still running near the high,” Flynn said. “I think at some point you’re going to have to prove you’re going to be able to get through those highs, and I don’t think we’ve hit that level just yet.”
Reaching the year’s high in mid-June at near $73, the current price of oil has the potential to surpass that number. Despite this, the strengthening in the US dollar put a damper on buying today.
“The good jobs number is good for the stock market, but also the dollar is going to short up,” Flynn commented. “When the dollar gets a little bit stronger, it’s probably going to keep a cap on the oil price for the near term.”
Additionally, with the end of the summer driving season nearing, the demand for gasoline and crude oil is expected to drop in the autumn.
“Oil prices are getting pretty close to a high; seasonally, pressure is going to be on them on the demand side,” he explained. “The possibility of a stronger dollar going forward could mean that we may have seen the high for the year already. Of course, if we get some other economic news, we’re not too far from the high were we could test it again.”
How Low Could Crude Go?
“Oil is ahead of itself,” Flynn stated. “We’ve been rallying on good economic news and a weak dollar, and as we start to see the economy improve a little bit, we can't just automatically assume that good economic news is going to be bullish for oil.”
Because the fundamentals are not supportive, basing the price of oil on economic news can make the market very volatile.
“Good economic news may mean we’re getting closer to a point where we’re going to have to remove some of the stimulus that we pumped into the economy, which means that oil may be getting closer to a top,” Flynn continued.
Weakening fundamentals and varied responses to economic data may push the price of oil down further with the year’s weakest demand period upcoming, as well as high inventory levels and a stabilizing dollar.
“I think we could see a pretty big correction in oil coming pretty soon,” Flynn foretold. “I think we could go down into the high $30s. I don’t see any reason why oil couldn’t have a substantial drop, why we couldn’t cut prices almost in half.”
Natural Gas Falls Again
On the NYMEX Friday, natural gas continued its decent, falling almost 7 cents to settle at $3.674. While natural gas was able to rally above $4 this week, the price has quickly corrected itself, dipping nearly 37 cents in the last two days.
“Natural gas obviously continues to be in a trading range right now,” Flynn said. “The market got above $4, and they were getting a little bit excited about some of these good economic numbers. But is that going to be sustainable?”
Weak fundamentals of over supply and diminished demand continue to plague the commodity.
“We’re still in a trading range on natural gas, and I’m not looking for a big move up in there,” Flynn concluded. “I’m looking for a move sideways, probably in a range between $3.20 and $4.20.”