Oil Steadies: Commercial Traders, Non-Commercial Investors Duke It Out

Crude oil trading on the New York Mercantile Exchange saw a $1.50 spread today, but the prices never dropped below $70. Settling just below Friday's close, oil traders continue to wait and see who will take the reins next.

The price of crude oil Monday settled at $70.60 on the NYMEX, a drop of 33 cents from the close last week. With four days above $71, the price of oil has dropped in the last two trading days, but managed to stay above the $70 mark.

"We're seeing some renewed commercial selling," reported Darin Newsom, the senior analyst with DTN, a market information service in Omaha, Nebraska. "Much of this rally that petered out last week was due to the non-commercial side of the market, the paper side of the market, the investment side, where the underlying fundamentals remain bearish."

While fundamentals remain weak for crude oil, the price has been buoyed by non-commercial investors buying the commodity on positive economic data that suggests that the economy, and in turn energy demand, is rebounding.

"We just don't have the enthusiasm coming from the investment side of the market," Newsom explained. "That has allowed it to go down as commercial traders put some pressure on it."

Economic Optimism VS. Fundamental Weakness

While the price of oil has been able to hold steady above $70, the analyst advised that the market can go either way. Should commercial traders maintain control, the price of oil will continue to fall based on weak fundamentals; but should the non-commercial investment community pump money into the market, the price of oil could rally again.

"If this investment money fails to come through on another wave of buying, then this market could certainly start to lose some of its recent gains in a relatively short order," warned Newsom. "Initially, again we’ll probably drop down to that $60 level."

Should the price of oil not find a floor at the $60 mark, the commodity has the potential to continue dropping.

"If that doesn't hold, that's when we could see this thing possibly move back down to between $53 and $46," he continued.

On the other hand, should the price of oil climb again, breaking the year's high of near-$73, then the commodity will have a chance to make further gains.

"If we see the investment money come back into this market, regardless of the fundamentals, and they push it through, the key number that I am looking at is right around $73.38, the high from the week of June 29," Newsom explained. "If we get through that -- and we were set up to challenge it last week -- if we get through that, then I think the market could see some follow-through buying and bring in some more buying enthusiasm."

Natural Gas Dips Again

Despite being able to rally above $4 for the first three days of last week, the price of natural gas has fallen for three days in a row. On the NYMEX Monday, the price of natural gas fell another 3 cents on weak underlying fundamentals to settle at $3.641.

"Investment traders show, basically since 2006, little to no interest in this market," said Newsom of the natural gas market. "The only interest that they have is being short. The rallies that we see are the occasional end-of-the-month short-coverings."

With a non-existent hurricane season thus far in 2009 and decreased industrial demand, the price of natural gas is likely to remain low for the time being.

"It's just going to stay flatlining like it is at this point, until one side or the other, the commercial or non-commercial side, begins to see a change, begins to change its outlook; and looking out, there’s just no indication of that happening," Newsom concluded.