Oil Drops Below $70 on Falling Equity Prices

The price of crude oil dropped below $70 Tuesday on the New York Mercantile Exchange for the first time this month, continuing a four-day fall that has brought the price down from nearly $72 last week. Though the most-recent rally threatened to topple the year’s high of $73.38, it has been unable to do so.

Crude oil settled at $69.45 a barrel on the NYMEX Tuesday, a decent of $1.15 from Monday's close. Tracking diminished spending in the equities market, the price of oil continued slipping for the fourth trading day in a row.

"It looks as if the falling equity prices helped to depress the oil market today," explained Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "Without the support of rising equity prices and with a weak dollar, the market comes under pressure."

Crude oil has been gaining on the market based on economic optimism that the current recession is rebounding. Positive economic news and a belief that energy demand will increase have been able to bolster the price of oil beyond what the underlying fundamentals support.

"Today's latest round of economic reports showed inventories drop pretty substantially, which rekindled some doubts about the economic recovery," McGillian continued.

'Based on Expectations'

Because actual supply and demand do not currently support the price of oil, the commodity has not been able to push higher, despite positive economic data.

"Right now, the market's basically entering into a phase that once we climb up above $70, the fundamental picture that is overhanging the market really halts the rally that is taking effect," McGillian said.

The current peak in price for the year was achieved in mid-June at $73.38 a barrel. The market then dropped into the $50s and rallied again, but was unable to reach a new high.

"Right now it looks as if the latest attempt to trek toward this year's high seems to have already lost speed, and we might be settling into the August doldrums trading where we could be range-bound until we get a clearer signal whether or not things are going to recover quickly enough to boost demand as we go into the last quarter of the year," McGillian said.

The analyst explained that sure signs that the US and Western European economies are improving must be seen before the price of oil will swell.

"Ever since the spring when we made our first move above $70, there's a lot of anticipation that that's going to occur, but unfortunately, we don't get any kind of real data that supports it," he commented. "You have data that says that things are slightly improving, but it doesn't look like they've started to improve significantly enough that energy demand levels have really started to grow."

Solid data supporting an improved industrial demand or employment environment will help to boost the price of oil.

"Right now the rallies seem to be based on expectations rather than solid footing," McGillian said. "That's why as crude oil gets through $70 it seems to be losing momentum."

Natural Gas Continues to Fall

The price of natural gas on the NYMEX slipped another 10 cents to settle at $3.541 for Tuesday. Weak fundamentals have squelched the rally that brought the price of natural gas briefly above $4 last week.

"Natural gas suffers from the most bearish fundamentals of all the energy markets," explained McGillian.

Despite this, a threat of a hurricane in the Gulf of Mexico may help to push the price in the near future.

"As we move into the prime time for the hurricane season, the reluctance of people to sell the market really aggressively starts to increase, but the fact is that we're trading back toward $3.50 and the market has been ranging between $3.20 and $4.40 now for four months," he continued.

Decreased industrial demand and a record storage level have helped to keep the price of natural gas low.

"The question comes down to: Will this year's hurricane season … forestall any aggressive selling as the market starts to trade down toward this year’s lows?" McGillian concluded. "I think it will. I think that we're basically range-bound, and I think it's going to find some support, and it will probably trade between $3.40 and $3.90 for the rest of the month."