Oil Rallies Above $70 on Federal Reserve Report

After slipping for four days, crude oil made gains Wednesday to settle at more than $70 a barrel on the New York Mercantile Exchange. Despite a stronger dollar and a report from the EIA that crude inventories rose, news form the US Federal Reserve helped to buoy the price of oil.

Crude oil managed to settle at $70.16 a barrel Wednesday on the NYMEX, a gain of 71 cents from the previous day. Conflicting data reports kept trading choppy, with an intra-day high of $71.34 and a low of $68.84.

Dampening the price of oil, the EIA reported that levels of crude oil increased this week, the value of the US dollar increased, and the IEA trimmed the global demand growth for 2010. Ultimately, oil made gains on the report from the US Federal Reserve saying it would keep the interest rate near 0 and extend treasury debt purchases.

"There was concern about what the Fed may or may not do, and so people were buying oil as the dollar got weak," explained Phil Flynn, vice president in charge of research for PFG Best in Chicago. "Then, after the Fed meeting, oil came down from its highs as the dollar got stronger because the Federal Reserve said that they would slow down their policies of buying back treasury securities."

With the Fed is slowing its stimulus spending, the market got a sense that the economy is improving, which firmed up the value of the greenback and bumped down the price of oil, explained Flynn. The US currency and oil tend to be inversely related.

"If the Fed came out and said, 'Hey, we're done with quantitative easing; we're not going to spend the money that we have,' oil prices would have plummeted," Flynn continued. "Because they are slowly easing back, I think the price of oil slowly eased back from the highs."

Economic Recovery: 'A Double-Edged Sword'

Recently, the price of oil has been bolstered by positive economic news and a hope that the economy is rebounding. But, should the economy completely recover, the Federal Reserve will discontinue its stimulus spending, which has also helped to prop up the price of oil.

"I think the main reason that oil went from $50 to $70 has been the Fed policy of quantitative easing," Flynn said. "If the Fed reverses those policies, we'll probably see oil back below $50."

While the market has been looking for data that depicts an improving economic outlook, a fully recovered economy will most likely push the price of oil down.

"It's a double-edged sword," Flynn reported. "If the economy gets better, we're going to use more oil, but if the economy gets too strong, the Federal Reserve is going to have to slow it down; and when they do that it'll bring down the price of oil."

Flynn explained that while the price of oil will most likely drop with an improved economy, demand will pick up again because of the lower price point, and oil will rise again.

"I think we could see a real big price correction, but I think it will be short-lived," he concluded. "I think we're seeing the beginning of the next bear market -- and bull market. It's just that we'll see the bear market first before we see the bull market."

Natural Gas Slips Further

After a brief spike above $4 last week, natural gas has fallen for the last week in trading. Closing on the NYMEX at $3.479, the bearish fundamentals for natural gas could not sustain the recent rally.

More than ample supply and weak seasonal and industrial demand have plagued the commodity as of late. With a new injection number coming out tomorrow, expectations are that natural gas inventories will increase further.

"The demand outlook for natural gas is obviously going to be a little bit better, but maybe not enough to overcome all the extra supply we have," Flynn said.