Oil Climbs Again on Economic News

Crude oil managed to rally again on the New York Mercantile Exchange Thursday, following the lead of Wall Street.

With intra-day trading reaching a high of $72.21 a barrel, crude oil managed to climb 36 cents on the NYMEX Thursday to settle at $70.52 a barrel.

Lately, positive economic news has been boosting the price of crude oil beyond fundamental support on the sentiment that the recession is waning and energy demand will increase.

"The markets are really taking a cue from the wider economic picture," said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. "Even though the market fundamentals are relatively bearish -- the demand numbers are still very weak this year -- there is a pretty bullish jobs report here in the US and the second quarter GDP numbers that came out were stronger than expected, and so that has put a bullish tint on prices."

Nonetheless, basing the price of oil on economic data rather than the underlying fundamentals can result in a fairly volatile trading environment.

"As long as the news remains relatively good, I think it can go forward," said Mueller of the possibility of the price of oil increasing. "Of course, if we have a bad jobs report or we have a few really bad days on Wall Street, that could turn prices around in a hurry; but as long as the news from the economic world is pretty bullish, that will keep prices strong."

Further boosting the price of oil, the Federal Reserve reported yesterday after its monthly meeting that it would keep interest rates firm near zero.

"I think a lot of it is going to depend on the Feds and how quickly they decide to move against inflation," Mueller explained. "I think the Fed has a very fine line they need to walk. They certainly don't want to keep policies too expansionary and risk a big jump in inflation, but at the same time, it's politically very difficult for them to raise interest rates when the economy is still so fragile and when unemployment is threatening to go up to 10%."

Oil Prices Here to Stay

Should the economic data continue, Mueller expects the price of oil to stay within the $70 range for the foreseeable future.

"Barring a real dramatic turnaround in the economic news picture, I think we're probably looking at prices in the $65 to $75 range for a while," Mueller said.

While the end of the summer driving season is nearing, the heating season soon follows.

"The distillate markets are relatively weaker than gasoline; so that could take some of the pressure out of prices," Mueller said. "But at the same time, by then we might start to see more general economic recovery, which would counteract that; and so that's why we're looking at prices probably moving in a range between $65 and $75, depending on which factor is getting more press that day."

Natural Gas Continues Falling

On the other hand, over supply and weak demand combined to push the price of natural gas down for the fifth day in a row. In trading on Thursday, the price of natural gas dropped another 14 cents lower to settle at $3.336.

Despite a hike above $4 last week, the price of natural gas has not been able to sustain a rally in the market. With record injection levels and diminished consumer and industrial demand, the price of natural gas has been range-bound for quite some time.