Crude Drops Below $67, May Fall into the $40s

Crude oil fell in trading Monday on the New York Mercantile Exchange, following a down trend on the Dow Jones. Ultimately dropping 76 cents to settle below $67, the price of crude actually rallied toward the end of the day to recover some of its earlier losses.

With intra-day trading dipping to $65.23, crude oil managed to lose only 76 cents in trading Monday to close at $66.75 on the NYMEX. Negatively affected by a loss of 200 points on the Dow Jones, the price of crude dropped nearly $2 at the beginning of the day, but it gained some strength on renewed commercial interest in gasoline later Monday.

"Early on we saw it drop over $2, which was not that surprising because we had selling coming from both sides of the market," explained Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "We had the Dow down over 200 points; so we had non-commercial traders getting out of these markets, not just crude oil, almost all commodities. Also, the underlying fundamentals are still bearish; so we had some commercial pressure."

Fundamentals in the crude oil market remain bearish with a $2 contango in the September-October contracts, pointing to an excess in supply. Nonetheless, the price of crude traded up toward the end of the day, buoyed by trading in the gasoline market.

"Interesting that we had both sides bearish early," said Newsom. "Commercial buying came back in late when the non-commercial buying seemed to die out and helped to trim the losses. Most of the support continues to come from the gasoline market."

Will Oil Continue to Fall?

Despite the summer driving season coming to a close, there has been renewed interest in the gasoline market as of late. This increased trading has helped to bolster crude oil prices, but the commodity's relationship with the stock market will ultimately be the tell as to how low the market goes.

"We've got a strong inverse, or backwardation, in the gasoline market that strengthened today; that could support crude oil overnight," Newsom revealed. "But the biggest thing is going to be: What does the Dow do, and does it continue to pull money out of commodities? If so, then it's going to offset commercial buying from the gasoline market and will work crude oil lower still."

Historically, the summer season has supported the peak price for oil, and those numbers have waned during the fall and winter. Analysts expect this year's cycle to resemble others, and the price of oil may continue on the down slide in the months to come.

"Initial support in the crude oil market, we're establishing a wide-trading range here that is between about $58.30 and $70.30 -- we've got a $12 range there," Newsom stated.

The analyst revealed that should the market take out the $58 trading low, the $12 range would put the price of oil in the $40s; but should the market rally and rise past the $70 mark, the price may be pushing into the $80s.

"Given the fundamentals that we have, given the time of year that we're in, we could certainly test that $58 crude, get back below $60 and then threaten to push this market lower through the winter;, but there's still just something in this market that doesn't want to die, and I think a lot of it has to do with gasoline," Newsom explained. "But if we start to get all these markets moving as they normally do over the fall and the winter, then I do think that pressure is going to continue to build. If the Dow Jones goes down and the fundamentals turn more bearish, then I think we will push the low end of this market and probably get back down into the $40s."

Natural Gas Plummets

On the NYMEX, natural gas continued its recent slide, dipping below the low late last year. Staying under pressure for most of the day, the price of natural gas was able to rally from an intra-day low of $3.117 to settle at $3.163 Monday.

Record injection levels of natural gas and waning domestic and industrial demand have plagued the commodity, pushing the price lower. Despite the threat of the most active part of the hurricane season -- and the year's first hurricane, Hurricane Bill, having developed -- the price of natural gas continued dropping today.

"This market just looks like it wants to continue to go down," Newsom said. "Outside of some miraculous or some dramatic scare all of a sudden to the supply and demand situation, which we just have not seen, this market looks like it should continue to work lower over time."