Oil Climbs Above $72 on Reduced US Inventories

Crude oil climbed more than $3 from Tuesday's close to settle at a two-month high on the New York Mercantile Exchange Wednesday. Spurred by a draw in oil supplies in the US, the commodity was able to close above $72 for the first time this month.

Rallying $3.23 on the NYMEX Wednesday, crude oil settled at $72.42 a barrel. Together with yesterday's rally, the crude oil market has been able to scramble more than $5 in two days.

Fueling the rally, the US Energy Information Administration released a report late yesterday portraying a decrease of 8.4 million barrels in crude oil stockpiles, which was contrary to expectations.

"We had a pretty bullish DOE inventory report today, and that helped push oil prices to two-month highs," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "The draw, not only was it unexpected it was an unexpectedly large drop, of more than 8 million barrels."

Pointing to more bullish fundamentals, a drop in the world’s largest oil consumer's inventories helped to ignite a buying frenzy that pushed the price of oil within $1 of the year's high.

"We keep suffering this back-and-forth trading that has been the main theme of the market for the last few months as people try to decipher whether or not this recession that we've been under is healing itself and the economy is going to start picking up," McGillian explained.

The crude oil market has been lifted beyond underlying fundamentals of supply and demand by economic optimism that the global recession is coming to a close and energy demand will spike.

"One of the major factors that oil prices have been under pressure this year is we've had a large stockpile of crude oil here in the United States, and when we saw this draw of 8 million, it raised some questions as to whether maybe supplies are going to shrink; and then if any kind of demand surfaces, the market is going to be vulnerable to higher levels," he added.

Contributing Factors

Adding to the market's volatility, the contract for September deliveries expires tomorrow. The price of crude for October deliveries reached $73.83 today on the NYMEX.

"In oil, a lot of times, when you get toward the last day or two days in the contract, the trading can get thin in the front month, and that can contribute to some higher levels of price volatility," McGillian stated. "Some of that might have been what prompted part of the rally, but I think the rally really was dependent on the information coming out from the DOE that not only crude oil stocks dropped by more than 8 million barrels, but you saw that crude imports dropped to their lowest levels since last September."

The analyst said that the reduction in oil imports may have stemmed from a rerouting of deliveries to the Far East, scheduled maintenance in the North Sea or production constrictions caused by violence in Nigeria.

"An 8 million draw and a drop in imports, that was unexpected, and that contributed to the explosiveness of today's rally," McGillian added.

Will the Rally Continue?

This summer, the price of crude oil has been volleying back and forth, unable to break through the 2009 high of $73.38 established in mid-June.

"I'd like to say clear-cut that the market is headed for higher levels, but we've approached this level enough times that it's got to demonstrate its ability to break through this resistance before we can say that we've opened up another leg on our rally for 2009," McGillian advised. "I think that the suddenness that the market moved back from $65 on Friday all the way up to near $73 shows that the market's trading movements are accelerating as we continue to go range-bound between $65 and $73."

If the rally continues -- and if it is able to break through the current ceiling -- the rally may be able to push past its present range. However, the economic data that has been bolstering the market is a day-by-day driver.

"I think you have to wait and see how tomorrow turns out, but if some of today's price rally is due to expiration pressures, and we go through expiration, and then we'll probably get a good indicator if the market has enough bullish strength to continue this year's rally," he concluded.

Natural Gas Finally Rallies

Breaking a nine-day losing streak, natural gas was able to trade slightly higher Wednesday to settle at $3.119 on the NYMEX.

"Natural gas ended its nine-day slide today, and I think that was partially prompted by being overdue for some short-covering," McGillian explained.

The natural gas market in the US has been plagued by extremely bearish fundamentals of diminished industrial and domestic demand, as well as record levels of inventories.

"Nothing seems to have really changed as far as the fundamentals of the market," he added. "We still have an exceedingly large amount of gas in storage, and none of the tropics seem to pose any kind of threat."

While the recession has affected industrial demand, a mild summer has reduced natural gas demand spurred by the weather. Additionally, a less than active hurricane season has not prompted any rash natural gas buying. Furthermore, the industry has not been able to squelch production quickly enough to strengthen prices.

"The tropics remain quiet, and other than that there isn't anything on the horizon for the next few days," McGillian said. "That leaves the gas market still looking for the signs that supplies are dropping because of the drop in gas rigs, which hasn't really been demonstrated significantly enough this year. That's why we fell to seven-year lows this week."