Crude Reaches a 10-Month High Above $73

Creating a new high for the year, the fist day of the October contract proved a positive one for bulls in the marketplace. Crude oil settled at a 10-month high on the New York Mercantile Exchange Friday, to close nearly a dollar more than Thursday's settle for the same contract.

Crude oil for October deliveries settled at $73.89 a barrel on the NYMEX, delivering a new high for 2009 and gaining 98 cents over yesterday's close. The year's previous high of $73.38 was reached in mid-June.

Positive economic news surfacing about the US and global economies has helped to sway investors to buy oil on the hopes that the economic recession is ending and energy demand will pick back up.

Furthermore, the value of the US dollar fell against other currencies today, prompting investors to buy the greenback-traded commodity to hedge against inflation.

"The outlook for Europe is better, and we're really seeing a significant shift in the eurozone toward getting out of the recession," said Phil Flynn, vice president in charge of research for PFG Best in Chicago. "That, of course, got the euro up higher and really crushed the dollar, and all these commodities took off."

Should the price of oil continue to rise unfounded by the underlying fundamentals, the economy may not be able to support the price.

"Obviously, you can't have oil prices continue to go straight up without doing some damage to the economic recovery; we learned that a year ago," Flynn said. "You can't have oil being driven by demand expectations all the time; you have to see some real demand numbers back it up, and we haven't seen it yet."

Fed Factor

While the global recession may be coming to a close, the US economy has a massive stimulus campaign in effect. That quantitative easing has not only bolstered the economy, but also inflated the price of oil by keeping demand in the country relatively stable.

"How are you going to get the economic stimulus troops out of the market?" Flynn asked. "You're going to have to take them out of there, and it's going to take some time to take them out."

Meanwhile, there is real potential that the price of oil could continue to climb.

"If you continue to see oil prices to go up, I think the Fed is going to have to come out more aggressively talking about quantitative easing going away," Flynn explained. "If not, these prices could spike up another $5 in oil, and then we'll be in the $80s, which would not be a friendly place to be for the global economy at this point."

How High Can Oil Go?

Increasing almost 10% in a week, the price of oil has seen a dramatic rise lately, but whether the commodity will continue its recent rally is anyone's guess.

"Obviously, short-term you have got to go with the trend, but just as a lot of people have been repeating the old adage, ‘The trend is your friend,'" Flynn said, "I've got another adage for them: ‘What goes up, must come down' -- and it may come down faster than it went up."

Pointing to bearish underlying fundamentals, the analyst expects a new ceiling on the price of oil soon.

"The market got a new lease on life with some of this European economic data; so we've opened up the door for a higher move, but I think that I would be looking for the next opportunity," Flynn advised. "If you're a long-term player, you want to be playing for a big correction. If you're a short-term player, go with the trend."

Nonetheless, this analyst sees the price of oil dropping again.

"I still think by the end of the year, the price of oil will be substantially lower than it is today," Flynn stated.

Natural Gas Creeps Lower Still

Depicting the largest spread in history between the price of natural gas and crude oil, natural gas continued to slip on the NYMEX today. Settling 14 cents lower than yesterday's close, natural gas closed at $2.804 on the NYMEX Friday.

Natural gas has reached seven-year lows because of overly bearish supply and demand fundamentals, which have been spurred by a number of factors in the marketplace.

"We're seeing that natural gas is down because we have a glut, and we have a glut because of new technologies," Flynn said. "There is a lot more supply online."

Prolific natural gas finds onshore the US, such as the Haynesville Shale, have ignited production in the US. This has helped to reduce the threat the Atlantic hurricane season usually poses.

"We're producing more natural gas onshore, as opposed to offshore, which basically means that the storms in the Gulf have less of an impact on the marketplace," Flynn added.

Furthermore, the domestic nature of natural gas has helped to shield the commodity from the inflationary pressures that crude oil has experience.

"NYMEX oil is more of a globally traded commodity, whereas natural gas is really more domestic," explained Flynn. "So it doesn't get influenced so much by the exchange rate, and that's another reason why the spread is so large."