Oil Continues Rally, Settles Above $74

Crude oil continued a five-day rally, making further gains on the New York Mercantile Exchange. Reaching a new high for the year, crude settled above $74 a barrel Monday.

Climbing 48 cents on the NYMEX Monday, crude oil settled at $74.37 barrel, spurred by a positive economic outlook.

A positive move from the September to October contract on the NYMEX, fueled by an increase in demand for heating oil futures, helped to contribute to the recent rally in oil prices. Additionally, last week's major drop in crude inventories reported by the DOE has continued to drive investments in the commodity.

It's likely that a lot of the financial players in the market looked at those numbers and have moved back into the long column in the futures market, and that is providing some bullish support for prices, explained Rick Mueller, the director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

Non-commercial investing has been influenced by a renewed belief that the global economy is recovering and that energy demand will, in turn, climb.

I think they are a little more reassured about where the direction of the economy is going, and I think they are looking at commodities as a likely investment, Mueller said of investors. When the economic growth really does start to rebound and folks will be looking for energy sources, they are going to see oil as a good place to be, especially if the dollar continues to weaken because a lot of them will look at oil as a safe inflation hedge to maintain the value of their investment.

Fundamental Factor

On the other hand, the supply and demand fundamentals remain weak for crude oil.

Certainly the crude fundamentals are still not particularly strong, said Mueller. If you look at the crude global balance, you look at demand trends, we're still looking at a multi-million barrel contraction in demand this year.

When the price of oil spiked near $140 a barrel in mid-2008, global demand dropped dramatically. A major correction in the market, worldwide inventories remain high after operators scrambled to decrease production in order to maintain appropriate supply numbers.

OPEC has been very affective in slashing its production and keeping output generally matched to the demand for crude, but at the price of tremendous increase in spare capacity within the cartel, Mueller explained. The fundamentals themselves don't appear that strong, but I think a lot of the speculation going on now is looking at future trends.

Range-Bound Price

Despite the recent rally that's pushed the price of oil to a new high for the year, Mueller does not foresee the price of crude making much more gains. In fact, his firm predicts that the price of oil will remain range-bound between $65 and $75 a barrel.

Prices could go briefly above that, but the Saudis have said publicly that $75 is a target that they are happy with, explained Mueller. Certainly, they won't want to see prices go too strong and potentially kill off the insipid economic recovery.

Saudi Arabia has effectively cut production in an effort to stabilize the price of crude worldwide.

If prices climb too greatly, I think you will see a bit higher volume of Saudi crude come into the market to try to control that price spike because the Saudis are very sophisticated at looking at economic trends and they don't want to kill the golden goose, Mueller added. So they are going to want to keep prices at a level where it's high enough where they generate a respectable profit, but not so high that it hurts economic growth or encourages a great deal of investment in alternative sources of energy.

This excess capacity, not only in Saudi Arabia, but worldwide, is expected to dampen any runs above $75 a barrel.

What's different now from when we had the spike in the last half of '07 and the beginning of 2008 is there is a great deal of spare capacity, both in the upstream production area and also downstream in the refining sector, Mueller continued. So when prices really do start to take off, there is that extra capacity that can come into the market and cool things off.

Natural Gas Makes Slight Gains

After its most-recent decent that took the price of natural gas to a new low, the price of natural gas held steady today in trading. Gaining nearly 12 cents on the NYMEX, natural gas closed at $2.923 Monday.

A record stockpile in natural gas and diminished demand, from both the industrial and domestic arenas, has squashed the price of natural gas, bringing it to seven-year lows recently. Further fueling the price drop, a mild summer has not increased cooling demand and the Atlantic hurricane season has posed no threats this year.