Crude Bobbles, Falls to $72

Despite briefly reaching an intra-day high of $75 in trading today, the price of crude oil fell Tuesday on the New York Mercantile Exchange to settle just above $72 a barrel.

Ultimately sliding $2.32, the price of crude oil on the NYMEX settled at $72.05 Tuesday. With prices briefly touching $75, Tuesday's low fell nearly $4 to just above $71 in intra-day trading.

The most recent rally has been based on positive economic news, spurring a belief that the recession is turning and global energy demand will increase. At the current high price, crude oil requires a clearer signal that the economy is rebounding.

"I think that the market appeared to have exhausted itself by trying to get to the $75 point and then immediately retreated," explained Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "As it dropped back through a couple of different technical levels, you saw some liquidation selling drag it all the way down there near $71."

Factors Affecting the Price of Oil

A better-than-expected consumer confidence number coming out of the US helped to ignite early trading during the day, as well as increased US home prices; but in the end, the numbers were not enough to keep prices at the $75 level, and prices fell dramatically in the afternoon.

"You're starting to hear some concerns starting to mount that Asian equity markets seem to be stalling a bit, and they were one of the primary reasons why the market crested through $70 again," McGillian added. "With them turning lower, the market is on uncertain footing."

Unable to hold its morning rally, the crude oil market was still able to stay high within its most-recent range.

"You have a combination of factors that seem to be coming together here, and people are waiting to see which side the scale tips toward," McGillian stated. "Right now, the mid-$70 range is proving to be pretty good resistance, considering some of the underlying supply and demand fundamentals for the oil market."

Additionally, the inventory numbers from the API and the DOE are expected late Tuesday and early Wednesday, respectively. Last week's draw of 8 million barrels of oil really pushed the recent rally.

"One of the factors that might have contributed to today's sell-off is that there is kind of a disbelief in the huge decline in oil inventories last week," McGillian conceded. "A lot of the longs are nervous with the reports; so they wanted to take some money off of the table before they get some kind of variance in this next coming report."

Clearer Signs of Economic Recovery Needed

Recently, the price of crude oil has been supported beyond supply and demand fundamentals, based on positive economic data -- but in order to surpass the $75 mark, more solid information is needed.

"When the market approaches the upper end of its trading band, which is from $72 now to $75, you need a clearer signal that the economy is improving," McGillian explained. "Like today's consumer confidence number, it came in at 54, which is well above what people were expecting, but the thing is the number itself still is not considered positive."

During the recession, demand has fallen in the US and abroad, which required the industry to contract petroleum production. Nonetheless, there still remains an inventory surplus and spare capacity within the market.

"You're going to have to see the labor employment situation improve and the idea that consumer spending is able to do more than just rebound for a month -- you need to see it start to improve as a trend," McGillian said of needed signals that the economy is truly on the mend.

"We're beginning to see signs of that, but the fact is that in the last six months, if you get a bad report, everything gets dashed on it. The market is kind of sensitive up at this area because of it."

Should the economy show clear signs of improvement, such as stronger employment and consumer spending data, the price of oil may be able to break into a new trading range.

"To conclude that the rally that we saw last year as we went from spring into summer, that we would have any possibility of that is highly unlikely, but I do think that the market has a good chance if it can get through $75 on good signals that things have returned that you could get up to the mid-$80s, maybe even $90 before the first quarter of next year," McGillian predicted.

Natural Gas Falls Again

The price of natural gas continued its recent freefall, despite a short respite in trading yesterday. Closing on the NYMEX on Tuesday at $2.882, the price of natural gas has reached seven-year lows on bearish supply and demand fundamentals.

"The fundamentals for the market remain really weak," explained McGillian. "You don't have any threats on the horizon as far as hurricanes go. You don't see any sustained levels of cooling demand showing up, and storage levels surely could be more than a record level if not near capacity by the end of the injection season."

While the analyst doesn't believe that the price of natural gas has hit its bottom, he does foresee the potential of the market to rise unexpectedly.

"There might be a quick window; so you have to be careful if you are projecting a lot further on the downside," he concluded. "I think the risk remains on the upside because the bias of the market is on the short side; and we haven't had anything that has been bullish for a while, and that might have a greater affect than what it usually would."