Oil Dips Again, May Make A Run for $90

Crude oil on the New York Mercantile Exchange dropped again, falling slightly to below $72 a barrel Wednesday. After achieving a new high of $75 during intra-day trading Tuesday, the commodity has fallen nearly $4 in the past two days.

Losing 62 cents on the NYMEX Wednesday, crude oil fell lower for the second day in a row, settling at $71.43 a barrel. Intra-day trading Wednesday resulted in a $2 spread, with a high of $72.64 and a low of $70.67.

"We saw crude oil try to rally and fall back, and try to rally and then fall back," reported Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "By the end of the day, it was just under a little bit of light pressure, some follow-through selling from yesterday."

Fueled by a report from the EIA today that revealed that US crude stockpiles rose by some 200,000 barrels of oil, the underlying fundamentals of the market seem to have botched the most recent rally.

"The same bugaboo that's weighing on this market is still there," Newsom said. "It looks like it wants to rally, it acts like it wants to rally, but when you tear everything away, it still has bearish fundamentals."

While investors have been encouraged by positive economic news to buy oil on the premise that the global recession is ending and demand for energy will increase, the present supply and demand fundamentals remain weak.

"Supply and demand are still not bullish, and are still going to make it difficult to rally," explained Newsom. "So when you see days where the Dow Jones wasn't enthusiastic, and money wasn't flowing into the market, and buyers aren't coming in, it's just going to weigh a little bit."

Oil May 'Make a Run Toward $90'

On the other hand, fundamentals are not the only factor that supports the price of oil, and the commodity may be able to push another rally in the market before the fall.

"I think it's going to find its legs, and that’s going to bring some money in, and I do think that there's still a chance that it could have one last run at it," Newsom predicted.

Because the fundamentals are not there to support the price of oil at this high level, when the current buy orders run out on oil, the price deflates quickly, explained Newsom.

"In markets that don't have supply and demand support, or support from the fundamental side of the market, once you exhaust those buy orders, there's nothing to continue to prop it up," he continued. "So what happens, like yesterday, we went to a new high of $75, and then we fell back down to the $71 range, simply because we ran out of orders."

But the drop that the oil market has seen in the last two days does not necessarily mean that the price of oil cannot rally again.

"We look at this gasoline market with a 13, 14 cent backwardation; so there's obviously some demand coming in from somewhere," Newsom said. "You tie that into the possibility that the Dow Jones could still make another run over the next 30 to 40 days, and that's going to generate some money and the feeling that this economy still has this chance of turning early."

This belief in the economy that has spurred the last two rallies in the market just might ignite another buying frenzy.

"I think the crude oil market still has the potential to make a run toward $90," Newsom stated. "Now, that having been said, if we fall hard, logically it seems like it could go much lower than it is right now; but to me, it just has this feeling that it wants to try to go up one more time, probably get a little top-heavy at that point, and start working lower over the winter."

Natural Gas Makes Slight Gains, Bearish Fundamentals Remain

While natural gas continued to exhibit seven-year lows, the price rallied nearly 3 cents to close at $2.910 on the NYMEX Wednesday.

Over supply and diminished demand continue to plague the natural gas market and push the price lower.

"As has been the case for months, if not years, natural gas has no friends from either side of the aisle -- non-commercial traders, commercial traders both view this thing as still being bearish," Newsom said.

"We will get little blips like we did today, basically just because people are tired of selling," he continued. "It rallies up a little bit, and then they jump right back on it and drive it back down. I just really don't see this market going anywhere too fast."

Combining record levels of inventory in the US with diminished industrial demand, mild cooling demand and a non-eventful Atlantic hurricane season thus far, the price of natural gas will likely remain low.

"There's just no interest in it from either side, and until we start to see some supply and demand change, then I just don't foresee anyone getting overly excited about buying in this market," Newsom concluded.