Oil Closes $1 Higher, Despite Early Sell-Off

With intra-day prices slipping below $70 a barrel, the price of crude oil managed to rally more than a dollar on the New York Mercantile Exchange by the close of Thursday.

The price of crude oil on the New York Mercantile Exchange Thursday gained $1.06 to settle at $72.49 a barrel. With intra-day prices falling to a low of $69.83, crude oil was able to rally late in the day.

"The oil market obviously was under a lot of pressure this morning," reported Phil Flynn, vice president in charge of research for PFG Best in Chicago. "There seemed to be some nervousness creeping back into the marketplace; people were on the defensive to start the day."

Economic Factors Affecting the Price of Oil

Because the price of crude oil has been bolstered by economic optimism that the global economy is on the mend, lackluster economic news can negatively affect investments in the commodity. Flynn explained that investors were pensive about buying oil due to worries about the US banking system, the GDP, employment numbers and the trade deficit.

"At the end of the day, though, I think the general consensus was: As bad as things are, they're not as bad as they thought, and they seem to be getting better," Flynn explained.

A weakness in the value of the US greenback also helped to push the price of crude oil. Seen as an inflationary alternative, crude oil is a hard commodity that will keep its value even if the dollar does not.

"We seem to get a new appreciation for risk tolerance, and that turned around the dollar," added Flynn. "I really think today's move in oil was a dollar move. The dollar seemed to be gaining some strength the last couple of days, and it got hammered today."

Furthermore, the attitude of the market has been influencing the price of oil beyond what underlying fundamentals support.

"When the market is less concerned about the stock market, we seem to see weakness in the dollar and then a movement back toward commodities," Flynn explained. "When there's a little less confidence, we see traders seeking safe haven in the dollar and putting pressure on oil."

Range Trading

The price of crude oil has been constrained over the last couple of months by a trading range of about $65 to $75.

"This whole week has been a week of the bulls and the bears really battling it out, and I don't think we've seen a situation where the market is really to break out yet," Flynn stated.

Flynn explained that once the bottom of the range is met, the price is expected to enter a lower range, and vice versa for the top of the range. This hasn't been happening.

"But I still feel that the market overall is going to be heavy," he advised. "There're a lot of supplies out there -- but it can't seem to break out a run on the upside; it can't seem to break out a run on the downside. We're right in this middle range here."

Natural Gas Contract Expires, Price Falls Again

Natural gas on the NYMEX fell again Thursday, with the last day of the September contract settling at $2.843. On the other hand, the contract for October deliveries closed at $3.206 Thursday.

Diminished domestic and industrial demand has combined with a record inventory to push the price of natural gas to seven-year lows. Additionally, the seasonal threat of a hurricane entering the Gulf of Mexico and shutting-in production has been nonexistent this year.

"We got a bearish report in a bearish market that was already at a seven-and-a-half-year low, and it was the last trading day for the September natural gas contracts," Flynn explained. "I think we pushed it down as far was we could on the expiration, and I think late in the day, we had a short-covering rally."

The contango that exists between the September and October contracts will help to define how low the price of natural gas goes.

"We're going to have to see how the October contract takes over," Flynn concluded. "If you look at the daily chart, we're going to have a big gap that we're going to be looking at tomorrow because the October natural gas is already at $3.20. It's looking pretty strong right now."