Oil Remains Steady on EIA Inventory Numbers

The price of crude oil on Wednesday ultimately remained unmoved, despite an initial dollar drop in intra-day trading. Oil settled unchanged on mixed news coming from the Department of Energy's EIA report on US inventories.

While intra-day trading saw the price of crude oil drop as low as $67.05 initially, at the end of the day, the price of oil remained unchanged, settling at $68.05 a barrel on the NYMEX Wednesday.

In its weekly report, the EIA revealed that while gasoline saw a larger-than-expected drop in inventories, the slight drop in crude stockpiles did nothing to encourage buying. Furthermore, distillate inventories climbed higher.

"Certainly, the gasoline number was pretty bullish for prices," reported Rick Mueller, the director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. "We had a 3 million barrel draw in gasoline stocks, and that's even before the big Labor Day driving holiday. Gasoline is setting up for maybe a nice little end-of-driving-season rally."

With the US holiday Labor Day signaling the close of the summer driving season, a shift in demand for crude oil begins.

"Distillate stocks keep growing; that's going to take the lead role from gasoline," Mueller explained. "As we transition out of the summer driving season into the heating season, diesel becomes the more important product; and right now, that's looking pretty bearish."

With a mild winter forecasted by national weather services, the heating season appears to support less demand. Furthermore, with a recessed economy, industrial demand is down for distillates.

"Demand just isn't that strong; I think that it's probably a factor of the slower economy," Mueller said. "Diesel demand, much more than gasoline, tracks GDP growth because it's used so much by industry and shipping. Until the economy really starts to recover, that diesel demand is going to remain pretty slow."

Factors Affecting Fall Prices

In a trading environment where daily economic data affects the price of crude oil, investors are persuaded to purchase the commodity when positive news points to an economic turnaround.

"In a lot of ways, the prices and market will be driven by wider economic stories as opposed to the oil fundamentals themselves because the oil market is pretty stable right now," Mueller said of oil prices this autumn. "We sort of know where we are at: Demand is down, but OPEC has cut their production to keep the market balanced."

Investors have been buying crude oil on the hopes that the global recession is waning and energy demand will increase. On the other hand, if economic news appears dismal, investors quickly pull their money out of oil.

"It's going to be driven by perceptions of how quickly the economy is recovering and how strong the economy is recovering," Mueller continued. "This week, you've seen a real hit to prices because of some of the economic news coming out of Asia. There are worries over there that China may not be as strong as what’s expected."

With this shift in oil demand, typically, prices depress over the fall and then rise again in the fourth quarter. But with prices buoyed beyond supply and demand fundamentals, Mueller expects the price of oil to stay in the same trading range it has been for the last two months.

"It's probably going to remain in a range between $60 and $80 for the most part," Mueller predicted. "The Saudis have said that their preferred price is around $70, $75; and they have demonstrated the discipline to keep volumes off the market. I think we're probably going to see prices stay within that range, and then fluctuations are going to be driven by what's the big economic story that day."

Natural Gas Slips Further

Hindered by weak supply and demand fundamentals, the natural gas market continued its slide into seven-year lows. On NYMEX Wednesday, the price of natural gas slipped again to close at $2.715.

A mild summer heating season has combined with depressed industrial demand to weaken the demand fundamentals, while over supply and a record US inventory have further diminished the price of natural gas. Additionally, the Atlantic hurricane season has done little to threaten offshore production and onshore refineries.

With a mild winter forecasted, the price of natural gas may continue dropping. Although onshore drilling rig numbers have dwindled in reaction to the price of natural gas, production and inventories remain high. An increase in demand and a decrease in supply are most likely the only two factors that will help the commodity long term.