Oil Gains Slightly Ahead of US Holiday

The price of oil climbed just above $68 on the New York Mercantile Exchange Friday, ahead of a long holiday weekend in the US. Despite bearish economic news about US employment numbers, the price of crude oil managed to remain steady.

In trading Friday, the price of crude oil rose 6 cents to settle at $68.02 a barrel on the NYMEX. US unemployment numbers had little affect on the price, as investors await the long US holiday weekend and next week’s OPEC meeting.

"Right now we’re seeing a situation where the market is really waiting around to see what's going to happen," commented Phil Flynn, vice president in charge of research for PFG Best in Chicago. “All this week, commodities ahead of the employment report were in a risk-aversion phase.”

Supported beyond the supply and demand fundamentals, oil had been trading favorably on investor’s hope that the economy is rebounding and energy demand will increase. Despite hitting the year’s highest price last week of $75, oil has fallen this week on bearish economic news.

Bearish Factors Affecting Oil Prices

“People were buying gold; they were buying treasury bonds; and they were selling oil,” Flynn continued. “They were afraid and suspected they were going to get a bad jobs report, and that’s not going to bode well for energy, especially going into the holiday weekend.”

Flynn contended that the price of oil fell this week in anticipation of the US jobs report, as well as on doubts that the positive economic data about home sales and manufacturing numbers were unsustainable.

“If you look at the manufacturing numbers, yeah, it was good, but a lot of that was ‘Cash for Clunkers,’” Flynn explained. “Housing sales numbers were good, but, obviously, that was because of the low interest rates and first-time homebuyer credits. At the end of the day, it’s going to be jobs, jobs, jobs that are going to bring the economy back, and we’re still losing jobs at an alarming pace.”

Showing weakness in the labor market, US unemployment reached a 26-year high at 9.7%. Despite job loss slowing, investors are concerned about the state of the economy.

Where Oil Is Headed

After the US Labor Day holiday, the NYMEX trading floor will reopen on Tuesday, although electronic trading continues. Next week could prove a major one for the oil market.

“I think next week we could have a big sell-off in oil if we go back into that risk-aversion mode,” Flynn warns. “If the stock market has a big sell-off or if we do get another big bank failure, if the market starts to get a bit nervous, we could see oil prices go back down.”

On the other hand, the analyst says that the market could potentially rally again.

“If nothing bad happens over the weekend, maybe oil can make another upturn, but it’s really going to depend on the stock market next week,” Flynn continued. “The stock market has to continue to put in good performances, or the supplies are going to weigh more and more on the market as we finish out the week.”

For the past two months, the price of oil has traded in a range, testing both the top and bottom.

“Pretty much since the end of June, the Fourth of July holiday, we’ve been really in a very volatile sideways trend between $67 and $75,” Flynn said. “Right now, we’re testing the far end of that range. If we take it out, we could very easily extend that range on the downside.”

The analyst explained that with an $8 range, should the top or bottom be surpassed, the new low would be $57 and the new high would be $83.

“I still feel because of the weak demand and the high supplies, that it will be to the downside,” Flynn revealed. “I think that $57 is more likely at this point than $83.”

Upcoming OPEC Meeting

With the Organization of Petroleum Exporting Countries scheduled to meet next week on Sept. 9, the market is also awaiting any possible changes to production output. The price of oil has been buoyed by the cartel’s most recent cuts.

“This is as good as it gets for OPEC,” Flynn said. “Prices are stable. They’re at a very high price that they are comfortable with, and life is very good for the OPEC cartel.”

While most analysts do not believe that OPEC will make any changes to current production levels, investors remain wary of changes that could greatly affect the price of oil.

“They’re not inviting the non-OPEC producers; so they don’t care that Russia is producing more oil,” Flynn added.

‘New Era of Natural Gas’

Natural gas climbed 22 cents in trading Friday ahead of the Labor Day weekend. Despite this gain, the price of natural gas remains at historic lows.

“It was at the lowest level since 2001, and rig counts keep going up,” Flynn commented. “What does that tell you? This is a market that is in a new era of natural gas. It’s starting to dawn on everybody the impact that we’ve had with these new production technologies in this country.”

Shale gas developments in the US have pushed inventories to a record high, and demand for natural gas has been weak, both domestically and industrially.

“By turning around the supply situation in this country with technology, they’ve really changed the way that we think about natural gas,” Flynn explained. “Natural gas hasn’t been pushed around by the dollar. It’s just being influenced by supply and demand -- and we’re demanding less, we’re able to produce more. It’s the perfect recipe for low prices.”

A mild summer combined with a mild winter forecasted, as well as no hurricane threats on the horizon have pushed the price of natural gas lower. While some see a new bottom forming for the commodity and a subsequent rally in the near future, others believe the market is changed for the long-run.

“I don’t think it’s just going to be low prices for a while,” Flynn concluded. “I think we could be looking at maybe 10 years of low prices, maybe more.”