Oil Continues Rally, Awaits DOE Numbers Thursday

The price of crude oil continued rising on the New York Mercantile Exchange Wednesday, extending the major jump in price achieved yesterday. Awaiting inventory numbers that will be released Thursday from the Department of Energy, the market remained steady, gaining only slightly to remain above $71 a barrel.

Although the price of crude oil reached an intra-day high of $72.52 a barrel, the price ultimately settled just 21 cents above Tuesday's close. With analysts expecting gasoline stockpiles to show draws in the DOE inventory report tomorrow, the price of oil remained steady on the NYMEX Wednesday, closing at $71.31 a barrel.

The weakness in the US dollar that was seen Tuesday encouraged investors to buy oil as an inflationary hedge. After a more than $3 boost in trading Tuesday, the price of oil made only slight gains ahead of the DOE report on Thursday. In line with what analysts predicted, the OPEC meeting today decided to keep production levels the same.

"Folks are waiting to see what will happen with tomorrow's DOE numbers when they come out," said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. "It will include the start of the big Labor Day driving season; so I think folks will be curious to see how the gasoline demand numbers look and how low our inventories might go as we head into the end of the driving season."

The Effects of Inventories

While analysts expect gasoline stocks to draw, there are other factors in the report that can affect the price of oil moving forward.

"Really it's going to depend on what imports do for crude because I expect refineries are going to slow down some of their runs, and the question is: How much did they back off purchasing ahead of time?" Mueller explained.

"If they are still importing relatively high numbers, then we're probably going to see a bit of a build; but all in all, it looks like the refineries have already started to back off some of their buying," Mueller continued. "I think we’ll see a bit of a fall in imports, leading to some continued drain in stocks, which would keep prices up over $70 -- unless there's a really dramatic build on the distillates side."

Demand for crude oil shifts at this point of the year in the US with the official end of the summer driving season passing after the long holiday weekend.

"This is the time of year when attention starts moving away from gasoline to heating oil," Mueller explained. "Distillate stocks are pretty high in the US, and if we get another big build, I think that could overwhelm any story in the crude market."

Range-Bound Trading

Since this summer, the price of crude oil has been locked in a trading range between $65 and $75 a barrel. Despite numerous bullish attempts at breaking out of this range, the price of oil remains steady.

"One thing that might affect us bearishly is some folks are calling for a second dip in the recession, even though numbers have been relatively strong over the summer, suggesting that the economy is starting to emerge," Mueller said. "If we see unemployment continue to go up and maybe a loss in consumer confidence that leads to weaker third quarter or fourth quarter GDP numbers and an accompanying dip in oil demand, then I think that could certainly push prices down again below the range."

Nonetheless, Mueller doesn't think this scenario is likely, instead indicating that the price of oil will continue trading in its current range.

"I expect we'll be somewhere in the mid-$70s by the close of 2009," Mueller predicted. "The economy is going to probably continue perking up, which will be bullish; but we are going to be in a very weak distillate market, and I think that's going to restrain somewhat the growth in prices because there are not going to be strong bullish signals coming out of the product market."

Natural Gas Remains Low

Natural gas continued to trade near seven-year lows on Wednesday, gaining 2 cents on the NYMEX to settle at $2.829.

Both commercial and non-commercial traders have shied away from the natural gas market because of overly bearish fundamentals. A mild summer has helped to push domestic demand lower while the recession has curbed industrial demand for natural gas.

Additionally, new technologies have unleashed much more onshore production than ever before, pushing inventories to record levels.

Keeping the market bearish, the Atlantic hurricane season has posed no threat to the offshore Gulf of Mexico production and pipelines, or the Gulf Coast refineries. Furthermore, a mild winter is predicted by weather authorities, which should keep domestic demand low.