Oil Rallies for 4th Day in a Row, Natural Gas Jumps

Crude oil rallied for the fourth day in a row on the New York Mercantile Exchange Thursday on the US Department of Energy EIA's inventory report. Settling just below $72 a barrel, oil has nearly erased last week's fall from a high of $75.

Trading on the NYMEX Thursday saw crude oil close at $71.94 a barrel. Buying was encouraged by a larger-than-expected drop in crude oil inventories reported by the DOE.

While the EIA reported that the week prior to Labor Day weekend saw a larger-than-expected drop in crude oil stocks on lower imports and higher demand, the products market saw a build in both gasoline and distillates.

"You had friendly crude and unfriendly product numbers in the weekly reports, and it showed up in the price," said Bill O'Grady, the chief markets strategist at Confluence Investment Management LLC, an investment advisory and management firm based in St. Louis. "Crude had a pretty good day, gasoline and heating oil not so much."

Officially ending the summer driving season in the US with the holiday weekend, the market now looks to heating oils to supplement demand for crude oil. A large build in these products helped to squash any bearish moves oil may have made on the crude draw.

"To get gasoline inventories rising right into your holiday weekend is actually statistically a little unusual," O'Grady commented. "Usually, you would have tried to move that gasoline into the system already; so now your gasoline fundamentals look really lousy, and now you're out of the driving season."

Nonetheless, a weakened dollar and strong day on Wall Street helped to push the price of oil up 63 cents from yesterday's close.

"You had a big drop in crude stocks, primarily due to a drop in imports, and that helped the market to some extent," O'Grady explained. "The other surrounding issues were supportive, too. You had a good day in the stock market, that weakened the dollar, and that tended to help crude prices, as well."

While products inventories rose, the draw in crude oil along with outside economic data contributed to a rally in oil prices.

"The big story fundamentally was the bifurcated weekly report -- bullish for crude, bearish for other stuff," O'Grady said.

Decreased Oil Imports

Typically, the amount of crude oil being imported into the US dips at this time of year, but it is usually due to delivery disruptions in the Gulf of Mexico caused by tropical activity. Obviously, that is not the case this year because a hurricane has not yet entered the Gulf of Mexico this Atlantic hurricane season.

"You get a hurricane in the Gulf, even if it doesn't hit anything, it'll disrupt flows of imports because if I'm trying to put an oil tanker into the loop, if the waves are too choppy, I can't do it," O'Grady explained. "What's unusual this time around is this stuff has been swinging 200,000 or 300,000 barrels a day for no apparent reason."

O'Grady said that the market may just been caught up in strange timing issues, that lately one week will show imports down and then the next, they are up.

"Typically, the way I look at the market is on a four-week moving average; it kind of smoothes out the bumps, and on a four-week moving average basis, imports are still falling," O'Grady disclosed. "But on a week-to-week basis, you can explain these big swings in crude oil inventories in part due to imports."

Furthermore, US refineries are readying for scheduled yearly maintenance programs.

"Refineries usually do maintenance in the fall, and we'll see some refineries reduce output, just cleaning up," he added. "That will tend to drop oil consumption because when they're doing maintenance on these units, they're not processing crude."

The big question many have is: Does this recent rally foretell rising crude prices long-term? O'Grady doesn't think so.

"I don't think this is the beginning of a major correction in crude oil inventories; I think it's just a one-week fluke," he concluded.

Natural Gas Makes Major Gains

After trading at seven-year lows for a number of weeks, the price of natural gas has been able to sustain a four-day rally, as well. Today, the price of natural gas jumped 42 cents to settle at $3.256, the highest it has been since starting the October contract.

"The big story frankly today was natural gas; it's just been on a big tear the past two or three days," O'Grady said. "You just had a slightly better-than-expected inventory report -- it wasn't fabulous, but it does show you the market has gotten pretty oversold."

O'Grady revealed that he received calls every day asking whether natural gas is a good buy because the price has dropped so low.

"I think you have people who want to own it because they think it's really, really cheap, and against a lot of relative measures it is," O'Grady explained. "Still, it looks like we're going to end up with about 3.9 trillion cubic feet-plus in inventory by the time the winter starts; and boy, if you don't have a cold winter, you're really going to be choking on this stuff."

The natural gas market has been plagued by extremely weak fundamentals. A record inventory in the commodity has combined with diminished industrial and domestic demand to push the price of natural gas to historic lows.

"There is some hope: Goldman Sachs came out this week and argued that you're going to see a pick-up in industrial demand, and you’ll probably see some," O'Grady continued. "I don't really see industrial demand coming back that strongly, but you've got a lot of interest in natural gas, and I think that helped it a lot. There’s hope that maybe the worst of this is over."

However, O'Grady said that the market may have just experienced a large amount of short-covering. Traders have been buying out of the commodity en masse, which has helped to push the price.

"You are going to see some pick-up in industrial activity, and that will help -- I just don't think it's probably going to be robust enough to push this market much higher than it's already gone," O'Grady concluded. "The moves have really been impressive, but I don't think that it's going to have legs."