Oil Falls, Natural Gas Makes Gains

For the second trading day in a row, crude oil on the New York Mercantile Exchange fell Monday. The price of crude has been locked in a trading range and remains so.

Crude oil on the NYMEX settled 43 cents lower, closing at $68.86 a barrel on Monday. After reaching a high near $72, the price of crude oil fell $2.55 on Friday, and that slide continued today.

"We saw the big sell-off late last week, and it was a little surprising because we had been building support," revealed Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "We spent most of the week trading higher; we had the spreads coming in a bit -- it just goes to show that there is this air underneath this market, that it's not as bullish as what some still want to try to make it."

Based on the hope that the global economy is rebounding and energy demand will escalate, the crude oil market has been lifted beyond what supply and demand fundamentals currently support. Positive news about the economy and a weakened US dollar have helped to push the price of crude oil higher.

"Crude oil is still in this pattern where it's going to be holding right around $70, $75; and it doesn't have the strength to push much past that at this point, nor is there the big push to knock it down lower, at least not right now," Newsom explained.

The price of crude oil has been locked in a trading range for the last couple of months. There have been a number of rallies during this time that have threatened to break out of the range, yet none have been successful.

"Right now, the market is comfortable trading between $65 and $75," Newsom said. "An outside shot is still going to be near $90, but it just looks like to me that the market is getting more comfortable trading near its lows in the $65 to $70, rather than the highs of $70 to $75."

Waning Gasoline Demand May Dampen Oil Fundamentals

"The interesting thing is gasoline is starting to lose some of its momentum," Newsom commented. "It's starting to look more bearish; it's starting to lose some of that contra-seasonal demand; and this could start to pressure crude oil in the longer term."

Last week, the Department of Energy's inventory report revealed that the US added to its stockpile of gasoline, despite leading into the country's Labor Day holiday weekend and the official end of the summer driving season.

"Even though we've seen spreads tighten, meaning we've got a bit less bearish supply and demand situation in crude oil, it's not at the point where if we start to see the demand for gasoline starting to shut down, we could see those crude oil spreads starting to widen back out again because you're not pulling those supplies in to make gasoline if gasoline demand really starts to slow down," Newsom explained.

Should refineries slow gasoline production based on weaker demand, this could affect the crude oil market.

Stricter Regulations in Trading

Some analysts have pointed to a regulatory crack down in trading as a reason for the recent sell-off in oil. On Friday, the CME Group Inc., which runs the NYMEX, sent an advisory to traders and brokers warning that tighter enforcement of existing rules about position limits may be coming down the pipe.

"If they tighten all the loopholes and they really start to crack down on enforcement of position limits starting off with the CME commodities, could it get over into the NYMEX? Certainly it could," Newsom said. "That could make non-commercial or the spec traders a bit leery, a bit nervous about getting into the market, but I think that's something a bit down the road yet."

Additionally, Newsom explained that Friday's release was according to a source at the CME, adding that another advisory was released by the company today, again from a source, saying that the enforcement of the rule would not change.

"Right now, I think what we're seeing is some normal liquidation," Newsom explained. "There are reasons, outside of the CME's decision, for spec traders to start liquidating their net long positions a bit, and that's certainly what we've seen in a number of commodities over the last few weeks."

Chinese Development

Today, the US revealed a decision to impose special duties on Chinese tires, which has the potential to snowball into more trade complaints. Some analysts are pointing to this new stressor with the second-largest consumer of crude oil as a reason for the sell-off in crude oil.

"Personally, I don't see it," Newsom said. "We would see the type of movement, the spreads data that would say that China is stepping out of crude oil market. That just didn't happen."

China and Saudi Arabia currently hold a large portion of the US debt.

"While it certainly could in the future, I don't really see it as a factor at this point," Newsom revealed. "There are trade disputes off and on between countries, and I seriously doubt if the US wants to get into a full-blown trade dispute with China."

Natural Gas Makes Major Gains

While the price of natural gas has been depressed to seven-year lows recently, the commodity made a major jump on the NYMEX in trading Monday. Climbing 13% in trading today, the price of natural gas settled at $3.297 per thousand cubic feet.

Despite overly bearish supply and demand fundamentals, some support has returned to the natural gas market.

"To me, just as we've talked about long liquidation in some of these other commodities, today what we're seeing is just some short covering," Newsom said. "Fundamentally, the market is still bearish."

Due to the recession, industrial demand remains low for natural gas. Additionally, a mild summer did not support strong domestic demand for the cooling season; and a forecast for a mild winter does not point to a strengthened demand in the upcoming heating season. Furthermore, US inventories have reached record high levels.

Because the fundamentals remain bearish, Newsom contends that this price spike is temporary.

"They're getting out of some of their short positions that they've been holding for quite some time," Newsom said. "If the fundamentals don't change, then there will come a point where they jump back in."