Oil Gains $2 on Economic Optimism, Natural Gas Continues Rally

Crude oil jumped more than $2 on the New York Mercantile Exchange Tuesday to close near $71 a barrel, based on positive economic data. Natural gas also rallied today, after a large spike in trading yesterday.

While trading on the NYMEX Tuesday saw a high above $71, the price of crude oil also dropped to an intra-day low below $69. Ultimately, the price of crude oil Tuesday settled $2.07 higher than Monday at $70.93 a barrel.

Positive economic data coming out about US retail sales, consumer confidence in Germany and a possible end to the recession helped to push the price of oil higher. A rally on the S&P and weakness in the dollar also helped to boost the price of oil, despite a mid-day sell-off.

"The market continues to pivot around $70; it's looking for a good signal that we have a bright future as far as economic activity coming out," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "The market really tends to really reflect anything that looks kind of positive."

Propped up beyond what supply and demand fundamentals can support, the price of crude oil has been trading on a hope that the recession is waning and global energy demand will increase.

"The question that is going to come as we approach our recent highs, between $73 and $75 is: Is there enough of a solid under footing for the market to continue this year's rally?" McGillian said. "At this point, I think it's still up in the air, and we have to keep an eye on it."

Bernanke Says Recession Probably Over

Today, on the one-year anniversary of the collapse of the Lehman Brothers, US Federal Reserve Chairman Ben Bernanke stated that the global recession was most likely over, adding that recovery and the generation of new jobs would be slow.

"When his statements came out, I think that the market did turn, especially on the equities side; and then it started this afternoon's rally," McGillian said.

Despite today's $2 jump, McGillian doesn't see the price of oil holding steady based on a statement from the chairman of the Federal Reserve.

"Of course when the Federal Reserve Chairman makes a statement about it, it's going to be positive -- until we get some kind of data that comes out that brings that into dispute," McGillian said.

Range-Bound Trading

Because crude oil is based on economic data and not fundamentals, the price of oil has been volatile. Regardless of steep rallies and large sell-offs, the market has been locked in a trading range for some time.

"We're still firmly in that $65 to $75 trading range that we've been in the last six months now," McGillian continued. "You have both sides of the market searching for signs that what they believe is going to be the deciding factor, and that's really the question that is up in the air."

What will force the market out of its current range-bound position?

"If we continue to see a weakness in the dollar, rising equity prices, and you begin to see a trickle of signs that demand is starting to recover, I think that that's going to be support for the market," McGillian revealed.

The analyst argues that definitive signs that the economy has recovered must be present before oil can rally higher than the $75 mark.

"You have to see energy demand, particularly in the United States and in Western Europe, start to pick up," McGillian said. "You'll probably notice it with them starting to wind down some of these stockpiles they've built up."

Upcoming Inventory Report

With the API inventory report released this afternoon and the more-sought-after DOE report coming Wednesday, the market is looking for information about US stockpiles to determine any changes in supply and demand.

"This week's inventory figures will be watched closely to see if now that we've started some maintenance programs if they drop these refinery runs back down, and you still see builds in the fuel market inventories," McGillian said.

Natural Gas Makes Gains for Second Day in a Row

In trading on the NYMEX Tuesday, natural gas made slight gains to continue a rally that was sparked by a 13% gain in trading Monday. The price of natural gas climbed 2 cents to settle at $3.320.

"This was the fourth time in the last six months that after the market has made a new low for the year, you've seen the market rally close to a dollar, if not more than a dollar," McGillian reported.

The price of natural gas has been trading at historic lows because of overly bearish supply and demand fundamentals.

"Every time up until now, the market, when it's turned around, it's been because of the vulnerability short-covering because the market is biased on that side," McGillian explained. "But this time around, since we're getting ready to enter the last quarter of the month when people become concerned with winter heating demand, there might be a little more strength coming."

Industrial demand for natural gas has diminished alongside the economic recession, and domestic demand has been dampened by a mild summer. Additionally, US inventories of natural gas remain at record levels.

"If we continue to see a lack of any tropical developments and injection rates don't start to fall, the natural gas market is going to have trouble sustaining any other rallies until we get our first cold spell of the season," McGillian continued. "On the other hand, if you start to see injection rates falling lower than expected, that might trigger a bit more short-covering as we get closer to the fourth quarter."