O&G Markets Take a Breath After Recent Run

Mirroring most other markets, the price of crude oil seesawed a bit in trading on the New York Mercantile Exchange to settle right back where it was. Losing only a few cents, oil remained steady on unchanged economic data. 


Closing 4 cents lower than Wednesday, the price of crude oil on the NYMEX settled at $72.47 Thursday after a relatively flat day of trading. After massive gains the last few days in natural gas, the price per thousand cubic feet fell some 30 cents to settle at $3.458 on the NYMEX. 

Trading on Wall Street was dismal today, and even bullish sweetheart gold couldn't muster a rally. 

"So poor oil, which usually has to find another market to follow like the dollar or the stock market, had nothing to follow, and ended up pretty flat on the day," explained Phil Flynn, vice president in charge of research for PFG Best in Chicago. 

Bolstered beyond underlying supply and demand fundamentals, the price of crude oil has been trading higher on economic optimism that the global recession is over and energy demand will rise. Many investors look to the stock market as an early indicator of recovery, and the crude oil market has been mirroring its gains for months now. 

"This whole week if you looked at the momentum going into today, you would have thought everything would have exploded today -- stock market, gold, silver, oil, and everything -- but today was a disappointment," Flynn said. "Really, we've come up so far so fast, I think the market took its breath here a little."

In today's news, US household wealth rose for the first time in two years and employment data showed signs of promise. Positive news this week, including the announcement by US Federal Reserve Chairman Ben Bernanke that the recession was most likely over, was not enough to continue the rally in the markets. 

"It really just confirmed stronger data that we saw earlier in the week on wholesale trade and deficits, and we had priced in a lot of this good news already," Flynn explained. 

Natural Gas Takes Center Stage 

After a dizzying decent to more than seven year lows, the price of natural gas rallied in the last several days to near $4, leading some to hope that a bottom in the market has been reached. Despite a bullish trend, the price of natural gas fell again today. 

"It's possible that the run up in natural gas could be over for a little while," Flynn contended. "Now, there's still some support for natural gas at $3.30, but today it seems like everything seemed to run out of steam."

For the last several months, natural gas has been plagued by overly bearish supply and demand fundamentals. While still high, US inventory numbers from the DOE's EIA yesterday showed lower-than-expected injection numbers. 

"Even though the number for natural gas was more bullish than expectations, when you step back and look at the big picture, supplies are still higher than they've been at this time of year, almost ever; so it was very hard to keep that bullish momentum going," Flynn added. 

A Big Push 

Because the market is trading on economic news, rather than fundamentals, investors and traders are looking for a clearer sign that the economy is getting better before pushing the price higher. 

"What it says to me is if we are going to get to the next level -- whether it is oil making a new high for the year, getting through $75, or natural gas is going to get to $4 -- we're going to need some news to get us to that next level," Flynn revealed. "Obviously, the bulls have given the market the benefit of the doubt the whole way up, but I think to sustain this momentum not only are we going to need good news, we're going to need much better than expected news to keep this drive alive."

While recent economic news has been supportive of the market, the price of crude oil has remained in a trading range, unable to break through the previous high of $75 a barrel hit earlier this year. In order to break into a new price level, something more is needed. 

"Otherwise we're probably due for a pretty good correction, I think in both markets," Flynn argued. 

'The Next Big Hurdle'

Most analysts agree that the economy is in much better shape than it was a year ago and even that the economic recession is over, but many foresee a gradual recovery. 

"To me, I think one more good scare in the stock market and oil might be good for us, not so much because the economy isn't getting better, I think it is, but I'd like to see us really test this one more time to give us the ultimate confidence that we have bottomed out," Flynn said. "This tepid little recovery where we've been going up by baby steps on the stock market, slowly trending up in oil and other markets, I want to make sure it's for real."

Because the US economy has been buoyed by stimulus spending, some are hesitant to dive full-force into spending.  

"The economy is getting better, but it's getting better because of all this stimulus that we've put in the system, and we're going to have to start taking that back," Flynn concluded. "As good as we are and as good as the medicine is that is helping fix the situation, we have to get off the medicine at some point, and that is going to be the next big hurdle for the market."