Crude Falls on EIA Inventories, Products

The price of crude oil dropped drastically on the New York Mercantile Exchange Wednesday after a report from the US Department of Energy's EIA revealed builds in crude oil, gasoline and distillate stockpiles. Plummeting nearly $3 in trading today, the price of crude settled below $69 a barrel.

After a big rally yesterday, the price of crude oil fell $2.58 in trading on the NYMEX Wednesday to close at $68.97 a barrel. Spurred by an unexpected build in crude and products, the market experienced a sell-off based on weak demand.

In its report today, the DOE's EIA revealed that US crude oil inventories increased by some 2.8 million barrels last week, when most were expecting a draw. Additionally, inventories of gasoline grew by 5.4 million barrels, and distillates stockpiles rose by 3.0 million.

"There was a big crude build; there was a big gasoline build; and there was a big distillate build," explained Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. "All of those inventory increases shocked the market to some extent; and we're down almost $3 now, and I think that is because the report today highlighted just how weak demand is."

The builds in inventory portray weaker demand during this transitional period in the market.

"For the gasoline market, generally you see lower demand after the summer driving season ends, after the Labor Day holiday," Mueller added. "In the distillate market, it is still a weak economy, and we really haven't started to see cold temperatures yet that would support heating oil demand."

Lately, the price of crude oil has been boosted beyond supply and demand fundamentals by positive economic news that points to an end to the economic recession and potentially higher energy demand. Despite the support the bullish news offers, the market remains hinged on the underlying fundamentals, and a bearish EIA report such as today's can greatly affect the price of crude oil.

Where Is the Price of Crude Headed?

With weak seasonal demand ahead of the market and a build in inventories, some bears are eager to see the price of crude oil drop. This may not be the case, warned Mueller.

"Prices have been trading in this range for some months now; so I would be surprised if they could really break-out effectively," Mueller explained.

Crude oil has been trading in a range between $65 and $75 for some time now, and tests to the top and bottom of that range have been unable to break out of it.

"Yes, it was a very bearish report, but this is just one week's data; and before this week, we had had several weeks of crude draws here in the US," Mueller continued. "Before you see a real dramatic slide in prices, the market will want to see some more confirmation that stocks are really on a growing path now."

On the other hand, the market could receive more positive news that pushes the price of oil back up.

"I hesitate to draw too much conclusion just from one day's price move, but I expect we'll see the price of oil in the high $60s -- maybe it will fall to test $65, but I don't see it going much below that," Mueller concluded. "The market will find some bullish nugget to hang its hat on through some strong action in Asian equities, or the dollar will weaken, and that will push money back into the crude complex."

Natural Gas Climbs Again, More Gains Needed

The price of natural gas continued strengthening on the NYMEX Thursday, closing more than 25 cents higher at $3.860 per thousand cubic feet -- the highest it has been in months.

The price of natural gas has fallen dramatically in the last year, exacerbated by extremely weak supply and demand fundamentals. Some experts feel that the bottom of the market has been reached, and the price of natural gas can only rally from this point.

Today, the CEO of mega-gas producer Chesapeake Energy reported that the price of natural gas must climb higher than the $4 mark in order to reignite drilling operations in the US. According to a report from Reuters, the company head said that the industry would have to see prices reach $6 or even $9 per thousand cubic feet before the onshore rig count climbs back up to 1,100.

"The industry can cope with $4 gas," he said. "The industry can't grow or sustain production with $4 gas."