Oil Tumbles Below $66, Natural Gas Climbs Near $4

For the second day in a row, the price of crude oil plummeted, pushed by an overly bearish EIA stockpile report yesterday and less than stellar housing numbers in the US. Natural gas, on the other hand, continued its rally, trading near $4 per thousand cubic feet.

Crude oil experienced a more than $3 sell-off in trading Thursday on the New York Mercantile Exchange, settling at $65.89 per barrel. Triggered by a large unexpected build in crude oil stockpiles reported by the EIA yesterday, as well as builds in gasoline and distillates, the price of oil has fallen nearly $6 in two days.

"The oil markets got pummeled today, and it looks as if it is just follow-through from yesterday's inventory report in combination with a pull-back in some of the economic sentiment that's driven the market above $70," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut. "Yesterday's report took a lot of the wind out of the bulls' sails, and inventories rose across the board."

Additionally, sales of existing homes in the US fell unexpectedly; and the dollar gained strength against the euro.

"Today's poor housing report about existing home sales coming in a lot lower than expected helped drive some of the financials down; and the dollar rebounded a bit, which is more attributable to the end of the quarter coming next week than anything else," McGillian added. "That helped force a lot more selling in the oil markets than people anticipated."

Will Oil Break Out of Its Range?

With prices buoyed by an economic optimism that the recession's end will bring increased energy demand, the build in stockpiles calls into question the demand for energy by the world's largest consumer.

"The selling started yesterday after the DOE report, and it basically hasn't stopped," McGillian said. "The market has picked up some technical momentum as it crossed through today's $67 support level, and right now, it looks as if we're closing in on testing our recent trading band range of $65."

The crude oil market has been trading in a trading range between $65 and $75 for some months.

"The longer the market stays in a certain kind of trading band, it seems to have a lot more fluidity as it goes from one side to the next," McGillian explained. "You saw that demonstrated today with the way we dropped down toward that technical support level around $67, and once we got through it, it looks as if you had a lot of liquidation selling on some stop losses come in, and that drove the market down another $1.50 pretty quickly."

"Once it did that, it looks as if the market stabilized, but it was never able to really pick its head up because it seemed as if without the support of the equity markets going higher and then the dollar selling off, the fundamentals of the market really had a greater bearing on oil prices," he added.

While positive economic news has been able to push the price of crude oil higher, the market has refocused on supply and demand fundamentals, which have brought the price back down. Nonetheless, the analyst doesn't foresee the price of crude falling that much more than it already has.

"Whether or not people are going to be aggressive down below $65 I'm a bit hesitant to say, but I think we're going to give it a look-see," McGillian said. "If we continue to see weakness in the equities and the dollar continues to rally, then there is probably a good chance that we will be able to do that; but without those two factors contributing, the market is going to have a tough time sliding too much further in the immediate term."

Natural Gas Trades Near $4

The price of natural gas continued climbing on the NYMEX Thursday, settling at $3.955 per thousand cubic feet. With the winter heating season nearing, many investors have re-entered the market.

"The market has been over sold, and as we get closer and closer to winter, the longs in the market can bring a lot of pressure to bear because the shorts are in it," McGillian explained. "You don't see a lot of people willing to get further short as we close in on the heating season."

Despite the recent rally in the price of natural gas, the market remains over supplied with US stockpiles near record levels.

"It looks as if in the last couple of weeks the gas market is starting to detach from the underlying fundamentals, and it's turning its attention to more of what's expected to occur in 2010, which is with an economic recovery combined with the possibility of a big drop in gas production over the last months that gas prices will get a nice boost later on," McGillian concluded.