Oil Trades Near $67 on Iran, Natural Gas Stays High

The price of crude oil rallied nearly a dollar on the New York Mercantile Exchange Monday, spurred by the conflict with Iran and the Middle Eastern country's recent missile tests. Though it dropped a bit from its stellar close last week, the price of natural gas remained strong in trading.

After a huge sell-off in the market last week that took the price of oil down almost $4, a three-digit rally on the stock exchange helped to spur investment in the commodity. Bolstered by supply fears fueled by Iran testing-firing missiles, the price of crude oil climbed 82 cents to close at $66.84 on the NYMEX Monday.

Last week the US and other countries warned Iran against a secret nuclear plant, and on Monday the Middle Eastern country tested two types of long-range missiles that drew concerns worldwide.

"Crude oil is a very reactive market to headlines; so when we saw all this scuttlebutt carrying on over the weekend and then carrying over into today, it wasn't that surprising that we had what looks like commercial buying coming in," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska.

Short-Lived Rally

Previously supported by an economic optimism that foresaw energy demand rising, the market bobbled last week because of weak fundamentals.

"The biggest thing is it just ran out of fresh bullish news headlines up to that point, and the weight of the dying demand in gasoline started to take effect," explained Newsom.

Last week's sell-off was ignited by sizeable builds in US inventories of crude oil, gasoline and distillates, but the market has since been enticed to buy out of supply fears.

"The reality of the situation is we're not short of crude oil," Newsom explained. "If this thing continues to fester and continues to boil up, yes it’s going to keep the market up just on the idea that something can happen to crude oil supplies."

Nonetheless, demand has diminished and the seasonal shift from driving season to winter heating season is taking its effect on the market.

"We still have a contango in the spreads; it has weakened notably, but overall I still think that we see a bearish supply and demand situation," Newsom explained. "We're in a bearish time of year for both gasoline and heating oil, and there's really not that much reason to spark a fundamental rally in this market -- that's why it looks like it is more headlines, meaning it's probably short-lived."

While it may be a short-lived rally, the situation in Iran is likely to continue to push the price of oil for as long as the conflict lasts.

"We'll see how long it takes for this thing to die down," Newsom contended. "I would anticipate, particularly with the sell-off that we've seen, that some money comes back into the market, and we see this thing go a little bit higher this week."

Possibility of a Fourth Quarter Drop

"Barring the unusual event occurring, that these headlines actually turn into a longer-term rally, I would anticipate that the seasonal downtrend begins, that we do have some support coming into this market, that it keeps heavy selling this winter in check because of some uncertainty, but I do think that we will see the markets at least try to work a little bit lower," Newsom argued.

Because demand has diminished and the market has ample supply, the crude oil market could fall further. Also, the market typically experiences sell-offs during this time of year.

"Fundamentally maybe the market is comfortable at this point -- some would argue it is still a bit overvalued up around $70 and probably needs to come down a little bit lower," Newsom explained. "I think seasonally it probably should and probably will, unless something strange happens that just turns it on its side."

Natural Gas Remains Strong

After a very impressive rally that brought the price of natural gas up from seven-year lows, trading on the NYMEX Monday saw the price fall 25 cents. Closing at $3.729 per thousand cubic feet, the price of natural gas remained strong.

"What initially looked like some short-covering, some pocketing of some of the money they may have made, certainly looked like it sparked the beginnings of this rally," Newsom said.

The price of natural gas had been dogged by weak supply and demand fundamentals that squashed the price to seven-year lows. While some may see a fundamental shift in the market, Newsom points to other reasons for the most recent rally.

"This is more of an end-of-the-month, end-of-the-quarter type of play, booking some profits, pushing the market a bit higher because there are just not a lot of sell orders out there right now," Newsom explained. "Nevertheless, the market rallied; and it certainly indicates that if we can keep finding some buying that there is some more room to go up."

In a speech last week, the CEO of natural gas producer Chesapeake Energy contended that the industry needs $6 to $9 natural gas before production picks back up. The possibility of this level of rally in the natural gas market is doubtful.

"Now, I'm still not a raging bull in natural gas," Newsom continued. "I just don't see the structure of this thing changing to the degree where this is all of a sudden going to become a bullish market, but the potential for at least higher prices than we are now over the next couple months if this buying continues is certainly there."