Oil Prices Stabilize on Mixed Economic News, Natural Gas Flirts with $5

Crude oil trading on the New York Mercantile Exchange was choppy Tuesday, tracking equities and ultimately stabilizing just below Monday's close. On the November contract, the price of natural gas remained high, closing near $5 per thousand cubic feet.

After experiencing choppy trading Monday, the price of crude oil on the NYMEX settled only 13 cents lower at $66.71 per barrel. Tracking the equities market, the price of oil was affected by US home sales data and consumer confidence numbers.

"The market really didn't have any direction to it, and I think that was primarily a result of the contradictory economic data that came out today," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "It looks like the market is just waiting patiently for the latest round of storage reports to come."

According to a report from Case-Schiller, the price of US homes rose, which helped to boost the price of oil early in the day, but an unexpected drop in US consumer confidence stifled the price before a rally could be achieved.

"Earlier today, the market appeared to be resuming its slide from last week as we came into the trading day because it looked as if the European equities were lower, and the market basically turned on a dime once it saw the latest housing price report from Case-Schiller," McGillian said. "But that didn't last long because the fact is that the next round of data that came out was disappointing, and the market traded all the way back down to its lows, and then it spent most of the afternoon just pivoting around the middle $66 level."

The price of oil has been tracking the equities market, boosted by positive sentiment that the end of the recession will bring higher demand for energy.

"It doesn't really seem as if the market has really done to much other than stabilize after last week's drop," McGillian added. "I think that's why people are eyeing the inventory reports more than anything else right now."

All Eyes on Tomorrow's Inventory Report

The API releases information about the state of US stockpiles late on Tuesday, and the more heavily weighted Department of Energy's EIA report comes out Wednesday. Last week's EIA report revealed a substantial build in crude oil, gasoline and distillate inventories, which helped to fuel the subsequent sell-off.

“If we see an across-the-board inventory decline, and the market it doesn’t have sufficient weakness to break down below the $65, which is the lower end of our six-month band, it probably is an omen that we're still range bound between $65 and $75," explained McGillian. "That's why people are watching it."

The price of crude oil has been range-bound for some months now tracking equities and the value of the dollar, despite a number of tests to the top and bottom of the band. With the driving season over and the winter heating season not yet started, bears believe the price may drop out of the range.

"Today's trading continues to demonstrate how the oil market really is following the broader financial markets because it's become more of an asset class type of trading incident, rather than the commodity that it's usually been," McGillian added.

Natural Gas Nears $5

In trading on the NYMEX Tuesday, the price of natural gas settled 14 cents higher to settle at $4.871 per thousand cubic feet.

"The market initially came in and dropped more than 20 cents lower, but when the equity markets and crude oil turned around, natural gas exploded and ran back above $4.90," McGillian said.

The price of natural gas has nearly doubled in the last few weeks, strengthened by short-covering and the impending winter heating season.

"It looks as if this September rally still seems to have some length to go on it, and I think that's primarily a result of concerns about the extent of how severe this winter is going to be in relationship to the possibility that we might be beginning to see some of the production levels come down from the drop in gas rates," McGillian explained.

The fundamentals in the natural gas market had been terminally weak, with a record inventory and diminished demand. Despite rising prices, the fundamentals in the market continue to be bearish.

While $5 natural gas is right around the corner, the analyst warned that it is too early to speculate whether the price will reach $6 this winter, adding that should this winter prove mild, the price of natural gas will likely fall again.

"The fundamentals of the market right now do not really support rising prices, and a lot of the pressure that’s been put on it is from the shorts that have been in the market for a long time," McGillian explained.