Bulls Take the Reins: Oil Jumps $4, Natural Gas Stays Strong

The price of crude oil on the New York Mercantile Exchange rallied nearly $4 Wednesday for a variety of reasons, including a draw in US gasoline inventories and a weakened dollar. Additionally, the price of natural gas continued to trade near $5 on the last day of the quarter.

The bulls took the reins today with the price of crude oil climbing above $70 on the NYMEX to settle at $70.61 a barrel. Despite falling for the last week, the price of crude oil was supported today by tensions with Iran, a weakened dollar, global manufacturing numbers and the DOE's inventory report.

Contributing Factors

"I think some people are attributing the rally to the concerns about the Iranian talks tomorrow, and though I do think that might be one of the reasons why people bought, I think this was more about global imbalances," said Phil Flynn, vice president in charge of research for PFG Best in Chicago. "I think what really caused this explosive rally on the last day of the quarter was the fact that we have mixed signals about the economic recovery when it comes to the manufacturing sector."

Pointing to industrial demand, manufacturing numbers released overnight revealed stronger support in Europe and Asia, but a report from the Mid West United States was contradictory. Additionally, the US dollar fell against other currencies.

"Oil rallied really because the dollar was weak and because it was the end of the quarter there were a lot of people that were short that had to cover before the end of the quarter," Flynn added. "What happened was people got the feeling that perhaps the economy in Europe might be a little bit better off than we are, and that had people buy the euro currency."

Should the European economy improve more quickly than that of the US, investors will buy the euro, putting more pressure on the dollar and further supporting the price of oil.

Additionally, the US Department of Energy's EIA revealed a substantial drop in gasoline supplies, pointing to an increase in demand for the world's largest energy consumer. On the other hand, the report also indicated a build in crude oil and distillates.

"Gasoline seemed to be a big mover today, but does anybody really ever worry about gasoline supplies at this point?" Flynn contended. "No, of course not; there are plenty of supplies; year-over-year gasoline supplies are 10.6% above where they were a year ago. I think that even though the gasoline numbers supported us, I don't think that it's the big issue at play."

Where Is Oil Headed in the Fourth Quarter?

Starting the next quarter tomorrow, oil is situated right in the middle of the trading range of $65 to $75. After sliding a number of days, the price of oil rallied to close out the quarter above $70.

"Once again, macroeconomics and the end of the quarter made for an explosive move, and we'll have to see what happens tomorrow," Flynn said. "There will be some focus on Iran."

Tensions with the OPEC country over a nuclear plant and test-firing missiles have heated up, and talks are scheduled to begin tomorrow to resolve the issues.

"What's going to happen with the talks? Are the Iranians going to go storming out? Are they going to come to some type of an agreement?" Flynn asked. "These are all questions that traders are going to be asking tomorrow, and hopefully we're going to get the answers and be able to put this Iran situation behind us."

For now, the price of oil remains range-bound, despite another test to the bottom of the band -- but where will the price go from here?

"I personally think it's a blip, but you have to respect what the market did -- it turned around and closed back above $70 a barrel, and that's pretty impressive," Flynn commented. "The same way the market failed to break out above $75, it failed to break down below $65."

Natural Gas Continues Trading Near $5

The price of natural gas stayed steady on the NYMEX Wednesday to close just below Tuesday's settle at $4.841 per thousand cubic feet. Despite weeks of trading near seven-year lows, the price of natural gas has been able to rally and remain high for more than a week.

Yet, the same bearish fundamentals that caused the sell-off continue to put pressure on the price of natural gas now, despite the upcoming winter heating season.

"If you look at the cash market and where the futures market is, the futures are a lot higher than the cash market is right now," Flynn explained. "I think that is because the futures market is trying to give an opportunity to the hedgers to lock-in a price so that they can continue to produce."

Last week, the US mega-producer Chesapeake Energy CEO stated that the industry needed $6 to $9 natural gas to continue producing.

"It's obvious that this market is getting a little bit of support from crude oil in some of the spreading activity that we've seen between the oil and the gas," Flynn concluded. "Also, I think it's trying to do its job to ensure that there is going to be supply going forward."