Oil Falls Below $70, May Be Headed Even Lower By Year End

On the New York Mercantile Exchange Friday, the price of crude oil dropped below $70 on escalating US unemployment numbers. Closing out a volatile week of trading, the price of natural gas remained high on Friday, settling at $4.718 per thousand cubic feet.

After closing near $71 Thursday, the price of crude oil slumped 87 cents to close at $69.95 a barrel on the NYMEX Friday.

The US Labor Department reported Friday that unemployment in the world's biggest oil consuming country reached a 26-year high of 9.8% for September, up from 9.7% last month. The rising jobless rate calls into question the strength of the economic recovery.

"Obviously, the jobs number is putting the pressure on this market," said Phil Flynn, vice president in charge of research for PFG Best in Chicago. "It's hard to imagine with the type of economic data that we had this week that we're going to have strong demand."

The price of crude oil has been buoyed beyond supply and demand fundamentals by bullish hopes that the recovering economy will bring resurgence in energy demand with it.

Bears Growling for Control

"Time is running out on the bulls -- they're running out of excuses to continue to buy this market," Flynn contended. "One of their arguments has been that the economy is getting better, but it's obvious with today's jobs number and the manufacturing numbers this week, the durable goods orders numbers, that the market isn't as strong. It's getting harder and harder for the bulls to justify their position in this environment."

While the price of crude oil remains in a trading range between $65 and $75, some analysts are foretelling a break-out to the bottom.

"I'm a little concerned about the market going into October," Flynn shared. "Probably the most bullish scenario for oil right now wouldn't be from the demand side; it would be from the economic stimulus side."

As the market edges into the winter heating season, demand typically falls this time of year.

"If we get into the next quarter, and the stock market crashes, the Feds may be inspired to give us another splash of economic stimulus, which could be very bearish for the dollar and could drive up oil prices again," Flynn explained. "But other than that, my feeling is that the market is going to continue to work lower into the end of the year because the supplies are just too high."

Oil May Be Headed Lower Through 2009

"I don't see any reason why we shouldn't see the low $60s or even get into the $50s, barring some unusually cold winter or increasing tensions with Iran," Flynn stated. "I think the market is realizing that no matter what happens we're going to have plenty of supply to get into winter."

In its report this week, the US Department of Energy revealed a draw in gasoline that helped to support the price of crude temporarily, but builds in crude oil and other products continue to weaken fundamentals.

"Earlier this week, the market was getting all excited because it thought gasoline demand was improving, but really should we be getting excited about gasoline demand as we head into winter?" Flynn commented. "The truth of the matter is that gasoline shouldn't be leading this time of year; it should be following. I think that it's a weak argument to think that because gasoline demand improved a bit, that that should support the entire complex."

Ultimately, the dip that Flynn predicts should help the market realize a stronger price point next year.

"For 2010, hopefully if I'm right, after a break in oil prices, that break will inspire more demand as we move into the next year," Flynn explained. "What I hope to see is low prices end up the year and then a rally begins based on growth created in part by relatively inexpensive energy prices."

Natural Gas Steadies, Ensuring Winter Production

Despite a fall yesterday on the NYMEX, the price of natural gas rallied 25 cents to close at $4.718 per thousand cubic feet Friday.

"This is a perfect example of a market working and why we need the futures markets," commented Flynn. "Because we have a glut of supply, natural gas got too cheap. If it stayed that cheap, producers wouldn't be able to afford to produce into the winter, and that could lead to disruption of supply if you have a cold winter."

For months the natural gas market had been squelched by weak supply and demand fundamentals, with the price per thousand cubic feet reaching a seven-year low last month. In the last couple of weeks, natural gas has experienced a dramatic rally.

"You have the speculators betting that the prices will have to rise so that the producers will continue to produce as we head into the winter, so the prices have gone up well above the cash market," Flynn explained. "That gives the producers the opportunity to lock-in a higher price. What you're seeing in the price of natural gas is the market ensuring that we have enough supplies to get us through the winter."

Despite the major rally, trading of natural gas this week has been volatile, with highs reaching nearly $5 and lows around $4.20.

"I do think that right now the market is going to stay in a range between $5 and $4 for some time; maybe throughout the rest of this month we'll be a big trading range," Flynn concluded. "After that, it's going to depend on Old Man Winter -- if it doesn't get cold right way, then I do think that we’ll see prices start to move back down in the futures again. And the futures should get more in-line with where the cash market is now, if not even a little lower at the end of October."