Rumors, Weak Dollar Strengthen Oil Prices, Natural Gas Stays High

Crude oil managed another rally today on the New York Mercantile Exchange, at one point nearing $72 a barrel, but ultimately settling just above yesterday's close. Natural gas slipped a bit, but stayed near the $5 range.

The price of crude oil rallied early to reach an intra-day high of $71.97 on the NYMEX Tuesday, but prices slipped in afternoon trading to settle at $70.88. Closing 47 cents higher than Monday's close, the price of oil was supported today by a weak dollar and rumors that major oil-producing countries held a secret meeting to stop trading oil in the US dollar.

"I think that everything that seemed to really have overriding influence on the market today happened early," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "Primarily that was in the overnight trading because when we walked in today, the oil markets were up pretty nicely -- basically up on the old story about the dollar under pressure, and it seemed as if that was boosting some of the equities markets."

Rumors of Secret Talks Help to Spur Rally

Additionally, news sources reported today that major oil producers were holding secret meetings to discuss trading oil in currencies other than the US dollar.

"The story that they were pushing around this morning was about some secret meeting about the oil-producing nations of the Gulf and Russia, China, Japan and France trying to re-price oil in a basket combination versus the dollar -- and that sent the dollar sliding," Gene added.

The value of the dollar and the price of oil are typically inversely related because oil is traded in the US currency. When the value of the dollar drops, the price of oil is lower for investors using other forms of currency.

According to a report from Reuters, both Saudi Arabia and Russia denied the rumor. Despite this, the value of the dollar in early trading was weaker, although it gained strength later in the day.

Range-Bound Trading Continues

"The market did seem to have a little bit of profit taking as trading went on, but again it seemed like that coincided with the little downturn toward the middle of the afternoon in the equity markets, and the dollar also firmed up a bit," continued McGillian. "I think that everything that's been weighing in here the last three to six months is still there, and right now it looks as if some of the some of the economic-inspired arguments for an oil price of $70 seem to be holding sway again, at least temporarily."

Despite weakening fundamentals, the price of oil has been trading in a range based on economic data pointing to an economic recovery and an increase in energy demand.

"If you really step back and take a look at more pricing movements, we're still stuck between $67 and $73, and each side of the market is looking for arguments to try to break the market out to end this range trading," Gene explained. "From one week to the next, it seems the different sides seem to have a little more influence."

The bears in the market have been pushing the price lower based on weak fundamentals of over supply and a weakened demand, yet bulls look to growing Asian demand, a weakened dollar and improving economic data to spur a rally.

"Even though you might have the normal up tick in the fourth quarter or the first quarter seasonal demand, there isn't a strong enough sign that economic activity is really picking up in the United States and the West," McGillian contended. "Until that really happens, the market is really going to have trouble trying to post further gains on this year's rally."

The two sides of the market have ultimately kept the price of oil locked in a trading range for some months, despite a number of attempts to break out of it.

"What we’ll probably see is price volatility," Gene added. "The market won't move too far away from where it is unless something dramatic happens, and all of a sudden we start to see things really looking brighter in the Western economies."

Natural Gas Continues to Trade Near $5

The price of natural gas dropped slightly Tuesday on the NYMEX to settle at $4.880 per thousand cubic feet.

"It looks as if from some of the forecasts that we're going to have some much more normal temperatures later this week in the Midwest and next week in the Northeast," explained McGillian. "That has stimulated the idea that heating demand is just around the corner, and that's why the gas market has firmed up."

While industrial demand remains weak, domestic demand shows promise as the country heads into the winter heating season.

"A lot of the rally lately has been ascribed to the fact that you're seeing certain weather forecasts predicting much colder than normal winter weather, and that's going to stimulate demand," McGillian added.

Additionally, the EIA reported that natural gas production in the United States was set to drop at the end of this year and into 2010.

"I don't see any forecasts calling for some big up tick in industrial demand; so the winter weather forecast doesn't really play out unless it coincides with sharply falling production rates," McGillian concluded.