Volatile Trading Results in Flat Day for Crude, Natural Gas

After a more than $2 rally yesterday, the price of crude oil attempted to climb again today, hitting an intra-day high above $72 on the New York Mercantile Exchange, only to drop back to where it started. Managing to hold onto its recent gains, the price of natural gas fell a bit after hitting $5 yesterday.

After climbing to an intra-day high of $72.24 on the NYMEX Friday, the price of crude oil settled back down to $71.77, just 8 cents above yesterday's close. Mixed economic news kept the price from moving very far either way.

"Today it was kind of a mixed bag -- it was a volatile day going both ways," commented Phil Flynn, vice president in charge of research for PFG Best in Chicago. "The bulls and the bears duked it out all day long, and at the end of the day we closed pretty flat."

Coinciding with an up tick in expected demand from the US Department of Energy's EIA, the International Energy Agency today raised its expectations for world oil demand moving forward due to a perceived faster economic recovery.

Also, the US Federal Reserve Chairman Ben Bernanke stated today that as the economy recovers, economic stimulus will have to be eased.

Market Movements Based on the Dollar

"Really, this entire week has been the dollar and whether or not the Federal Reserve is going to be able to raise interest rates any time soon, and really that impacted the prices all week," Flynn explained.

Should the Federal Reserve raise interest rates, the value of the dollar will be bolstered. The price of oil and the value of the dollar share a strong inverse relationship.

"We had a wildly bearish inventory report; we are blowing away the five-year average on supplies," Flynn stated. "The market is just over supplied, but that didn't matter because the dollar hit an 18-month low yesterday that drove oil prices higher."

In its weekly inventory report the DOE's EIA revealed a build in both gasoline and distillate stockpiles, which proved bearish for oil prices that day. Ultimately, the devaluation of the dollar prevailed, and oil rallied the rest of the week.

"The key going into next week is the dollar," Flynn added. "Are they going to find some stability, or is the market going to go down?"

Investors tend to buy oil when the value of the US dollar is low as a hedge against inflation. Additionally, international investors holding other currencies are able to purchase oil at a better price when the value of the dollar is lower.

"Right now, it's all about the confidence in the dollar," Flynn explained. "If the market gets confident that the dollar is going to get stronger, I think oil prices have a long way to fall. But if the dollar continues to get whacked, people are still going to seek safe haven, and I think oil futures are going to be a place where they are going to run."

Economic Shift

While the US economy just emerged from the worst recession in decades, much of the economy has been buoyed by an aggressive economic stimulus. As the economy recovers, this stimulus spending in the US will curtail.

"Because we know that when the Fed raises rates, it will give strength to the dollar, that will offset some of the bullishness of people saying, 'Hey, they're raising rates; the economy is getting better, therefore demand will go up,'" Flynn contended. "I think that what's really going to happen is the market is going to get hit pretty hard, and then low prices will inspire a rally later on."

For the last several months, the price of crude oil has been supported beyond the supply and demand fundamentals in the market by positive economic news that feeds an economic optimism and a hope that energy demand will increase.

"It's going to be a very interesting time for oil because we're going to get into a situation where good news in the economy might be bad news for oil -- because good news in the economy means we're closer to raising interest rates, and therefore that may push the market back down," Flynn continued. "Recently, of course, good news for the economy has been bullish for oil because it's driven the price up."

The shift away from stimulus spending will spur a shift in the way positive economic news affects the price of oil, contends Flynn.

Natural Gas Bobbles, Keeps Strength

In trading on the NYMEX Friday, the price of natural gas fell some 19 cents to settle at $4.770 per thousand cubic feet. The commodity has experienced a dramatic rally, doubling in price and rescuing natural gas from seven-year lows just weeks ago.

"Natural gas, it really had its day in the sun," Flynn commented. "It blew off that record storage and tried to rally; it was influenced by the weather, and it was influenced by the strong oil prices."

The rally is despite bearish fundamentals, including record inventory levels in the US. In fact, the price of natural gas climbed above $5 intra-day trading yesterday, the first time since January 2009.

"At the end of the week, people are realizing we have plenty of natural gas," Flynn explained. "With oil prices stabilizing, people decided to take profits because they didn't want to wait until Monday if temperatures weren't quite as cold as people thought they might be."

The impending winter weather demand has helped to push the price of natural gas, despite record stockpiles.

"We could be in for a big sell-off," Flynn concluded.