Oil Price Rises with OPEC Demand Forecast, Natural Gas Falters

Making additional gains Tuesday, the price per barrel of crude oil climbed to more than $74 during intra-day trading on the New York Mercantile Exchange, but fell short of breaking the $75-high for 2009. On the other hand, natural gas crested $5, but fell nearly 30 cents from Monday's close.

After rallying to an intra-day high of $74.47, the price of light, sweet crude ultimately settled at $74.15 on the NYMEX Tuesday, a gain of 88 cents from yesterday's close.

Helping to boost the market's spirits today, OPEC revised its global oil demand forecast for 2010. Additionally, the value of the US dollar fell to a 14-month low against other international currencies, which spurred investors toward commodities and helped gold rally to a new high.

Weaker Dollar, Investors Buoy Prices

While today's oil prices were buoyed by enthusiastic buyers, investors are still maintaining a realistic outlook concerning the pace of the economic rebound. Incoming quarterly earnings reports from US firms are elevating concerns about whether stronger earnings predictions for the quarter may be too optimistic.

U.S. weekly oil inventory data due this week from the American Petroleum Institute (API) and the Energy Information Administration could tell the tale of another build in stockpiles, as market fundamentals remain bearish.

"I don't think the oil price is based on huge changes in the underlying fundamentals," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska.

Newsom continued, "I think the biggest thing we have supporting the oil price and keeping it going is the investment money coming in. I just don't think it's a supply-driven market. It's a fresh-demand driven market, and what we're seeing is that the weakness in the dollar is creating these inflationary fears, and the way to combat inflationary fears is to buy into commodities."

OPEC's Oil Demand, Dow Jones Uptick

Today, OPEC announced its raised expectations that a recovering world economy will stimulate a growth in crude oil demand by 700,000 barrels per day next year, to 84.93 million bpd. The oil cartel had previously announced its demand forecast for 2010 at only 500,000 bpd.

According to OPEC's monthly market report, "The world economy now appears to be entering into a new phase, moving from a period of containing the crisis to one of economic recovery."

"I think it [OPEC's forecast] was a bit optimistic," Newsom contended. "I think the market reacted kind of how crude oil normally reacts, and that is it chases headlines."

"Now, if the Dow Jones continues to rally, and let's say it gets up over 10000 points, then I think by the end of the year we'll see crude oil pushing towards $90. On the other hand -- with October being a critical month for the Dow -- if it fails to go above 10000 and starts to break down, say in the middle to latter part of October, I think it's going to pull crude oil and possibly some of the other markets with it. Right now, with the weakness of the dollar and with the overall trend of the Dow, I'm going to say we will go above 10000 and crude oil is going to go above $75, setting it up for a fourth quarter rally," Newsom predicted.

Natural Gas Price Rally Freezes 

Natural gas closed at $4.588 per thousand cubic feet during trading on the NYMEX Tuesday, or nearly 30 cents lower than yesterday's close.

While recent gains pushed the energy commodity close to $5, bearish underlying fundamentals cannot support a higher price for natural gas.

"On the other hand, you have a long-term buy signal on the charts at the end of September, meaning it's going to pull some money into this market, which many view is undervalued in comparison to other markets in the energy sector," Newsom explained.

"So, you've had some investment buying coming in, helping to support natural gas, but when there are weaknesses, when there are days when those traders don't show up, this market is going to have 20 or 30 cent sell-offs because there's no fundamental support to it, there's not that supply-and-demand tightness, or not even a hint of increased demand tightness of supply to help support the natural gas market, so it tends to fall down relatively quickly," he said.

"Longer term, maybe we'll see that change, and maybe we'll see the underlying fundamentals change, but it hasn't happened yet."