Crude Futures Retreat from High of $80, Natural Gas Soars Above $5

After rallying for eight consecutive sessions over the past week, crude futures retreated Tuesday despite flirting with $80 during earlier trading on the New York Mercantile Exchange. Oil prices ultimately came under pressure from today's rise in the greenback's value, coupled with a slide in the stock market.

On the other hand, the price of natural gas recovered after paring losses from a high of $5, settling more than 30 cents above that price at the close of Tuesday's session.

As the November crude contract expired today, the price of light, sweet crude oil settled at $79.09 on the NYMEX Tuesday, down 52 cents from yesterday's close and falling below both an intra-day and yearly high of more than $80 a barrel. Settling only a few cents higher than November's contract, crude futures for December delivery also dropped from a high of $80.40 to $79.12 a barrel.

"It's almost a technical stopping point around the $80-level. A lot of the rally was based on dollar weakness, and now it appears that the fundamentals are coming back in with excess supply and there's no real reason for oil to keep going back up," commented Brian Uhlmer, a research analyst with Pritchard Capital.

"Without a real fundamental demand driver, it's hard to get any massive legs behind this recent rally," the analyst reiterated.

Fundamentals Keep Oil Prices Down

Today, the US dollar rebounded from a 14-month low against a basket of international currencies. For the past eight trading days, Wall Street's optimism, as well as a consistent decline in the dollar's value, recently spurred oil prices to new heights, but a reversal in these factors have sent prices back into negative territory.

Some analysts had predicted that oil's rally in prices would continue toward a new target price range. However, others argued that the rally would be short-lived, since it was primarily being driven by a weaker dollar and nothing more.

"Even the massive producers of OPEC are not in favor of oil going back up to $100 a barrel," Uhlmer noted. "They believe that oil prices reaching that high could hamper the economic recovery," Uhlmer said, citing yet another reason why the rally ended.

The analyst doesn't see the price per barrel of crude oil soaring toward $100 or even $90 any time soon, since, as data released weekly by the Energy Information Administration continues to indicate, the U.S. is sitting on ample supplies accrued during the worst of the economic downturn. This bearish fundamental underlies the fact that demand has not picked up enough to justify higher oil prices.

Until we get rid of excess capacity and excess supply, a huge rally in oil prices cannot be sustained, Uhlmer contended.

Natural Gas Price Gears Up for New Rally

Recording new gains this week, natural gas closed at $5.161 per thousand cubic feet on the NYMEX Tuesday as anticipation for an uptick in seasonal demand helped the energy commodity rally past its recent high once more.

Although natural gas prices have remained rooted below $5 for months, Uhlmer believes that prices have more room to grow and will surely rise above $6 in 2010.

"I think natural gas is going to average $6.50 next year, with the market breaking $6 by March and possibly spiking above that. We're starting to see production roll over, and right now the weather is also helping out. People are anticipating that this could be a very cold winter, which will help draw down storage faster," Uhlmer said.

"Not to mention that we're seeing some economic increases, whether it's in the automotive sector or specialty chemicals," the analyst continued.

"A variety of people have reported earnings that have beat out estimates to make people think that demand for natural gas from the industrial side could also increase, which is a fundamental driver for higher prices," Uhlmer concluded.