Commodity Futures Subside with Gulf Winds, Market Awaits EIA Data

Oil prices lost steam earlier today as the threat of a recent tropical storm evaporated and U.S. producers began to recommence operations from offshore installations in the Gulf of Mexico. However, the price per barrel of crude oil pared a $2-loss from Tuesday morning's lows to settle back near $79 on the New York Mercantile Exchange in spite of a stronger U.S. dollar.

Closing only 38 cents less than yesterday's final price tag, crude oil for December delivery traded down to $79.05 a barrel on the NYMEX today.

"I think a lot of yesterday's rally was driven by worry about Ida, and the market was helped to some extent by the strong rally in equities," reflected chief markets strategist Bill O'Grady at St. Louis-based Confluence Investment Management LLC, an advisory and management firm.

Oil Market Awaits Weekly Inventory Data

Although Ida has passed without any reported material damage in the Gulf, nearly 43% of U.S. oil production and 28% of natural gas production remained offline Tuesday, according to the MMS.

"There is a legitimate worry about the outage, and you're going to see some disruption in next week's DOE report," the analyst noted. "We'll probably cut a little bit of oil from inventory."

Ahead of this week's inventory report, the U.S. Energy Information Administration revised its 2010 forecast for crude oil demand up by 160,000 barrels per day, but trimmed its demand estimate for the world's largest energy consumer.

When news of bearish underlying fundamentals, such as ballooning inventories, hits the market each week, near-term energy prices usually come under pressure. Regardless, the energy commodity is still being purchased as a viable asset at new record prices for the year. 

O'Grady explained, "Consumption fundamentals are very weak; product inventories are high, demand is still very slow and it's pretty obvious in most of the product markets that we're sitting on significant excess inventories, especially compared to consumption."

"But commodities in general, and oil in particular, have become an asset class, so investors are putting money into these markets really as a form of savings," the analyst revealed.

"I know a lot of analysts rail on the whole idea that the fundamentals don't justify the [oil] price here, but the reality is that this investment demand is a new fundamental," O'Grady stated.

Natural Gas Sweats Out November Injection Season

Natural gas futures also fell back into negative territory Tuesday, ultimately settling at $4.467 per thousand cubic feet on the NYMEX, or 20 cents less than Monday's close.

O'Grady points to the impact of a warmer November on the natural gas market leading into the official heating season on Dec. 1.

"Every day that this warm weather lasts, the more consumption is lost, and in a market that is sitting on a pretty significant supply overhang, we're going to need a pretty cold winter just to get inventories down to a manageable level," O'Grady said.

"The longer the weather stays mild, the more prices will stay bearish," the analyst concluded.