Crude Retreats to $77 on Wall Street Woes, Firmer Greenback

Shrugging off positive economic news for the day, Wall Street succumbed to broader financial worries, spurring a dragdown in equities which sent crude spiraling toward the lower end of its trading range on the New York Mercantile Exchange Thursday.

Rolling in a new contract on the NYMEX tomorrow, the price of light, sweet crude oil settled lower for December delivery at $77.46, slipping more than $2 from yesterday's final price tag. Trading for the January 2010 contract was slightly better, ultimately closing at $78.05 a barrel.

A combination of two things, "primarily from the financial side of the equation," helped drive crude down at the end of today's trading session, suggested Bill O'Grady, the chief markets strategist at St. Louis-based Confluence Investment Management LLC.

He explained, "You had a pretty substantial decline in global equity markets, with no obvious reason why equities declined, and that put a negative tone on crude oil. The other negative factor was that the dollar strengthened a little bit today."

Financial Market Continues to Sway Commodities

Crude's more-than 2% loss today is underscored by the fact that trading for the energy commodity has been pinned to the broader financial market's performance, as well as the primary factor continuously driving investors to and from the commodity market -- the U.S. dollar.

"The overall economic fundamentals haven't been terribly supportive for crude oil. But the reality is that these factors were known when oil was trading at $50 a barrel, so I think it has more to do with what's happening in outside markets," O'Grady reiterated.

"The key link to it all is uncertainty surrounding the viability of the dollar," the analyst revealed. "If analysts and investors felt comfortable that the U.S. was actually taking the dollar's behavior into account when setting policy, oil would be trading off of its own independent fundamentals than what is going on in outside markets."

"Right now," O'Grady emphasized, "investors are using commodities as a way to protect themselves from concerns about future inflation and losing the dollar's store of value function."

Natural Gas Swings into Positive Territory

Conversely, natural gas futures inched higher on the NYMEX Thursday, gaining .088 cents from yesterday's contract low to finally settle at $4.342 per thousand cubic feet.

Adding to the bearishness of underlying market fundamentals, the EIA reported that domestic natural gas storage rose 20 billion cubic feet, boosting the supply overhang to 3.8 trillion cubic feet in the week to November 13. Despite sluggish demand, especially due to above-average temperatures heading into the winter heating season, natural gas prices have remained grounded in a higher trading range between $4 and $5.

"The natural gas market had slightly-better-than-expected news today; inventory numbers came in close to expectations. But given the weather, I don't know if we will get any significant draws [in inventories] next week," O'Grady commented. "Going into December, we usually start to see big inventory declines, and if we don't get some colder weather," he warned, "it's going to be tough for those inventory declines to occur, which is a pretty significant risk."