Supply-and-Demand Factor Catches Up with Oil Prices

Oil plunged to a new contract low on the New York Mercantile Exchange Monday as the Federal Reserve's Chairman underscored the U.S. economy's vulnerable condition, spurring energy traders to weigh in on the reality of the crude oil market's weak underlying fundamentals in spite of last Friday's positive economic news.

Moving just under its months-long trading range between $75 and $80 on the NYMEX, the price of light, sweet crude oil for January delivery tumbled more than $1 less than Friday's final price tag to settle at $73.94 a barrel. Conversely, natural gas spot prices at the Henry Hub traded higher on the NYMEX today, rising above $4.50 per thousand cubic feet.

"Ben Bernanke gave gold a bounce, but his words about low interest rates didn't seem to filter over to the oil market, and I think the oil market just felt a little technically heavy today," noted Phil Flynn, vice president in charge of research at PFGBest in Chicago.

Fed Chairman's Comments Suppress Risk Appetite

Federal Reserve Chairman Ben Bernanke said Monday that because the U.S. economy remains in a fragile state, the Federal Reserve is considering an extended period before it increases interest rates.

With interest rates currently at record lows near zero as a result of low inflation and high unemployment, oil prices and the dollar's value have increasingly forged an inverse relationship that has sent investors either seeking safe-haven in the dollar or purchasing risky commodities with renewed vigor to hedge against inflation.

On Friday, however, a better-than-expected jobs report showed unemployment dropping to 10% last month, which stoked speculators' predictions that the Fed would potentially mark up rates soon, and also added some heft to the U.S. currency's weight against a basket of foreign currencies.

Bernanke's sober emphasis that the U.S. economy will still be in a recovery stage next year -- growing at a moderate pace due to a weak labor market and fiscal lending situation -- today brought oil demand into the spotlight and oil prices under pressure.

Since oil prices have risen on macroeconomic news for much of this year, Bernanke's comments redirected the market's attention back to its supply-and-demand fundamentals.

Oil Market Eyes Brimming Inventories

Crude oil products have booked record highs for 2009 as the world's top oil consumer has failed to initiate a significant drive up in demand.

Last week's inventory report indicated another rise in inventories for the previous week, and a preliminary report by Reuters concerning last week's domestic stocks issued today predicts an additional increase in supplies.

Furthermore, various OPEC members have reaffirmed in statements directed to the market ahead of a meeting on Dec. 22 that the oil cartel intends to keep output unchanged due to burgeoning onshore stockpiles and an estimated 165 million barrels of crude oil and refined products in floating storage.

"I think the oil market is starting to disconnect a bit from some of these other [dollar-related] fundamentals in order to focus more on the weak demand/ high supply situation," Flynn contended.

"The supply side of the equation is starting to weigh on traders' minds now that the macroeconomic picture isn't quite as dire as it was before."