Market Report: Oil May Break Down to Old Trading Range as Focus Shifts

Maybe when the Energy Information Agency came out with their price projections for now until the end of the year in their latest Short-Term Energy Outlook, they should have adjusted for inflation. Or at the very least they should have adjusted for the dollar. I am only half kidding. The EIA predictions might have been right on when the dollar was falling out of bed, saying the price of West Texas Intermediate crude oil will average about $76 per barrel this winter which is through the October-to-March period. Of course remember they made this prediction before the beleaguered dollar started to show some life. They also did most of the work prior to the better than expected monthly jobs report.

Now with oil more focused on weak demand growth and an improving employment picture, oil seems to have broken down to its old trading range which is more likely between $75 and $65. Further out the EIA said the monthly average will dip to $75 early next year then rise to $82 per barrel by December 2010 on the assumption that U.S. and world economic conditions continue to improve. Yet are they right about that last statement? Will oil go higher if the economy in the US and the world improve or is it possible we may still go lower?

Remember that the major reason oil is trading anywhere near current levels is because of the weak dollar. As the economy improves, interest rates will go up and that should put pressure on oil. The price of oil, like the economy as a whole, is being supported by outside means. Even the former peak oil bulls and other formerly wildly bullish analysts are coming to that same conclusion. The economy and the price of oil have training wheels on. At some point when the Fed gets some confidence that they can stand on their own, those wheels will come off. When they do we know there will be a fall in price but then eventually the price and the economy will start to ride on its own. Still the EIA forecast for US GDP is a modest 1.9 percent in 2010 and world oil-consumption-weighted real GDP grows by 2.6 percent. Perhaps they feel that this growth is not going to be enough to see much higher interest rates.

Today, oil is getting a boost by a surprise drawdown in crude supply as reported by the API yesterday. The API reported that crude oil supplies fell by a shocking 5.82 million barrels. Now I know at this time of year the industry likes to draw down supply for tax purposes but 5.82 million barrels stills seems like a pretty big drop. Distillates, according to the report, rose by 1.01 million barrels and gas supply fell by 753,000 barrels.

That brings us back to the Short Term Energy Outlook. The EIA says that rising crude oil prices contribute to an increase in the annual average regular-grade gasoline retail price from $2.35 per gallon in 2009 to $2.83 in 2010, as pump prices approach $3 per gallon during next year's driving season. Projected annual average diesel fuel retail prices are $2.46 and $2.96 per gallon, respectively, in 2009 and 2010. Average household expenditures on heating oil this winter are expected to increase to $1,911 from $1,864 last winter. Projected average household expenditures for propane of $1,700 this winter are almost 13 percent lower than last winter's $1,950.

For natural gas the EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $4.62 per thousand cubic feet (Mcf). This represents a $0.67-per-Mcf increase from the estimated 2009 price of $3.95 per Mcf. Natural gas working inventories reached a new record-high level of 3.837 trillion cubic feet (Tcf) on November 27 as mild weather throughout much of the country contributed to uncommon storage builds for most of that month. Projected average household expenditures on natural gas total $778 this winter, compared with $889 last winter.