Crude Rebounds Above $70 Ahead of EIA Inventory Report

Defying a stronger dollar, as well as ending a nine-day losing streak on the New York Mercantile Exchange, oil prices were lifted above $70 Tuesday on the expectation that tomorrow's government data will support an anticipated decline in crude stocks to offset a previous build.

Rising ahead of the Energy Information Administration's weekly inventory report, the price of light, sweet crude oil for January delivery gained more than $1 to settle back into positive territory at $70.69 a barrel. The front month January crude oil contract is set to expire on the NYMEX tomorrow.

Still burning bright on the commodity market, natural gas spot prices at the Henry Hub made additional gains on Tuesday, ultimately riding high at $5.523 per thousand cubic feet.

Additionally, a more optimistic OPEC slightly raised its growth forecast for world oil demand in 2010, ahead of the oil cartel's meeting on Dec. 22.

Will Market See Fall in Crude Supplies?

As a dollar-denominated commodity, crude oil is inversely affected by the U.S. currency's rise and fall against a basket of international currencies. Today, trading for the energy commodity broke away from the effects of a strengthening greenback, which typically spurs investors away from riskier markets, as market participants were encouraged by a potential cut in a massive supply overhang.

"We've knocked crude down for nine sessions in a row, so we saw a bit of a bounce today in commercial buying on the idea that the market may see crude stocks drop a bit," noted Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska. "But I'm not convinced of that," he contended.

For the past nine trading days, the bullish optimism propelling the market forward and oil prices higher lost its momentum as investors instead focused on increasingly bearish underlying supply-and-demand fundamentals on the domestic front. Today, optimism was again stoked by a Reuters analyst survey predicting a drop in crude supplies by 1.8 million barrels last week. Newsom isn't so sure this will play out when the EIA releases its data on Wednesday. 

"With a $2 contango in this market, I think that indicates stocks should, longer term, continue to build. Overall we're not in a tight supply situation by any stretch of the imagination," the analyst pointed out.

Echoing other analysts' estimations that the energy commodity was recently overpriced at this year's record highs near $80, Newsom said, "What's interesting to me is that even as we were working below $70, the contango continues to strengthen, certainly indicating that the [crude oil] market is still overvalued at this point."

"We could still work in the mid-60s to upper 50s and find support in that range -- maybe at that point, the spreads will start to come back together," Newsom advised.