Oil Comfortable Around $80, But Will Demand Rise?

Despite concerns over the pace of the economic recovery weighing on the markets yesterday, crude oil futures pared losses on the New York Mercantile Exchange Friday to close back near the $80-threshold.

Ahead of the weekend, the price of light, sweet crude for April delivery recovered by nearly 2% to settle at $79.66 a barrel. Natural gas spot prices at the Henry Hub also closed higher at $4.81 Mcf.

Today, traders were encouraged by an upward revision in U.S. gross domestic product for the fourth quarter; the economy reportedly grew faster than expected at 5.9%, fueling optimism for an uptick in energy demand in the near future.

"Crude is holding around $80 in what looks like an attempt to start its seasonal rally," said Darin Newsom, senior analyst with DTN, a market information service in Omaha, Nebraska.

"Starting in mid-February, we see the market rally about 34% up through mid-July," Newsom explained. "So the market is giving indications that that's what it wants to do. But, does it have the fundamental strength to really start its rally at this point -- there's still a lot of questions about that," the analyst contended.

Will Demand, Oil Prices Rise?

Nobuo Tanaka, head of the International Energy Agency noted Friday that so far this year, the global economic recovery has yet to strengthen demand for oil.

"Demand numbers have not been as strong as the macro economists say the economic recovery has been," the IEA executive director said in an interview with Dow Jones Newswires.

Newsom, however, believes that demand could potentially accelerate during the upcoming driving season, slated to begin at the end of May and peak in the summer months from June-July.

Oil prices will likely rise alongside growing demand. The price per barrel has already jumped more than 9% this month, according to Reuters' estimates, without fundamental demand as a driver.

"If the seasonal tendency of the market pans out, it could project out to a crude oil price in mid-July between $95-$100, but roughly around $96," Newsom advised.

"What's going to have to happen, though, is we will have to see stronger demand, which will probably have to come from the gasoline side of the equation," he continued.

"Could it happen? There's been some talk that we are going to return to 2007 levels for crude oil demand -- a lot of it coming from increased driving -- on the idea that the economy is getting better. It certainly remains a possibility given what we've seen in the market the last couple of weeks."