Surprising Upturn for the Energy Sector

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"There's shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand."

For those of us who've been waiting for oil and natural gas to move higher, this week has rewarded our almost-exhausted patience.

This has been a rally I anticipated and it wouldn't surprise me to see oil test the $60 level and Natural Gas try to break through the $4.50 level. These are the higher ends of the trading range I spoke of in my last article about the energy sector.

The government continued to issue reports this week that influenced energy prices, but in which direction depended largely on how the data were interpreted.

For example, the Energy Information Administration said America's oil surplus grew less than expected, which typically gives energy prices a boost. But levels rose nonetheless, meaning storage houses were bloated with more crude than has been seen in nearly 19 years. Growing levels of unused crude in most cases would drive energy prices down.

In addition, the government said refineries have cranked up operations a bit more. But it also said American petroleum consumption has dropped to its lowest level in a decade.

Then on Friday, the U.S. Labor Department said that employers cut 539,000 jobs in April. That was less than expected and the smallest reduction in six months. However, the U.S. unemployment rate climbed to 8.9%, the highest since late 1983.

For most of us, a sustained rise in energy prices seems hard to justify. Short of some sudden and unanticipated disruption in supply, I would expect energy prices to top out in the next two weeks and then start heading down to the lower end of the range.

"There's shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand," analyst Phil Flynn said in a client note. "Traders are calling me and are stunned with no idea of what is happening."

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