Commodities trading outlook: crude oil and natural gas futures

WTI and Brent futures were lower during afternoon trade in Europe today. Both contracts scored gains last week, as Islamist militants battled security forces in Iraq, OPECs second-top oil producer. Meanwhile, natural gas futures were lower, as weather forecasts project cooler weather over parts of the northern US, lowering power demand outlooks.

West Texas Intermediate futures for settlement in August traded for $106.31 per barrel at 14:24 GMT on the New York Mercantile Exchange, down 0.49%. Prices ranged from $106.15 to $107.45 per barrel, reaching a nine-month high. The US contract added about 0.6% last week.

Meanwhile on the ICE in London, Brent futures due in August stood for a 0.53% drop at $114.20 per barrel at 14:24 GMT. Daily high and low stood at $115.66 and $113.86 per barrel, respectively, nearing an 18-month peak. Brent’s premium to WTI stood at $7.89, after last week’s closing margin of $7.98. The European contract gained more than 2% last week.

Iraq

Sunni militants, led by a group of extremists called ISIS (Islamic State in Iraq and the Levant), continued fighting security forces over the weekend, capturing a strategic border crossing into Syria. Also, the key town at Tal Afar and its airport have reportedly fallen to Islamist fighters, in addition to more towns in predominantly Sunni regions.

Meanwhile, US Secretary of State John Kerry visited Iraq and held talks with senior politicians and community leaders in Baghdad. Iraqi Prime Minister Nouri Maliki reportedly asked for US airstrikes against insurgents, with Mr Kerry expressing concern about civilian casualties, according to the BBC.

“The south of the country is not beyond the geographic reach of extremist groups seeking to undermine the government,” analysts at Barclays said in a note, cited by Bloomberg. “We believe that any significant uptick in unrest in the south, even if oil facilities were spared, would likely accelerate the exodus of foreign oil workers out the country.”

Authorities assured that the military were in control of the refinery, and that the militants were being pushed back. The government also insisted insurgents do not threaten Baghdad, nor the southern oilfields, which account for 90% of Iraqi oil output.

Iraq is OPEC’s second-top oil producer, and exports some 3 million barrels per day from its main southern terminal at Basra.

Demand outlook

HSBC released its preliminary reading on China’s manufacturing PMI for June earlier today. The figure surprisingly beat expectations to stand at 50.8, logging the first monthly expansion in the factory sector since January. Later this week, Chinese industrial profits will be reported on Friday.

The industrial sector accounts for nearly half of Chinese GDP, while China itself consumes about 11% of all oil in the world.

Also, the Eurozone, which accounts for 14% of total oil consumption, reported preliminary PMI for June earlier today. Both services and manufacturing in France contracted more than expected, with readings at 48.2 and 47.8, respectively. A reading of 50 or higher means expansion, and vice versa. The greater the distance from 50, the more sizable an expansion or contraction.

Germany also logged worse than expected, with services PMI at 54.8 and manufacturing at 52.4. The Bloc as a whole posted readings between those of its two main economies, with services PMI at 52.8 and manufacturing at 51.9. About 70% of EU GDP is generated in the services sector, with industries adding about 27%.

The US, which account for 21% of global oil demand, posted housing data today. The existing home sales annualized rate has increased by 4.9% on a monthly basis in May, after 1.3% in April, for a figure of 4.89 million since a May 2013. New home sales for May will be reported tomorrow, with expectations of gains there as well. The real estate sector accounts for 13% of US GDP.

Consumer confidence in the Eurozone and in the US will also be reported tomorrow. The German Ifo institute will probably reveal steady sentiment for the EU for July, with expectations for a standing of 110.2, after 110.4 in June. Meanwhile, the Conference Board is set to unveil growing confidence in the US for July, with a forecast reading of 83.5, after 83.0 in June.

Natural gas

Front month natural gas futures, due in July, dropped 1.30% at the New York Mercantile Exchange to trade for $4.472 per million British thermal units at 14:26 GMT today. Prices ranged from $4.461 to $4.577 per mBtu. The contract dropped lost about 4.5% last week, after another sizable gain for US inventories was reported.

Natural gas extended its weekly decline on Thursday after the Energy Information Administration reported a larger-than-projected build in US natural gas inventories during the week ended June 13th. The log revealed a gain of 113 billion cubic feet, while analysts at NatGasWeather.com had suggested a 105-110 Bcf injection. The 5-year average gain for the week is 85 Bcf. Inventory levels remain 29.1% below last year’s readings for the same week.

However, movement to the downside is expected to be limited as the US enters the summer season when high temperatures spur electricity demand to power air conditioning, with power stations accounting for 30% of US natural gas consumption. The above-normal temperatures over the US recently will probably dent gains in the following report this week, which will cover the seven days ending June 20.