Commodities trading outlook: crude oil rebounds off multi-month lows, natural gas slides

Both West Texas Intermediate and Brent crude benchmarks rebounded off multi-month low levels as their recent drop was seen excessive ahead of an expected drop in US crude oil, gasoline and distillate fuel inventories. Persisting geopolitical tensions in the Gaza Strip and Ukraine kept the market supported but a strong dollar and successful military actions against Islamic State insurgents in Iraq pressured prices down. Natural gas fell ahead of a government report poised to show another larger-than-average build in nationwide inventories.

On the New York Mercantile Exchange, WTI crude for settlement in October stood at $93.09 per barrel at 12:22 GMT, up 0.25% on the day. Prices held in a daily range between $93.29 and $92.73, close to Tuesday’s 8-1/2-month low of $92.62 a barrel. The contract lost 0.95% on Tuesday after shedding 1.65% on Monday, closing the session at $92.86.

Meanwhile on the ICE, Brent futures for delivery in the same month added 0.32% to trade at $101.89 a barrel, having ranged between $102.37 and $101.44, close to Tuesday’s trough of $101.07, the lowest since June 26 2013. The European crude benchmark traded at a premium of $8.80 to its US counterpart, down from Tuesday’s settlement at $8.70.

According to a weekly Bloomberg survey ahead of the government data, crude oil inventories are expected to have declined by 1.75 million barrels in the seven days through August 15th. Gasoline stockpiles are anticipated to have dropped by 1.55 million barrels while distillate fuel supplies, which include diesel and heating oil, probably slid by 300 000 barrels.

The American Petroleum Institute’s private report showed on Tuesday that US crude supplies fell by 1.4 million barrels last week, while distillate fuel inventories decreased by 568 000 barrels. Gasoline inventories, more closely watched during the peak summer driving season, fell by 2.1 million barrels. Supplies at the Cushing, Oklahoma, hub rose by 1.7 million barrels. APIs data, however, is considered less reliable than EIAs numbers as it is based on voluntary information from operators of refineries, pipelines and bulk terminals, while the government agency requires the filing of reports.

A stronger dollar weighed on dollar-denominated commodities, including oil. The US dollar index, which measures the greenback’s strength relative to six major trading peers, held close to a 13-month high of 82.170 which was touched earlier in the trading session.

Market players also eyed the upcoming release of Feds July meeting minutes, as well as the annual meeting of central bankers in Jackson Hole, Wyoming that begins on Thursday. Fed Chairwoman Janet Yellen speaks on Friday and could possibly give a clue of when the central bank may hike interest rates.

Geopolitical tensions

Oil prices were pressured down after Iraqi forces and Kurdish fighters managed to retake the Mosul dam with the help of US air support and are seeking to reverse Islamic State militants’ advance through northern Iraq.

Faleh al-Issawi, the deputy head of Anbar provincial council in the west, said, cited by Bloomberg, that around 100 rebels were killed and 50 vehicles destroyed in the three days of air strikes conducted by US air forces.

President Barack Obama said on Monday that the US will continue limited air strikes against the rebels.

Civil unrest in Iraq, OPEC’s second-largest producer, has so far failed to disrupt oil output in the southern parts of the country, which accounts for around three quarters of nationwide production.

Also pressuring down oil prices, a spokesman for the Libyan National Oil Corporation said nationwide crude output has risen to 562 000 barrels per day this week from 535 000 bpd during the weekend.

However, despite the current success of the military campaign in Iraq, continuing unrest in OPEC’s second-largest oil producer, as well as persisting tensions in Ukraine and the Gaza Strip will keep the market supported to some extent. Islamic State insurgents released a video on Tuesday showing the beheading of US journalist James Foley and threatening to kill another US journalist, saying his life depends on how the US acts in Iraq.

In the Gaza Strip, an extended truce was broken on Tuesday as Israel responded to rocket fire. Israel said that around 50 rockets were fired from Gaza yesterday and 20 more were launched on Wednesday but no injuries have been reported. A Hamas official in Cairo said Israel in turn had been targeting Mohammed Deif, the head of its armed wing.

Local medics said that eight people, allegedly from the same family, were killed by an Israeli strike in central Gaza on Wednesday morning and, according to officials, around 100 Palestinians have been wounded since the truce ended. In all, more than 2 000 Palestinians and almost 70 Israelis have been killed since Israel began its attacks on Gaza on July 8th.

Ukraine

Heavy fighting and street-to-street battles were reported from Luhansk, one of two remaining pro-Russian separatist bastions. The Ukrainian military said advances have been made in Luhansk, and Kiev now controls one of the districts. Several smaller towns were also captured.

Civilians are reported fleeing by the thousands daily, with several hundred thousand already displaced by the conflict, while the death toll has climbed to over 2 000, the United Nations said.

A civilian convoy, evacuating wounded non-combatants, came under attack on Monday, killing at least 17 people, Kiev said. The convoy was escorted by Ukrainian military and was not moving in an established humanitarian corridor. Kiev accused the rebels of the attack, while separatist leaders put the blame on the Ukrainian military.

Meanwhile, Ukrainian sources said another convoy of dozens of Russian armored vehicles entered rebel-held territory late on Tuesday, after 2 other groups of Russian military machines were detected, one destroyed by Ukrainian forces.

Natural gas

Natural gas traded mostly lower on Wednesday ahead of government data poised to show on Thursday that US natural gas inventories rose almost two times the average in the week ended August 15th. Weather forecasts pointing to warmer-than-usual weather across most of the US through the end of the week limited losses.

On the New York Mercantile Exchange, natural gas for settlement in September was down 0.85% to trade at $3.844 per million British thermal units at 12:25 GMT. Prices held in a daily range between $3.888 and $3.828 per mBtu. The contract added 2.2% on Tuesday to close at $3.877 after falling to a nine-month intraday low of $3.727 on Monday.

According to a Bloomberg survey, EIAs report will likely show tomorrow that nationwide inventories rose by 82 billion cubic feet (bcf), well above the five-year average gain of 48 billion bcf. NatGasWeather.com analysts expect a build of around 85 billion cubic feet. Next week’s inventory report is also projected to come in well bearish, albeit leaner than recent ones, with injections sharply exceeding average values.

Weather outlook

According to NatGasWeather.com’s August 20th – August 26th weather forecast, a large number of warmer weather systems will track across the US this week, carrying showers and thunderstorms. They will allow temperatures over the northern US to gradually rise into the upper 70s and lower 80s, boosting nationwide cooling demand to moderate compared to normal. At the same time, the southern parts of the country will remain quite hot with highs well into the 90s spreading over the Plains and Tennessee Valley. The West will also be warm but several weather systems will track through, bringing showers and cooler-than-average readings. Despite the nationwide warm-up, there will be enough weather systems carrying cooler temperatures across the US to ensure another larger-than-average build in inventories next week.

In the August 27th – September 2nd time span, NatGasWeather.com projects that a Canadian system with showers, thunderstorms and below-seasonal temperatures will pass through the central US, bringing cooling demand to lower than usual. The southern and western US will remain very warm with highs well into the upper 90s and lower 100s, driving regionally strong cooling demand.