Commodities trading outlook: crude oil futures remain pressured by weak China data, natural gas up

Both West Texas Intermediate and Brent crude benchmarks remained pressured to the downside on Thursday as a slowdown in manufacturing growth in China fueled fears of softening demand in the worlds second biggest consumer. Continuing geopolitical tension in the Gaza Strip, Ukraine and Iraq kept a floor under prices. Natural gas extended its weekly advance amid short-term weather forecasts calling for mostly warmer-than-usual weather across most of the US.

On the New York Mercantile Exchange, WTI crude for delivery in October stood at $93.43 per barrel at 13:30 GMT, down 0.02% on the day. Prices shifted in a daily range between $93.80 and $92.50 a barrel, the lowest in 8-1/2-months. The US crude benchmark added 0.64% on Wednesday to settle at $93.45, snapping two days of losses.

Meanwhile on the ICE, Brent futures for settlement in the same month slid 0.55% to trade at $101.72 per barrel. The contract ranged between $102.29 and $101.21 a barrel, close to Tuesday’s 14-month low of $101.07. The European crude benchmark added 0.71% on Wednesday to close the session at $102.28 a barrel. Brent’s premium to its US counterpart narrowed to $8.29 from Wednesday’s close at $8.83.

Crude futures slid on Thursday after a preliminary reading provided by HSBC and Markit Economics showed that manufacturing activity growth in China slid in August to the lowest in three months. The Flash China Manufacturing PMI registered at 50.3 in August from July’s final reading of 51.7. At the same time, the Flash China Manufacturing Output Index slid to 51.3 from 52.8 in July, also a three-month low.

Output, new orders and new export orders increased, but at a slower rate, while employment in the sector decreased at a faster rate. China is the world’s second biggest oil consumer and will account for 11% of global demand this year.

In Europe, France’s manufacturing sector contracted at a faster pace, data by Markit showed, with France’s preliminary manufacturing PMI sliding to 46.5 in August from 47.8 in July. If confirmed, this would be the lowest since May 2013. Analysts had expected a flat reading. Values below the threshold of 50 indicate a contraction in the sector.

Germany’s manufacturing sector, however, outperformed economists’ projections, with the flash German manufacturing PMI registering at 52.0, compared to 52.4 in July, but beating predictions for a drop to 51.8. If confirmed, this would be the 14th straight month of expansion.

In the Eurozone as a whole, manufacturing activity growth fell to the lowest since July 2013. The flash manufacturing PMi slid to 50.8, trailing projections for a moderate drop to 51.3 from 51.8 in July.

In the US, jobless claims for the week ended August 16th fell by 14 000 to 298 000, the Labor Department reported, beating projections for a drop to 300 000 from the previous periods upward revised 312 000.

Oil prices, and especially Brent, were also pressured as Libya resumed exports from its largest port, boosting output to the highest in months, while OPECs top exporter Saudi Arabia raised its output to 10 million barrels per day in July

US inventories

Yesterday’s mixed US inventories data also failed to lift the oil market. The Energy Information Administration reported that total motor gasoline inventories rose for the first time in three weeks, having added 0.6 million barrels in the week through August 15th to 213.3 million, defying analysts’ expectations for a 1.4-million drop. Distillate fuel stockpiles, which include diesel and heating oil, fell by 1.0 million barrels to 121.5 million, compared to a projected 0.3-million decline.

US crude oil inventories fell by 4.5 million barrels last week to 362.5 million, beating analysts’ forecasts for a 1.75-million drop. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, rose to 20.2 million barrels from 18.4 a week earlier. Domestic crude production jumped to 8.577 million barrels of crude oil per day, up from 8.556 million last week and more than 1 million above year-ago levels.

Geopolitics

Fighting in eastern Ukraine continued with high intensity on Wednesday, as government troops battle with pro-Russian separatists. Battles left at least 34 civilians dead on Tuesday alone, the BBC reported, bringing the estimated death toll to over 2 100, while a further 5 400 people were injured.

Elsewhere, Israeli Prime Minister Benjamin Netanyahu pledged to see the military campaign in Gaza through “with all means necessary” and until the safety of Israel is secured, as Hamas-fired rockets continued landing in Israel on Wednesday.

The remarks come after yesterday the Israeli military bombed a residence in Gaza, presumed to house Hamas’ military leader Mohammed Deif. The strike left his wife and young son dead, while he was said to have been elsewhere at the time, sparing his life.

Early on Thursday, Israel carried out more airstrikes on houses in Gaza, killing several high-ranking Hamas commanders, the Palestinian authority said.

The latest exchanges of fire between Hamas, which controls Gaza, and Israel come after peace talks brokered by Egypt crumbled. The principal demand by Israel that Gaza must demilitarize is dismissed by Hamas, while Israel refuses to ease the blockade on the Palestinian enclave and demands it has control over its borders in any case.

The conflict in Gaza has claimed more than 2 000 Palestinian lives, mostly civilians, and 66 Israelis since flaring back to life some six weeks ago.

In northern Iraq, US military aircraft carried out fresh strikes against Islamic State insurgents, despite the groups threat to kill another captured American journalist. US Navy fighters and drones provided air support to Iraqi and Kurdish forces battling IS near the city of Mosul.

Natural gas

Natural gas rose on Thursday and extended its weekly advance amid short-term weather forecasts for mostly warmer-than-normal weather across the US through the end of the week. However, projections government data later today will show another larger-than-average build in US natural gas inventories, as well as extended forecasts pointing to cooler weather in the northern US, limited gains.

On the New York Mercantile Exchange, natural gas futures for settlement in September were up 1.26% by 13:30 GMT to trade at $3.871 per million British thermal units. Prices ranged between a one-week high of $3.995 and days low of $3.829, respectively. The energy source lost 1.39% on Wednesday to settle at $3.823, but was up almost 2.5% on weekly basis following Thursday’s advance.

Market players awaited the release of the Energy Information Administration’s weekly US natural gas inventories data. According to a Bloomberg survey, EIA’s report will likely show a build of 82 billion cubic feet (bcf), well above the five-year average gain of 48 billion bcf. NatGasWeather.com analysts expect a jump of between 82 and 86 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.

US weather outlook

According to NatGasWeather.com’s forecast for the August 21st – August 27th time span, the southern US will remain quite hot with highs well into the 90s extending as far north as the southern Plains and Tennessee Valley. The western parts of the country will have several weather systems track through with showers, thunderstorms, and cooler-than-usual temperatures. There will be several days of warm temperatures early next week over the Great Lakes where highs could establish at 90 degrees Fahrenheit for several days before dropping back to near or below normal.

The northern US will also see milder weather systems carrying heavy showers and thunderstorms. A much cooler system will push into the northern Rockies and Plains, bringing highs down to the 60s and 70s. Overall, nationwide cooling demand during the next seven days will be moderate compared to normal.

According to NatGasWeather.com’s August 28th – September 3rd weather outlook, an expected Canadian weather system with showers and below-usual readings will enter the US and sweep across its northern areas. It will push moderately deep into the central US, lowering temperatures to comfortable levels. The first wave of cooler Canadian air has already tracked across the northern Rockies and Plains, and will stall there for several days.