Commodities trading outlook: crude oil and natural gas futures

WTI and Brent futures remained pressured during midday trade in Europe today, amid growing tensions in Ukraine and downbeat factory gauges in China, the worlds second-top oil consuming economy. Meanwhile, natural gas futures were also in the red, correcting some of the significant gains of last week.

West Texas Intermediate futures for delivery in October traded at $95.76 per barrel, down 0.21%, at 13:26 GMT on the NYMEX. Prices ranged from $95.52 to $95.91 per barrel. The US benchmark added 2.4% last week.

Meanwhile, October Brent on the ICE in London, stood for a 0.15% drop at $103.04 per barrel. Daily low and high were $102.82 and $103.30 per barrel, respectively. The contract’s premium to its US counterpart widened to $7.28. The European brand added ~0.9% last week.

Ukraine

Tensions in embattled eastern Ukraine flared up last week, after the Russian military was seen directly helping the pro-Russian rebels with manpower and hardware, pushing the Ukrainian army on the defensive.

A coastal town at the border on the Azov sea coastline, well away from the rebel’s positions, was captured by pro-Russian forces including many armored vehicles, presumably Russian military, opening up a new front for the fight.

Meanwhile, the Kremlin denied allegations of involvement. It should be noted that in previous wars Russian officials had denied such allegations, which turned out to be true. In March this year, Russian President Putin also dismissed accusations that Moscow had sent troops to Crimea, only to later admit it was Russian soldiers who took over the peninsula.

Russia is the world’s second-top oil exporter, and the conflict was seen as a threat to Russian shipments. Investors, however, now seem more adamant in the face of supply risk in regards of Ukraine.

“It is extremely unlikely that Russia would suspend oil shipments in the event that further sanctions were to be imposed,” Carsten Fritsch, analyst at Commerzbank, said for the Financial Times. “Instead, the already subdued oil demand could dwindle yet further.”

Demand outlooks

Two separate readings on Chinese factories were posted earlier today. Both the official government manufacturing PMI reading and HSBC’s figure were logged at above 50, meaning an expansion in the sector, though both were below expectations and standing for a significant slowdown in growth.

The manufacturing sector is a leading gauge for oil consumption in China, the world’s second largest economy where the industrial sector accounts for nearly half the GDP, as produced goods need to be shipped, accounting for a significant portion of total oil consumption.

“A fair bit of weak sentiment around China has already been priced in,” Ankit Pahuja, a commodity strategist at ANZ investment bank, said for Reuters. “China has held to a 7.5 percent growth target, so the government does have plans to maintain growth across the next couple of quarters.”

Elsewhere, the Eurozone posted downbeat manufacturing readings today, though the Bloc-wide figure was still above 50, meaning an expansion in the sector. More economic data on the Eurozone is due this week, before a crucial European Central Bank (ECB) interest rate decision on Thursday. Speculation has been mounting that the ECB will take action to halt the downward spiral seen in the making for the Eurozone, though analysts expect the measures will fall short of lowering the central lending rate. The US will see a key manufacturing PMI reading tomorrow, looking to log another month of massive growth.

Natural gas

Front-month natural gas futures for delivery in October traded at $4.047 per million British thermal units (mBtu), down 0.44%. Prices ranged from $4.035 to $4.061 per mBtu. The contract added ~4.3% last week.

The US Energy Information Administration (EIA) report from last Thursday, which covers the week through August 22, logged an injection of 75 billion cubic feet, the smallest weekly build since early May, though continuing the larger-than-average builds series for the nineteenth week. Storage levels were reported at 2 630 trillion cubic feet, just 16.5% short of the 5-year average, and are headed for a near-complete replenishment ahead of winter heating season.

“There’s been enough extremely hot weather in gas-consuming states to throttle back those significant injections,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “The bearish factor is we are progressing into the fall season, so the threat of heat to run up electric power generation is going to start to diminish.”

Next week’s build is also expected to be leaner, as several days of warm temps over the northern US drive fairly strong cooling demand.

High temperatures in the summer generally prompt increased cooling demand, which in term bumps up overall natural gas consumption, as 30% of all US natgas is burned in power stations, generating electricity for air conditioners, among all other things.