Commodities trading outlook: crude oil futures retain losses ahead of US supply data, natural gas swings

Both West Texas Intermediate and Brent crude benchmarks fell on Thursday after posting sharp gains in the previous session as industry data showed an unexpected rise in US fuel stockpiles, while crude inventories fell less than projected. A strong dollar and Ukraine peace hopes further pressured prices. Investors eyed the upcoming EIA supplies report, as well as the Labor Department’s jobs report to gauge demand prospects.

On the New York Mercantile Exchange, WTI for settlement in October was down 1.17% to $94.42 per barrel at 13:02 GMT, having shifted in a daily range between $95.39 and $94.16. The US crude benchmark fell to a 1-1/2-week low of $92.68 on Tuesday, before surging 2.86% on Wednesday to settle at $95.54, the sharpest gain since August 2013.

Meanwhile on the ICE, Brent futures for delivery in the same month traded at $102.33 a barrel, down 0.43% on the day. Prices ranged between $102.95 and $101.90. The contract plunged to a 16-month low of $100.17 on Tuesday but rebounded 2.4% on Wednesday to settle at $102.77. Brent’s premium to its US counterpart widened to $7.91 from yesterday’s close at $7.23.

Oil prices slipped into negative territory after industry data provided by the American Petroleum Institute showed that US motor gasoline stockpiles rose by 362 000 barrels in the seven days through August 29th, while distillate fuel inventories added 385 000 barrels. Both categories were projected to have dropped. Crude oil inventories fell by 545 000 barrels.

API’s data however is less influential compared to EIA’s government report. According to a Bloomberg survey of analysts, the Energy Information Administration is likely to report that crude oil inventories slid by 1 million barrels last week, while motor gasoline stockpiles declined by 1.4 million. Distillate supplies probably fell by 1.2 million barrels, the survey showed.

US data

Fanning some bullish sentiment, data by the Census Bureau showed yesterday that US factory orders surged by a record 10.5% in July to reach the highest level in 8-1/2 years. This compared to a 1.5% gain in June and a 0.6% contraction in May. Another report on Tuesday showed that the US manufacturing sector expanded at the fastest pace in almost 3-1/2 years in August, with the ISM Manufacturing PMI coming in at 59.0 which sharply exceeded analysts estimates for a drop to 56.8 from July’s high of 57.1.

On Thursday, Automatic Data Processing reported that US employers added 204 000 jobs in August, defying expectations for a jump to 220 000 from a downward-revised 212 000 a month earlier.

In a separate report the Labor Department said that the number of people who filed for initial unemployment benefits during the week ended August 29th rose to 302 000 from 298 000 in the preceding period. Meanwhile, the Commerce Department reported that the US trade deficit narrowed to $40.55 billion in July, defying projections for a jump to $42.20 billion from Junes downward revised deficit of $40.81 billion.

A strong dollar dragged on prices. The greenback rose to a fresh 14-month high against a basket of major trading peers, additionally strengthened by ECBs decision to cut its benchmark interest rate to a new record low of 0.05%. The dollar index September contract traded at 83.400 at 13:06 GMT, having hit a daily high of 83.475 earlier in the session, the highest since July 15th 2013.

Market players now eyed tomorrows US jobs report. The Labor Department is expected to report that US employers added 225 000 people to payrolls in August, which would be the sixth straight month of job creation above 200 000, while the unemployment rate likely slid to 6.1% from 6.2% in July, further supporting the possibility of an interest rate hike.

Russia-Ukraine

Easing geopilitcal tensions eroded oil’s risk premium. Russian President Vladimir Putin said yesterday he is hoping for a peace accord to be reached between Ukraine and pro-Russian separatists on Friday when they resume talks in Minsk. He urged both counterparts to cease military action in eastern Ukraine and proposed a seven-point peace plan, which includes pulling back troops, halting active offensive operations, full prisoner exchange, international monitoring of the process, opening a humanitarian corridor for refugees and aid delivery, restoration of destroyed infrastructure and prohibiting the use of military jets against civilians.

Ukrainian President Petro Poroshenko said he had agreed a ceasefire process with his Russian colleague. In a statement Mr. Poroshenko’s office said that their conversation resulted in an agreement on a process for ceasing fire in the Donbass region and that the two presidents reached a mutual understanding on steps leading to peace.

Natural gas

Natural gas swung between minor gains and losses on Thursday after losing almost 5.5% the previous two sessions. Market players weighed expectations for one of the smallest inventory builds during the replenishment season against prospects of cooling temperatures across most of the US.

Natural gas for delivery in October lost 0.13% by 13:06 GMT to trade at $3.842 on the New York Mercantile Exchange, having ranged between $3.867 and $3.830 for the day. The power-station fuel fell by 1.1% on Wednesday, adding to Tuesday’s steep 4.3% drop, the biggest in six month, to close at $3.847 per mBtu.

Government data by the Energy Information Administration is expected to show US natural gas inventories probably rose by 74 billion cubic feet in the week ended August 29th, exceeding the five-year average gain of 56 bcf by a third. Inventories are expected to jump by an amount ranging between 72 and 76 bcf, NatGasWeather.com analysts said in a note to clients, with values below 72 seen as slightly bullish and below 70 as quite bullish. If the report, however, comes in at near or above the upper limit, a sell off to $3.75 per mBtu and even below can be expected.

However, with receding cooling demand at hand as the summer ends, we are set for massive builds possibly reaching over 100 billion cubic feet for weeks to come, before the winter kicks in and heating demand becomes the primary market mover. Thus, overall bearish sentiment will continue to dictate the power-station fuel’s general direction, unless of course the hurricane season, whose peak is in September, threatens to impact supplies from major production areas.

US weather

According to NatGasWeather.com, cooling demand within the next seven days will be overall moderate compared to normal as readings across the Midwest and eastern US rise over the next couple of days, but it will begin to transition into lower than usual as early as next week. The southern US will also see a few degrees of warming, with highs reaching into the mid and upper 90s.

However, a following cooler Canadian weather system will sweep across the central and eastern US during the weekend, carrying showers, thunderstorms and slightly cooler-than-seasonal temperatures. This will bring cooling demand across most of the US to moderate-to-low.

Between September 11th and 17th, cooler weather systems tracking across the central and eastern will bring comfortable temperatures in the region, and will even spur some heating demand as lows during nights will briefly drop into the 40s, and even 30s in some areas. The Canadian weather systems will also push fairly deep into Texas and the Southeast, lowering highs into the upper 70s and lower 80s instead of the 90s. As a result, national cooling demand is expected to noticeably decrease, paving the way for the return of 90+ bcf inventory builds. An even more pleasant weather pattern is expected to follow for much of the US in the third week of September.