Commodities trading outlook: crude oil futures extend slump, natural gas lower

WTI and Brent futures extended the slump to log two-year lows after Saudi Arabia dispelled speculation of an imminent deep cut in production. Meanwhile, natural gas futures were also lower as investor await EIAs storage report.

WTI futures for October delivery on the New York Mercantile Exchange traded at $90.54 per barrel at 12:29 GMT today, down 1.23% for the day. Prices ranged from a sixteen-month bottom at $90.43 to $91.91 per barrel. The contract has dropped 1.16% yesterday.

Meanwhile on the ICE in London, October Brent stood at $96.80 per barrel, down 1.26%, daily prices between a 26-month low of $96.72 and $98.26 per barrel. October Brent’s premium to its US counterpart narrowed to $6.26. The European contract dropped 1.13% on Wednesday.

“Oil prices continue their nosedive,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said in a report cited by Bloomberg. “OPEC already appears to be responding to the threat of oversupply. All the same, further cuts would need to be made by OPEC in order to balance the oil market.”

The Organization of Petroleum Exporting Countries (OPEC) revised downwards its projection of demand for its crude for next year. The organization now expects an average of 29.2m barrels per day to be marketed by its member countries, 200 000 less than it foresaw a month ago.

Meanwhile, Saudi Arabia, by far the biggest producer in OPEC and the world’s largest crude exporter with daily shipments of some 7m barrels, said domestic production was down 400 000 barrels per day in August, spurring speculation that an imminent deeper cutback in production is due, as to support faltering crude prices.

Oil prices “always fluctuate, and this is normal,” Ali al-Naimi, Saudi Arabia Oil Minister, told reporters in Kuwait today, dispelling much of the speculation and further pressuring crude. It’s too early to talk about the need for oil exporters to meet over prices, he said.

OPEC’s forecast revision “is the clearest acknowledgment that the current requirement for OPEC crude is far less than they are currently supplying to the market,” Abhishek Deshpande, analyst at Natixis, said for the Financial Times. We would hence expect Opec to reduce oil output in coming months and a large chunk of this could easily come from Saudi Arabia.”

The revision also outlines a wider, global trend of supply outgrowing demand. Booming shale production and the return of Libyan and more Iraqi crude to the market, in addition to a glut in the Atlantic basin, paint a bearish outlook for crude prices.

US supply

Bearish US figures weighed on crude prices yesterday, extending the losing streak to a fifth session out of six. The EIA report, which covers the week through September 5, revealed crude inventories dropped 1 million barrels, largely meeting expectations of 1.1m-1.5m draw. The decrease extends the series of declining US stocks to an 11th out of 12 weeks.

Production of crude logged a minor drop to 8.6 million barrels per day, up 11% on an annual basis. Net imports last week were 7.2m, down 9% on an annual basis, outlining the shift towards domestic production, in light of booming shale production in the US.

“There’s too much light, sweet crude out there,” Michael Wittner, head of global oil research at Société Générale, said for The Wall Street Journal. “Also, demand has been weak.”

Gasoline stocks surprisingly added 2.4m barrels, compared with expectations of no change or slight decrease, signaling the US is oversupplied with the fuel, pressuring crude lower. Meanwhile, distillates, a category which includes diesel and heating fuel, were up almost 4.1m barrels, compared with forecasts of a 0.6m-1m gain.

Refineries bumped up production, EIA logging a weekly refinery utilization rate of 93.9%, 1.5% up on annual basis and almost 10% more than two years ago. Gasoline production, however, was actually some 5% lower than a week ago at ~9m barrels daily, while distillates output averaged 5.1m, little changed from a week ago.

Natural gas

Front-month natural gas futures for settlement in October traded at $3.922 per million British thermal units (mBtu), down 0.81% for the day. Prices ranged from $3.919 to $3.963 per mBtu. The contract closed Wednesday’s session down 0.75%, after adding ~5% over the previous two.

Investors eye the upcoming Energy Information Administration (EIA) weekly report on natgas inventory levels later today, with expectations of a 21st straight week of larger-than-average builds. The injection is projected to come at 84-88 billion cubic feet. Last week the deficit to the 5-year average total gas was narrowed to only 15.4%, down from a record 50% in March.

This week’s cold spell will likely have a positive impact on upcoming natgas inventory builds, further adding to builds momentum, as the market enters Fall shoulder season.

“Next week will likely again come in under 100 Bcf,” analysts at NatGasWeather.com wrote in a note to clients today. “But there should be some fairly hefty 100+ Bcf builds to follow.”

US weather outlook

The cold Canadian system is already tracking deep into the central US, bringing temperature troughs as low as 30-40 Fahrenheit at places. These places, however, are only in lightly populated regions, and will likely induce only minor heating demand. More importantly, the system will kill much of the cooling demand over the South in the coming days, bearing up natgas players. Meanwhile, the northern Midwest and the Northeast will also have quite cooler than normal temps for a significant time as reinforcing cool blasts draw track through the Great Lakes next week.

“We feel confident there will be limited chances for early season cold to become established,” NatGasWeather.com analysts said. “There will still be periods … of light heating demand.”