Commodities trading outlook: crude oil and natural gas futures edge lower

WTI and Brent futures were still in the red during midday trade in Europe today, as traders await key readings on US oil inventories. Meanwhile, natural gas futures dropped further, as prices correct the excessive Monday rally.

WTI futures for October delivery on the New York Mercantile Exchange traded at $92.66 per barrel at 11:36 GMT today, down 0.28% for the day, while prices had ranged from $92.55 to $92.97 per barrel. The US benchmark added 0.8% on Monday after losing ~1% last week.

Meanwhile on the ICE in London, November Brent stood at $97.69 per barrel, down 0.19%, daily prices between $97.44 and $98.13 per barrel. The contract’s premium to November WTI narrowed to $5.97. The European brand was little changed on Monday close, after it dropped 3.7% last week.

Crude prices are again under pressure by worries over supply-demand disbalances. Yesterday China, which accounts for 11% of total oil demand, posted the latest in a string of downbeat economic data, with industrial production for August logging the slowest annual growth in almost six years. Below-par data on retail sales, investments and CPI had also weighed on Chinese outlooks, though also spurring speculation that authorities will intervene more heavily to stimulate faltering growth.

Europe, which consumes about 14% of all oil, has also clocked in its fair share of bearish sentiment with a plethora of negative data. Unlike China, however, the European authority has already intervened with a central lending rate cut to 0.05%, the lowest ever, and the launch of a €3tn QE program. Despite the massive accommodation, businesses in Europe still feel downbeat on economic conditions. The German Zentrum für Europäische Wirtschaftsforschung (ZEW) logged sentiment for both the Eurozone and Germany at 2-year lows. Tomorrow will feature CPI readings, also set for little change from the very downbeat recent figures.

The downturns in Europe and China serve to only complement the significant expansion of oil production recently. Libya is recovering output and exports despite the ongoing civil war, and the same goes for Iraq, while the US are experiencing a shale oil boom.

OPEC, the world’s leading oil supplier, lowered the projected oil it will market next year, while the IEA also decreased its oil demand growth outlook for this year and for 2015.

“Production is increasing and there are no visible shortages of oil,” Olivier Jakob at oil analyst Petromatrix in Zug, Switzerland, said for Reuters. “The IEA revised demand lower, China is not pulling and the European economy is at risk of sanctions and counter-sanctions (between Russia and Western powers).”

US inventories

Oil traders now eye the key figures out of the weekly US Energy Information Administration (EIA) oil inventories report due on Wednesday. Meanwhile, later today the industry-funded American Petroleum Institute (API) will post its separate readings.

Big draws in US oil stocks would be supportive for prices, as they would indicate lively demand in the the world’s top oil-consuming economy, where 21% of all oil goes.

A Bloomberg survey suggests crude stocks fell by 1.5m barrels, while gasoline dropped 0.4m and distillates, a category which includes diesel and heating fuel, added 0.8m. A Reuters poll projects a 1.8m draw for crude inventories.

Natural gas

Front-month natural gas futures for settlement in October traded at $3.899 per million British thermal units (mBtu), down 0.81% for the day. Prices ranged from $3.898 to $3.934 per mBtu. The contract added 1.92% on Monday.

Natural gas futures rallied on Monday, partly because of an explosion at a gas pipeline. Chevron, which operates the pipe, said that damage and supply disruption were minimal, and that it expects full operations to resume within days.

Markets had already priced in a healthy amount of shock, however, and weather patterns projecting a distant possibility of a cooler spell over the US supported futures against an immediate correction.

The possibility of any significant cooling is quite distant, though, while the incoming system is certain to limit cooling demand, and traders are struggling to find a direction.

“Very comfortable temperatures simply cover too much of the US to expect anything but much larger than normal nat gas builds,” analysts at NatGasWeather.com wrote in a note to clients today. “By this weekend, … [temperatures] will set up about as good of nat gas build weather as you can get over the US.”

Thursday will probably offer the market a health amount of “direction”, as the US will report the weekly natural gas inventories build. The log usually triggers intense trade, with even small deviations from expected builds resulting big moves in either direction. Analysts expect a close-to-100Bcf build be reported this week, which would be the 22nd straight bigger-than-average injection.

Weather outlook

A mild cool blast will track through the Great Lakes and into the US Midwest and Northeast this week, keeping temperatures comfortable, killing much of any cooling demand and probably inducing some very light heating. Meanwhile, the South will be warming as high pressure builds, which will eventually break into the North, heating the Midwest and Northeast later on. The West Coast is experiencing a very hot few days ahead of moderate temps coming back by the weekend. Overall cooling demand across the US will be moderate-to-low for the next few days, with insignificant heating.

“By this weekend, much of the country will be experiencing temperatures in the mid-70s to mid-80s and very comfortable overnight lows,” the analysts at NatGasWeather.com wrote. “This will drive some cooling demand, but it will be limited.”