Commodities trading outlook: crude oil and natural gas futures climb

WTI and Brent futures were still on the upside during midday trade in Europe today, after the shock slump late Tuesday, as investors eye EIAs weekly oil report. Meanwhile, natural gas futures also rose after the moderate losses on Tuesday.

WTI futures for November delivery on the New York Mercantile Exchange traded at $91.99 per barrel at 13:16 GMT today, up 0.91% for the day. Prices had ranged from $91.22 to $92.10 per barrel. The US benchmark lost 3.6% on Monday, reversing all recent gains and nearing a 1.1/5-year low.

Meanwhile on the ICE in London, November Brent stood at $95.31 per barrel, up 0.68%, with prices between $94.53 and $95.35 per barrel. The contract’s premium to its US counterpart widened to $3.32, near the lowest in a year. The global benchmark closed Tuesday session for a 2.6% loss, while reaching a two-year low at $94.24.

Analysts agree that a complex of factors contributed to the late slump Tuesday. A four-year strong dollar, weakening demand outlooks in Europe and China, Mexico bulk-trades, rising output from OPEC and technical covering at the end of the quarter were all cited as possible factors in the worst session for WTI in almost two years.

Key data on China was posted this week, with both HSBC and the Chinese government seeing growth in China’s factory sector last month. The factory sector is a leading oil demand gauge, as manufactured goods need transportation and factories themselves require a significant amount of fuel or power. In China especially, the factory sector is a massive part of the economy, accounting for more than 40% of GDP, while China itself accounts for about 12% of global crude demand.

Elsewhere, ADP posted its reading on US payrolls for September today, logging new jobs at 213 000, slightly above expectations and well over the official figure of 142 000 for August. The official September report is due on Friday, while ISM will post its manufacturing and services PMI readings for the US later today and on Friday, respectively, set to log another month of massive growth for both sectors, potentially driving the dollar to a new peak.

Meanwhile, Eurozone manufacturing PMI, posted earlier today, was the latest in the string of bearish data, with the Bloc barely logging growth in the factory sector in September, while Germany posted a contraction for the first time in fifteen months.

Previously, key unemployment and CPI figures from the Eurozone, where 11% of all crude goes, were also posted. The unemployment rate was logged unchanged at 11.5%, while consumer inflation, as expected, dropped to 0.3% on an annual basis. Core CPI, however, was lower than forecast at 0.7%. The news sent the euro hurdling down, logging a new two-year low, while the dollar climbed a four-year peak against a complex of other major currencies, extending the recent upwards trend and pressuring commodities across. Key for the euro will be Thursday’s European Central Bank (ECB) meeting, the first after the Bank lowered its benchmark lending rate to the historic low of 0.05%, and introduced a €3tn stimulus program.

US inventories

Key to sustaining crude’s lower prices, or to inducing a rally back to earlier levels, will be the Energy Information Administration (EIA) report on US oil inventory levels, due for release later today.

A Bloomberg survey suggests crude stocks in the US added 1.5 million barrels in the week through September 26th, while gasoline dropped 0.6m and distillates were unchanged. Crude production reached a 28-year high last week.

The report is expected in the backdrop of record production in the US, and worldwide, pushing crude into surplus and pressuring prices.

The latest Reuters poll suggested OPEC saw its output grow in September. The results were probably the strongest factor behind Tuesday’s slump, as it came in the backdrop of calls for OPEC, and withing OPEC, for the cartel to trim production and bring oil prices back $100 per barrel levels.

Previously, OPEC and the International Energy Agency (IEA) both lowered crude demand growth outlooks for 2015, while also noting ample supplies. OPEC also lowered its own marketable crude projection.

Morgan Stanley analysts said that unless OPEC cut output, “crude markets will remain oversupplied and risk selling off into expiry,” Reuters reported. “OPEC should eventually provide support, but less so in the short run,” the analysts said.

Natural gas

Front-month natural gas futures for settlement in November traded at $4.177 per million British thermal units (mBtu), up 1.36% for the day. Prices ranged from $4.119 to $4.184 per mBtu. The contract dropped 0.79% on Tuesday, having added 3.1% on Monday.

Looking past the early heating hype, the main focus of investors today and tomorrow will be the Energy Information Administration (EIA) report, due for release at 14:30 GMT Thursday. Analysts expect a build of well over 100 billion cubic feet, highlighting the peak of Fall shoulder season. Should the injection meet expectations, it would be the twenty-third straight week of above-average builds.

“Today will likely bring some positioning going into tomorrow’s EIA weekly report, which is expected to bring in another much larger than normal build with estimates around 105-109 Bcf,” analysts at NatGasWeather.com wrote in a note to clients today. “With a cooler northern US pattern beginning to take shape, stronger heating demand should be expected over the coming weeks.”

The market seemed well-saturated on the bull side by late Tuesday, allowing traders to cash in profits, pushing the contract down in the red, though still well above earlier levels. A set of cooler Canadian systems was on track to lower temps in highly-populated areas in the Midwest and Northeast beginning this weekend, pushing up heating outlooks, and natgas prices.

“The initial system this weekend “is not exceptionally cold, but the pattern will be relentless where every few days a fresh burst of chilly Canadian air will cross the US border,” the analysts at NatGasWeather.com wrote. “We believe weather patterns will remain at least moderately bullish, and if cooler temperatures find success pushing into the northeastern US coastline, it would be potentially strongly bullish.”