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

WTI and Brent futures were deep in bear ground during midday trade in Europe today, as investors cut losses, helping crude reach multi-year lows. Meanwhile, natural gas futures were little changed as traders eye US storage figures.

WTI futures for November delivery on the New York Mercantile Exchange traded at $88.88 per barrel at 7:28 GMT today, down 2.04% for the day. Prices had ranged from a six-month low at $88.18 to $91.00 per barrel. The US benchmark reversed all gains to close for a 0.5% loss Wednesday.

Meanwhile on the ICE in London, November Brent stood at $92.05 per barrel, down 2.24%, with prices between a two-year trough at $91.55 and $94.37 per barrel. The contract’s premium to its US counterpart narrowed to $3.17. The global benchmark closed Wednesday’s session for a 0.5% loss.

“We have more than enough supply out there and demand is not catching up,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said for Bloomberg. “U.S. production is just incredible. Fundamentally we are just producing so much oil.”

Crude contracts failed to hold on to sizable gains yesterday, tumbling some 2% on news that Saudi Arabia, the world’s top crude exporter, cut the list price of its crude for Asia, Europe and North America. The news caught the market off guard, erasing the positive sentiment from a bullish Energy Information Administration (EIA) weekly US oil report.

“That [price cut] tells the market they [the Saudis] are not going to cut [production]“, John Kilduff, founding partner of Again Capital in New York, said for The Wall Street Journal. “That was a signal to the market that the oversupplied conditions are going to continue for a while.”

Some market analysts had expected Saudi Arabia to cut output, and lift global crude prices, to accommodate smaller OPEC members, though at the cost of its own market share. The Kingdom is the only oil exporter with sufficient production with quick-shut capabilities, which makes possible significant, and timely, production cuts, or increases, which could significantly impact global prices.

The price cut, however, indicates that Saudi Arabia is not keen on suffering to keep other OPEC members afloat, and global prices will probably have to dive deeper to stoke a reaction from the Kingdom, pressuring crude contracts.

Earlier on Wednesday, markets were encouraged by bullish EIA data.

US inventories

The EIA report, which covers the week through September 26th, revealed crude stocks had been drawn by 1.4 million barrels, meeting expectations and logging the 15th out of 18 weeks of draws.

Production of crude logged a minor decrease from last week’s 28-year high to 8.84 million barrels per day. Meanwhile, imports of crude increased by 0.4m b/d to about 6.9m. The previous report read for a 16% drop of inbound shipments on a weekly basis.

Stocks at Cushing, Oklahoma, the delivery point for the NYMEX West Texas Intermediate contract and the largest hub in the US, were slightly higher at 20.5m, while hubs at the gulf coast dropped to 184.5m.

Gasoline stocks were down 1.8m, beating expectations of a 0.6m draw, while distillates, a category which includes diesel and heating fuel, fell by 2.9m, in comparison with analysts expecting no change.

Refineries pared back production as maintenance season kicks in, for an operating capacity of 89.8%, almost 4% below last week’s figure. Gasoline production was logged at 9.0m b/d, slightly lower than last week, while distillates output averaged 4.9m b/d, same as last week.

Previously, on Tuesday crude crashed, logging the worst day in almost two years, with both benchmarks closing for ~3% loss. Analysts agree that a complex of factors contributed to the slump. 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.

China, Europe, and US, manufacturing PMI figures were all logged below expectations, though ISM again recorded a significant month of growth for the world’s top economy. 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. The US and Eurozone consumer about 21% and 11% of all oil, respectively.

Natural gas

Front-month natural gas futures for settlement in November traded at $4.018 per million British thermal units (mBtu), down 0.12% for the day. Prices ranged from $4.011 to $4.059 per mBtu. The contract dropped 2.38% on Wednesday.

The main focus of investors today will be the Energy Information Administration (EIA) report, due for release at 14:30 GMT. Analysts expect a build of well over 100 billion cubic feet for the week through September 26th, highlighting the peak of Fall shoulder season. Should the injection meet expectations, it would be the twenty third straight week of above-average builds.

Analysts cautioned, however, over a possible trackback of prices going into the report, as the early cold hype could be short-lived.

“If weather patterns fail to look more intimidating going into the weekend without a bullish EIA number, there should be concerns higher prices won’t hold,” analysts at NatGasWeather.com wrote in a note to clients today. “Expect leaner weekly builds after the next two.”

A set of long-anticipated, and already well priced-in, 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.

“What’s important is the pattern is conducive to cooler than normal temperatures sweeping across the north-central US … while the West remains quite warm,” the analysts at NatGasWeather.com wrote. “It’s best to expect coming weather patterns to be cooler, but not exceptionally so.”