Commodities trading outlook: crude oil futures extend slide, natural gas drops

Both West Texas Intermediate and Brent crude benchmarks extended losses in early US trading on Monday, despite a gauge of US dollar strength easing off a four-year high, amid ample supply and no outlook for Saudi Arabia to cut its output before a November 27 OPEC meeting. Natural gas fell.

WTI for settlement in November fell by 0.81% by 14:30 GMT to trade at $89.01 per barrel on the New York Mercantile Exchange, having shifted in a daily range between $90.41 and $88.80 a barrel. The US crude benchmark fell to a 1-1/2-year low of $88.18 on Thursday and settled last week 4% lower, reversing gains in the previous two five-day periods.

On the ICE, Brent for settlement in the same month slid 0.99% by 14:34 GMT to $91.40 per barrel, having hit a fresh 27-month low of $91.35 earlier in the session. The contract closed at $92.31 on Friday, the lowest settlement since June 2012. Prices slid almost 5% last week, the most since April 2013, marking their fourth weekly decline in five. The contract is down 17% this year. Brent traded at a premium of $2.39 to its US counterpart, down from $2.57 on Friday’s close.

The greenback rallied to a four-year high against a basket of major trading peers on Friday after upbeat US jobless data spurred speculations the Federal Reserve might raise interest rates by mid-2015 or earlier. The US Labor Department reported on Friday that US employers added 248 000 new jobs in September, compared to expectations of a 215 000 reading, while the unemployment rate was logged at a six-year trough of 5.9%, also beating expectations.

The US dollar index for settlement in December was down 0.45% at 86.620 by 14:38 GMT on Monday, having ranged between 86.845 and 86.385 during the day. The US currency gauge surged to a four-year high of 86.870 on Friday and settled the day 1.3% higher at 86.823.

Continuing to weigh on the market, Saudi Arabia, the world’s top crude exporter, cut the list price of its crude to all destinations, rebutting broad market expectations for a reduction in its output, which would lift prices and accommodate smaller OPEC members at the cost of its own market share. Saudi Arabia is the only oil exporter with sufficient production with quick-shut capabilities, which makes possible significant, and timely, production cuts or increases, which could notably impact global prices.

Morgan Stanley analysts said in a note on Monday: “OPEC remains optimistic that improving crude demand in the fourth quarter, which we expect as well, will drive prices higher. We would be surprised to see any large reduction in production prior to the November OPEC meeting.”

At the same time, US crude production remains at the highest level in more than two decades and is expected to reach even greater levels in the near future. The Energy Information Administration reported on October 1st that domestic crude production slightly eased to 8.84 million barrels per day in the week ended September 26th, down from the preceding week’s 8.867 million bpd which was the highest since 1986.

Furthermore, the EIA expects US crude output to jump to a 45-year high of 9.53 million bpd in 2015. At the same time, the International Energy Agency trimmed its global demand growth outlook for this year and the next, citing a weakening global economy.

Natural gas

Natural gas fell for the fourth time in five days, reversing last week’s advance, as short-term forecasts for overall mild weather across the US set the stage for more bigger-than-average inventory builds.

On the New York Mercantile Exchange, natural gas for delivery in November slid 2.82% to $3.925 per million British thermal units by 14:38 GMT, having shifted in a daily range between $4.000 and $3.891 per mBtu. The energy source rose to a three-month high last Wednesday and settled the previous week 0.4% higher.

Market players continued to digest last week’s stockpiles data. The power-station fuel plunged last Thursday after the Energy Information Administration reported that US natural gas storage expanded by 112 billion cubic feet in the week ended September 26th, exceeding a projected gain in the range of 105-109 billion cubic feet. The build was the twenty-fourth straight bigger-than-average injection, and narrowed the deficit to the five-year average to 11.4%, down from 55% in March.

The recent comfortable readings are projected to lead to another quite larger than the average build due to be reported this Thursday. According to analysts’ preliminary estimates, the government agency will likely report a gain of 114 billion cubic feet in the week ended October 3rd, exceeding last year’s 91-bcf injection during the comparable week and the five-year average increase of 84 billion cubic feet.

However, the following reports are expected to register leaner builds as cooler weather makes due through the northern US. A set of cooler Canadian systems will be tracking in quick succession through the third week of October, with each tapping progressively more of the very cold, Arctic air over northern Canada. While its too early to call winter, the pattern will provide significant upward pressure on natural gas prices.

Short-term weather outlook

In the short-term, temperatures across the Midwest will range, with central and western Kansas seeing highs in the lower 80s, while readings from the Dakotas to the central parts of Illinois, Indiana and Ohio will peak out at the cooler 50s and 60s. The Northeast will enjoy warmer temperatures, with afternoon highs in the 60s from West Virginia to New England, while New York will enjoy readings in the 70s.

Down the South, warmer conditions will set up during the first half of the week following a cool weekend, with parts of the region expected to reach highs into the higher 80s and mid-90s. Severe thunderstorms, coupled with strong winds, hail and isolated tornadoes may occur in northern Mississippi, northern Alabama, Tennessee and eastern Arkansas.

To the West, Arizona, Nevada, Oregon, California, New Mexico and eastern Washington should see highs in the 80s and mid-90s, while temperatures across the remainder of the region will likely max out in the upper 60s and 70s. By Wednesday, readings are expected to peak in the 70s and 80s throughout the entire region.