Commodities trading outlook: WTI hits 27-month low on ample supply, natural gas extends drop

West Texas Intermediate crude fell to a 27-month trough and Brent declined to the lowest since November 2010 as easing global demand growth limited demand at times of ample supply. Natural gas fell for a second day.

US November crude traded 0.50% higher at $82.25 per barrel at 14:06 GMT, having earlier plunged to $80.01, the lowest since June 29th, 2012. The contract lost 4.55% on Tuesday, the most since November 2012, to settle at $81.84.

Meanwhile on the ICE, Brent for delivery in the same month was up 0.36% at $85.35 a barrel, having earlier declined to $83.37, the lowest since November 2010. The European crude benchmark shed 4.3% yesterday, the most in three years, and settled at $84.48, the lowest since end-November 2010. Brent traded at a premium of $3.10 to its US counterpart, down from yesterday’s close of $3.20.

The International Energy Agency said in its monthly report that global oil consumption will climb by only 650 000 barrels per day this year, a downward revision of 250 000 bpd from its prior estimate. This was the IEA’s fourth consecutive monthly forecast revision, with projections now slashed in half from July’s 1.3-million bpd growth estimate. The Paris-based agency also said that OPEC will need to supply around 200 000 barrels per day less crude this year and in 2015.

The Paris-based agency’s downward revision comes at a time of rising OPEC output, while US crude production is at its highest in almost three decades and Russians are closely trailing a post-Soviet record. Last week, the International Monetary Fund trimmed its global economic growth forecast to 3.8% next year, down from the previously expected in July 4.0%, fanning additional negative sentiment toward oil demand growth prospects.

Opec price cuts

Prices were further pushed down after Saudi Arabia decided to cut its prices to Asian buyers, followed by Iran and Iraq.

Venezuela’s foreign ministry said on October 10th that the country will seek an extraordinary OPEC meeting to discuss falling prices. However, oil ministers from Kuwait and Algeria dismissed possible output reductions.

Ali al-Omair, Kuwait’s oil minister, said that $76-$77 will probably be a strong area of support because that was the cost of production in the US and Russia. He said for the official Kuwait News Agency that while producers would like higher prices, there was “no room” to achieve that by cutting output.

Downbeat data

The market received additional pressure as downbeat data from Europe, China and the US further fueled fears of softening demand.

Major EU economies posted sluggish inflation numbers, while the Eurozone’s industrial production contracted in August both on monthly and year-on-year basis. A gauge of investor confidence for the single currency bloc fell for a tenth month, while both current conditions assessment and economic sentiment in Germany were also much worse than expected.

In China, the National Bureau of Statistics reported that consumer prices rose by 0.5% in September from a month earlier, beating projections for a 0.4% gain. Year-on-year, CPI was up 1.6%, trailing the preceding month’s 2.0% jump and slightly below economists’ 1.7% projection. Producer prices fell for the 31st consecutive month, down 1.8% in September from a year earlier.

In the US, the Labor Department reported that producer price inflation contracted by 0.1% on a monthly basis in September after remaining flat a month earlier, defying analysts projections for a 0.1% jump. Year-on-year, the Producer Price Index marked a 1.6% rise, trailing projections and the preceding month’s 1.8% gain. Core PPI also underperformed analysts’ anticipations.

A separate report by the Department of Commerce showed that retail sales plunged 0.3% last month after adding 0.6% in August. This was the poorest performance since January and trailed analysts’s preliminary estimates for a 0.1% decline. Core retail sales, which exclude the volatile automobile sales, slid 0.2%, the most since March 2013, confounding projections and the preceding month’s 0.3% jump.

Meanwhile, the Federal Reserve bank of New York reported that its NY Empire State Manufacturing Index slid to 6.17 in October from 27.54 a month earlier, trailing projections for a moderate drop to 20.50. This marked the worst level of business conditions in the region since April.

Natural gas

Natural gas extended yesterdays decline as the lack of persistent freezing temperatures prompted only moderate natural gas demand over the next two weeks.

On the New York Mercantile Exchange, natural gas for delivery in November traded 0.52% lower at $3.796 per million British thermal units at 14:14 GMT, with prices holding in a daily range of $3.857-$3.764. The power-station fuel settled 2.55% lower on Tuesday at $3.816 per mBtu.

According to NatGasWeather.com, natural gas demand over the next seven days will be moderate compared to normal. The eastern parts of the country will be hit by a strong weather system today, carrying showers, thunderstorms and little-below-average temperatures. Additional reinforcing cool blasts will push overnight lows into the 40s and 30s on Friday and during the weekend, inducing modest heating demand.

However, those weather systems will not be significant enough to bring widespread and consistent freezing temperatures, leaving the markets supported, but also unable to advance much.

The far southern US will remain warmer than usual throughout the week with highs in the upper 80s, stoking late season cooling demand for the energy source.

Next week, numerous weather systems with showers, thunderstorms and slightly lower-than-usual temperatures will track across the Midwest and Northeast, and will also push deep into the Southeast. The southern US will continue to gradually cool, with the until-recently widespread highs in the 80s and 90s becoming rarer, easing the need for cooling. Both the southern and western parts of the country will remain near or little above average.

Supplies

Prices plunged last Thursday when the Energy Information Administration reported that US natural gas inventories rose by 105 billion cubic feet (bcf) in the week ended October 3rd, largely in line with analysts’ expectations for a jump by 105-110 bcf. This was the 25th straight weekly above-average build.

This week’s supply data is projected to show a build of around 90 billion cubic feet, compared to the five-year average of 78 billion. If confirmed, this would be the closest net injection to the average since April. Near-term builds are expected to keep narrowing the deficit as average weekly injections begin to decrease after this week’s shoulder season peak.

Gas stockpiles were less than 11% below the five-year average in the week ended October 3rd, but this still was the biggest gap for this time of the year since 2005. The EIA said in its Short-Term Energy Outlook dated October 7th that inventories may rise to 3.532 trillion cubic feet by the end of the month, the lowest for this time of the year in six years.