Commodities trading outlook: crude oil slides on China worries, natural gas rallies

Both West Texas Intermediate and Brent benchmark crudes fell in early US trading on Monday, dragged by a strong dollar and new signs of a slowing Chinese economy. Natural gas rallied amid speculations that cold weather across the eastern US would stoke high local heating demand.

US December crude traded 0.56% lower at $80.09 per barrel at 15:26 GMT, having shifted in a daily range of $80.98-$79.65. The contract slid for a second day on Friday and settled 0.71% lower at $80.54, falling for a fifth consecutive week. Prices dropped almost 12% last month, the biggest such decline since May 2012.

Meanwhile on the ICE, Brent for delivery in the same month stood at $85.30 per barrel, down 0.65% on the day. Prices held in a daily range of $86.22-$84.91 a barrel. The European crude benchmark fell 0.44% to $85.86 on Friday, settling the week 0.3% lower. Prices plunged 9.3% in October. Brent traded at a premium of $5.21 to its US counterpart, down from Friday’s close at $5.32.

Oil prices remained under downward pressure after private data showed China’s manufacturing sector expanded at a minor pace in October, albeit slightly better than September. HSBC, in collaboration with Markit Economics, reported that the HSBC China Manufacturing PMI registered at 50.4 last month, confirming a flash reading and outpacing September’s dismal 50.2 expansion.

However, the report showed that output and new order growth weakened to the lowest in five months while new export business expanded at the slowest rate since June.

Official data showed on Saturday that the Asian country’s factory output surprisingly slid to the lowest in five months as companies struggled with slowing orders and rising borrowing costs. The official Chinese Manufacturing PMI fell to 50.8, defying analysts’ projections to have inched up to 51.2 from 51.1 in September.

The official report is based on information primarily provided by larger, state-owned companies, while the private numbers are focused on smaller, private-owned manufacturers.

A separate official report showed on Monday that activity in China’s services sector grew at the slowest pace since January as the cooling property sector dragged on demand. The respective non-manufacturing PMI declined to 53.8 in October from 54.0 in September.

Strong dollar

A strong dollar continued to weigh on commodities across the board, including crude oil. The US dollar was at the highest in seven years after Bank of Japan unexpectedly boosted unprecedented stimulus last week. The central bank said it is targeting an 80 trillion yen expansion in the monetary base, up from 60 to 70 trillion yen before.

Earlier in the week, the Federal Reserve ended its Quantitative Easing program and said it could raise interest rates faster than expected, given that the labor market improves at an accelerated pace and prices retain stability.

Further boosting the US dollar, but oils demand prospects as well, the Institute for Supply Management reported that manufacturing activity in the US expanded more than expected in October, supporting indications of a robust economic recovery.

The respective ISM Manufacturing PMI rose to 59.0 from 56.6 in September, defying analysts projections for a drop to 56.2. Octobers reading matched August as the highest in 3-1/2 years, with a gauge of production hitting the highest in a decade.

The US dollar index, which measures the greenback’s performance against a basket of six major trading peers, rose to the highest in more than four years. The December contract gained 0.40% to 87.365 by 15:30 GMT, having earlier risen to 87.540, the highest since June 2010. The US currency gauge rose 0.91% on Friday to 87.016.

OPEC output

The oil market remained under pressure after a Bloomberg survey showed last week that the Organization of the Petroleum Exporting Countries boosted its crude oil output in October, reflecting the group’s reluctance to lose market share and its ability to cope with lower prices.

OPEC pumped 30.974 million barrels of oil per day in October, Bloomberg reported, marking a 53 000-bpd increase from a month earlier, led by gains in Saudi Arabia, Iraq and Libya. September’s figure was revised down by 14 000 barrels per day to an average of 30.921 million barrels per day.

Additionally, OPEC Secretary General Abdullah al-Badri said last week he sees little change to the group’s 2015 output target and that there is no need to panic at the recent slump in prices, reinforcing indications that member countries are in no hurry to cut output.

Natural gas

Natural gas kept gaining ground last week and extended its march on Monday as forecasts warned about sub-freezing temperatures across the Midwest and Northeast.

On the New York Mercantile Exchange, natural gas for delivery in December gained 3.87% to $4.023 per million British thermal units by 15:26 GMT. Prices ranged between $4.065, the highest in a month, and $3.989. The contract edged up 1.20% on Friday to $3.873 per mBtu, and settled the week 4.73% higher, its biggest gain since mid-February.

According to NatGasWeather.com, natural gas demand in the US over the next seven days will be moderate, compared to normal, with a slightly colder weather trend for the seven days between November 10-16.

High pressure and mild temperatures will return to the eastern US, after a weekend of lows in the 20s and 30s. However, the gentle temperatures will not last long as chilly Canadian weather systems will arrive late this week.

Texas will be affected by strong thunderstorms and slightly cooler temperatures, NatGasWeather.com reporteed. Clashes between colder Canadian air and milder U.S. air over the Midwest and Northeast will result in periods of sub-freezing temperatures with warmer air in between. North-central and northeastern regions may reach into the low 20s.

Overall milder-temperature periods will reign over most of the U.S. with chilly weather at times. The high-demand states of Texas and Oklahoma will remain mostly mild but incoming northern cool blasts will still keep heating demand at considerable levels over the next 10 days.

Supplies

The Energy Information Administration reported on Thursday that US natural gas inventories rose by 87 billion cubic feet in the week ended October 24th, sharply exceeding the five-year average increase of 59 bcf and the 45-bcf gain during the comparable period a year ago.

Total gas held in US storage stood at 3.480 trillion cubic feet, narrowing the deficit to the five-year average to 8.2%, compared to 9.1% a week earlier. Inventories were 7.8% below the 3.774 trillion cubic feet of gas held in storage a year ago.

The EIA is expected to report a build of around 90 bcf this Thursday, which would outstrip the 5-year average gain by almost 30 bcf. If confirmed, this would be seen as quite bearish. Support is expected to be drawn by weather data.