Commodities trading outlook: crude oil, natural gas futures

Both West Texas Intermediate and Brent crude benchmarks extended losses on Monday, with WTI hovering near the lowest level in more than a week, as weak demand prospects and a 24-hour humanitarian truce in the Gaza strip offset continuing clashes in eastern Ukraine and Libya. Natural gas erased previous daily losses but moves to the upside were limited as weather forecasting agencies predicted overall mild weather across most of the US in the upcoming couple of weeks.

On the New York Mercantile Exchange, WTI crude for delivery in September fell by 0.91% to $101.16 per barrel by 13:10 GMT. Prices shifted in a daily range between $101.10, near Fridays one-week low of $101.00, and $102.10 a barrel. This is the contract’s fourth day of declines out of five. The US benchmark added 0.02%, or 2 cents, on Friday to close the week at $102.04 a barrel.

Meanwhile on the ICE, Brent futures for settlement in the same month dropped 0.94% to trade at 107.37 per barrel. Prices held in a daily range between $108.38 and $107.37. The European crude benchmark added 1.23% on Friday and closed the week 1% higher at $108.39. Brent traded at premium of $6.21 to its US counterpart, down from $6.30 on July 25th which was the highest since July 7th.

Crude oil futures were pressured to the downside as upcoming US economic data releases may signal softening demand prospects. A gauge of US services sector activity may post slower growth from a month earlier, coupled with overall weak housing data. The flash Services PMI, prepared by Markit Economics, is expected at 59.8, down from June’s final reading of 61.0. Meanwhile, US pending home sales are projected to have risen by a mere 0.5% in June, well behind the preceding month’s 6.1%.

Also indicative for oil demand, the Conference Board’s consumer confidence for July, due to be released on Tuesday, is expected to have inched up to 85.3 from a month earlier.

On Wednesday, the US Commerce Department is likely to report that the US economy grew by an annualized 3.0% in the second quarter, compared to the preceding three months’ 2.9% contraction. Also on Wednesday, the Federal Open Market Committee will conclude its two-day policy meeting.

On Thursday, we are likely to see a moderate jump in initial jobless claims for the week through July 25th, but they will remain in the shadow of Friday’s non-farm payrolls and unemployment rate for July. US employers probably have added 230 000 jobs this month, compared to 288 000 in June, while the unemployment rate is anticipated to have remained flat at 6.1%.

Inventories

Government data last week showed that nationwide crude oil inventories fell by 4 million barrels in the week ended July 18th. However, gasoline stockpiles surged by 3.4 million barrels to the highest level in four months, while distillate fuel supplies jumped by 1.6 million barrels.

Michael Hewson, a market analyst at London-based CMC Markets Plc, said, cited by Bloomberg: “Demand expectations are likely to remain weak and exert downward pressure in what is a big week for U.S. data. I think markets are expecting much more positive news out of the U.S. than is likely and this could well see U.S. prices slip back towards $100.”

Investors will also be keeping a close watch on crucial economic data from Europe this week, including consumer inflation and unemployment rate, as well as manufacturing activity.

Geopolitical premium

Both crude benchmarks, and especially Brent, also felt pressured as tension cooled in the Gaza strip after Hamas agreed to a proposed 24-hour humanitarian ceasefire. However, broad market expectations called for limited downward moves as the prospects of a definitive ending to the clashes coming soon was seen as unlikely.

However, ongoing tension in other key points of interest for oil kept the market underpinned. Continuing clashes between Libyan government forces and Islamist militants in Benghazi over the weekend led to the death of more than 35 people, keeping supply prospects uncertain.

The Libyan government announced on Monday that an oil depot near Tripolis international airport caught fire during clashes between rival militias, and sought international help. Libyas nationwide oil production fell by 20% last week to around 450 000 barrels per day. The country holds Africas biggest crude reserves.

Meanwhile in Ukraine, continuing clashes between Ukrainian forces and pro-Russian rebels escalated on Sunday, causing the death of 13 people. However, in spite of US and EU intentions to discuss additional economic sanctions against Russia this week, market analysts said Russian energy exports will likely remain unaffected.

Natural gas

Natural gas erased its daily losses and rose into positive daily territory, but moves to the upside were likely to remain limited as weather forecasts continued to call for mild weather across most of the US within the next couple of weeks.

On the New York Mercantile Exchange, natural gas for settlement in September rose by 1.38% to $3.833 per million British thermal units at by 13:10 GMT. Prices fell to an eight-month low of $3.728 earlier in the day, before rebounding to a daily high of $3.834. The energy source lost 1.72% on Friday and closed the week at $3.781, 4.3% lower.

According to NatGasWeather.com, the next in a series of Canadian weather systems will push deep into the southern US states over the next few days, bringing showers, thunderstorms and below-average temperatures. Many regions will enjoy mild weather with much lower-than-usual cooling demand, which is expected to allow for a yet another larger-than-average build in US natural gas inventories. The western and southernmost areas of the United States will remain hot with temperatures peaking between 90 and 100 degrees Fahrenheit.

In the 8-14 day time span, NatGasWeather.com expects below-average readings over the eastern and northern US for the first days of the period. A gradual warm-up is projected to follow, pushing readings up to near seasonal, but conditions are not expected to become hot, thus cooling demand should be moderate at most.

Last Thursday, the Energy Information Administration reported that US natural gas inventories rose by 90 billion cubic feet in the week through July 18th, exceeding the five-year average gain by 44 bcf. This was the fourteenth consecutive above-average build. Stocks were 20.2% below last year’s reading for the respective week. Natural-gas market analysts at NatGasWeather.com expect this week’s EIA data to show a build near or little over 90 billion cubic feet, again well above the five-year average.

Data by the US Commodity Futures Trading Commission revealed that hedge fund managers trimmed bullish bets on natural gas by 11% during the week ended July 22nd.

Meanwhile, Goldman Sachs said that mild weather and the record pace of inventory gains will likely push prices even lower over the next three months. Daniel Quigley, a Goldman analyst said in a note, cited by Bloomberg: “While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to U.S. gas prices in the next three months.”