Commodities trading outlook: crude oil, natural gas futures head for weekly losses

Both West Texas Intermediate and Brent crude benchmarks headed for a weekly drop as a stronger greenback weighed on dollar-denominated commodities while an agreement to start a ceasefire in eastern Ukraine eroded oils geopolitical premium. Losses were capped by an overall bullish EIA supplies report and as economic data from the US pointed to a robust recovery, bolstering demand prospects. Natural gas is also poised to settle the week lower as weather forecasts called for an almost nationwide cooling to begin early next week.

On the New York Mercantile Exchange, WTI crude for delivery in October was down 0.36% at 12:58 GMT to trade at $94.11 a barrel, having shifted in a daily range between $94.99 and $94.09 a barrel. The contract settled 1.14% lower on Thursday at $94.45 a barrel. Prices are down ~1.8% this week.

Meanwhile on the ICE, Brent futures for settlement in the same month lost 0.46% to $101.36 a barrel, holding in a daily range of $102.44-$101.29. The European crude benchmark fell 0.91% on Thursday to $101.83. Brent’s premium to its US counterpart narrowed to $7.25 from yesterday’s settlement at $7.38.

Both crude benchmarks were pressured down by a firmer dollar, which rose to the highest in 14 months against the euro after the ECB cut its benchmark interest rate to 0.05%, the lowest on record, and Mario Draghi committed to buying so-called asset-backed securities and covered bonds to inject cash in the Eurozone’s stalling economy.

Disappointing jobs growth

The greenback however gave back some gains after the US Department of Labor unexpectedly reported that the pace of job creation in August fell to the lowest since January, reflecting a pause in the labor markets recent momentum. Analysts had projected a jump to between 225 000 and 230 000 from Julys upward-revised 212 000 jobs added.

Meanwhile, the US unemployment rate matched expectations and slid back to a 6-year low of 6.1%, the same as in June, after jumping back to 6.2% in July. The drop reflected a decline in unemployment among teenagers.

The September contract stood at 83.670 at 13:02 GMT, down 0.20%, having hit a session high of 83.965, the strongest level since July 10th 2013. It added 1.14% on Thursday to settle at 83.834. A stronger dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Data earlier in the week showed that the US manufacturing sector expanded at the fastest pace in almost 3-1/2 years in August, with the ISM Manufacturing PMI coming in at 59.0 which sharply exceeded analysts’ estimates for a drop to 56.8 from July’s high of 57.1.

Meanwhile, the US services sector expanded at the fastest pace in nine years in August, with the Institute for Supply Managements non-manufacturing index surging to 59.6 last month, defying analysts projections for a drop to 57.5 from 58.7 in July.

Ukraine ceasefire

Easing tensions in Ukraine also pushed prices down. The Ukrainian government and pro-Russian rebels who met in Minsk today have signed a preliminary agreement to start a ceasefire, Ukrainian President Petro Poroshenko said. He said the truce will come into force at 14:00 GMT.

Peace talks between rebels and Kiev began after Ukrainian President Petro Poroshenko and his Russian counterpart Vladimir Putin had agreed to have the peace process initiated. However, more fighting near Mariupol was reported earlier today.

Meanwhile, Western countries continued to work on expanding sanction against Russia. Nato leaders agreed at the organizations summit in Wales on the formation of a rapid reaction force to meet new challenges.

US inventories

Prices drew some support after the Energy Information administration reported a larger-than-projected drop in US gasoline stockpiles on Thursday. Inventories slid 2.32 million barrels to 209.99 million in the seven days through August 29th, surpassing projections for a 1.4-million drop. Distillate fuel supplies, which include diesel and heating oil, rose by 605 000 barrels to 123.4 million, defying expectations for a decline of 1 million barrels.

Commercial crude oil inventories logged a 905 000-barrel drop, largely in line with projections for a 1-million-barrel fall, while supplies at the nation’s biggest hub at Cushing, Oklahoma, slid by 385 000 barrels to 20.3 million.

Refineries operated at 93.3% of their operable capacity, down 0.2% from a week earlier, with refineries entering their maintenance season to switch to producing winter-grade fuels. Gasoline production rose to ~9.6m barrels per day, while distillate fuel output was little changed at ~5.1m barrels a day.

Domestic crude production was little changed at 8.6 million barrels per day, more than 1 million above year-ago levels. Meanwhile, net imports of crude stood at 7.2 million bpd, 1 million down from year-ago levels.

Natural gas

Natural gas was mostly unchanged on Friday after losing over 6% in the previous three sessions, with weather forecasts calling for comfortable temperatures settling across most of the US in the coming days. A bearish supplies report by the Energy Information Administration on Thursday also helped maintain the bias to the downside.

On the New York Mercantile, natural gas futures for settlement in October traded at $3.818 per million British thermal units at 13:02 GMT, down 0.03% on the day. Prices held in a daily range between $3.848 and $3.807. The contract lost 0.73% on Thursday, a third straight session of losses, to settle at $3.819. Prices are down little over 6% so far this week.

The Energy Information Administration reported yesterday that US natural gas stockpiles added 79 billion cubic feet (bcf) in the week ended August 29th, exceeding analysts’ projections for a build in the range of 72-76 bcf. At 2.709 trillion cubic feet, storage levels narrowed the deficit to the five-year average of 3.204 trillion cubic feet to 15.4%. This was the twentieth consecutive week of above-average inventory injections.

US weather

Bearish sentiment was further fanned as weather forecasts called for an upcoming almost nationwide cooling. According to NatGasWeather.com’s September 5th – 11th weather outlook, a fast-moving cool front will bring showers, thunderstorms and comfortable temperatures across the southern and eastern US during the weekend and early next week. Cooling demand over the next seven days will remain overall moderate compared to normal as the western and far southern parts of the country will remain quite warm, with highs reaching into the upper 80s and 90s.

Much of the US will see pleasant highs of 70s and lower 80s before a strong cold Canadian system tracks deep into the central US late next week. Extended forecasts for the period between September 12th and September 18th show that the aforementioned Canadian weather system will track across the northern US and Midwest, extending further south into Texas and the Gulf Coast. This will lead to lower-than-seasonal cooling demand and will even spur some heating demand over the Midwest where overnight lows may drop to the 30s and 40s. However, the cold spell is expected to last only for a couple of days, and the lack of additional cold blasts will allow temperatures to return to comfortable levels, eliminating fears of early winter season price spikes.

With readings across most of the US set to range in the 70s and 80s during the third week of September, cooling demand will remain low, paving the way for massive inventory builds which will further narrow the five-year-average deficit. Only the West is expected to remain warmer than normal.