Commodities trading outlook: crude oil and natural gas futures

WTI futures pared back earlier gains, while Brent was pressured deeper in bear territory during midday trade in Europe today, as investors await US inventories data. Meanwhile, natural gas futures were steadily orbiting the previous close.

WTI futures for November delivery on the New York Mercantile Exchange traded at $91.55 per barrel at 12:28 GMT today, down 0.01% for the day. Prices had ranged from $91.25 to $91.92 per barrel. The US benchmark added 0.8% on Tuesday, reversing losses from Monday.

Meanwhile on the ICE in London, November Brent stood at $96.56 per barrel, down 0.30%, with prices between $96.40 and $97.01 per barrel. The contract’s premium its US counterpart narrowed to $5.01. The European brand added minor losses after sliding 1.5% on Monday, to a two-year low at $96.38.

Investors eye the upcoming US Energy Information Administration (EIA) weekly oil report. Last Wednesday the EIA reported the first build in stocks in five weeks, while production was logged at the highest level in 28 years.

The industry-funded American Petroleum Institute (API) posted its separate readings yesterday, boosting WTI contracts with a 6.5 million-barrel draw for crude, which would be the biggest draw in two months, if confirmed. The group also posted a 3m increase for distillates, a category which includes diesel and heating fuel, and a 0.1m build for gasoline.

A Bloomberg survey projected crude stocks had added 0.75 million barrels in the week through September 19, while gasoline was unchanged and distillates grew by 0.5m. A Wall Street Journal survey of analysts also showed small changes for crude and for products.

The mostly-Arab US-led coalition made the first air strikes against targets of the Islamic State in Syria and the Levant (IS, ISIS, ISIL) on the territory of Syria yesterday, though the move failed to affect prices, as investors had already priced out much of any discount.

Meanwhile, Libya restarted operations at the Sharara oilfield, the biggest crude-production site in Africa’s largest crude reserves holder. The increase in Libyan output depressed crude to near multi-year lows on Monday, as it heralded the return of high-quality Libyan oil to the already over-supplied market.

Talks of a cut in output to be discussed and implemented by OPEC offered background support to crude last week, as investors sought cues as to the intentions of the world’s top oil-exporting body in regards to prices falling below the $100 benchmark. Many nations have set the $100 per barrel as a budgetary minimum, and prices lingering below the threshold hurts their public, and private, finances.

OPEC official moved to dispel speculation about an imminent output cut, but the group did lower its marketable oil expectations for 2015, signaling a decrease in production could follow as to meet market demand.

China, Eurozone

HSBC and Markit posted their preliminary figure on Chinese manufacturing PMI, logging at 50.5, above expectations also above the “50.0″ mark, signaling the sector has expanded in September. Factories are the bulk contributors to Chinese industrial output, which generates about 44% of the country’s GDP. At the same time, however, goods, such as those produced in factories, need to be physically transported, while factories tend to consume a lot of power and other fuels, hence the manufacturing PMI figure is a key leading gauge for oil demand.

The second-top economy in the world is also the second-top oil consumer, and will account for 11% of all demand this year, the International Energy Agency (IEA) says.

Meanwhile, manufacturing PMI figures for the Eurozone were also posted. France reported a surprisingly smaller than expected contraction in the factory sector, though still logging a decrease in activities, while Germany posted disappointing growth in the sector. Bloc-wide figure was recorded as expected, at 50.5. Although the industrial sector is just ~25% of the Eurozone’s economy, it still constitutes a massive chunk of transportation fuel demand. The EU consumes ~13% of all oil.

Earlier today, the German Ifo institute posted its monthly economic sentiment report, logging the key “business climate” gauge to the downside for the fifth straight month and at the lowest level in almost 1.1/2 years.

Natural gas futures

Front-month natural gas futures for settlement in October traded at $3.815 per million British thermal units (mBtu), down 0.03% for the day. Prices ranged from $3.796 to $3.844 per mBtu. The contract dropped 0.88% on Tuesday.

“We continue to view coming weather patterns as very bearish. The longer these patterns continues into October, the longer prices will likely remain under $4.00,” analysts at NatGasWeather.com wrote in a note to clients today. “We have yet to rule out one more seasonal low before colder winter temperatures finally arrive and drive prices higher.”

With just a few days left in the October contract, higher volatility is to be expected, analysts say. Prices are very unlikely to break the $3.75-$4 trading range of the past few weeks, but a surprise in the Energy Information Administration (EIA) weekly natgas report tomorrow could spell shock for the markets.

Traders have been reluctant to price in a milder weather outlook in the next two weeks, as a ominously cold reservoir of cold air over northern Canada could be tapped by US-bound weather systems by early October.

Meanwhile, seasonal maintenance at nuclear power plants and coal stockpiling at thermal power plants could also be driving natgas demand up, supporting prices against the mild weather.

More light will be shed on supply and demand tomorrow, as the EIA releases its weekly readings on natgas inventories. Analysts expect a build of just under 100 billion cubic feet be logged for the week through September 19th. The next two weeks, however, will most probably see builds in the triple digits, as Fall shoulder season kicks in high gear.