Commodities trading outlook: crude oil, natural gas futures climb as fundamentals weighed

WTI and Brent futures edge higher as investors eye upcoming data on US oil supplies. Meanwhile, natural gas futures also turned upwards, extending the recent rally as traders look to a cold weather system over the US to spur heating.

WTI futures for November delivery on the New York Mercantile Exchange traded at $94.75 per barrel at 13:19 GMT today, up 0.19% for the day. Prices had ranged from $94.18 to $94.90 per barrel. The US benchmark added 1.1% on Monday, after a further ~1.4% gain last week.

Meanwhile on the ICE in London, November Brent stood at $97.30 per barrel, up 0.10%, with prices between $96.98 and $97.80 per barrel. The contract’s premium to its US counterpart narrowed to $2.55, the lowest in a year, with the global benchmark adding just 0.2% yesterday.

“There’s plenty of supply but no demand,” Michael Hewson, a London-based market analyst at CMC Markets Plc, who forecasts that Brent could drop to $90 a barrel and WTI fall as low as $85 next quarter, said for Bloomberg. “We have weak growth, with China and Europe slowing down, while U.S. air-strikes are protecting oil supplies in the Middle East. The momentum is certainly for a lower oil price.”

HSBC and Markit reported their reading on the key manufacturing sector in China earlier today. The groups’ manufacturing PMI was logged at 50.2, slightly below expectations, but still standing above the key “50.0″ mark, indicating the sector has expanded. The factory sector is a leading oil demand gauge, as manufactured goods need transportation and factories themselves require a significant amount of fuel or power. In China especially, the factory sector is a massive part of the economy, accounting for more than 40% of GDP, while China itself accounts for about 12% of global crude demand.

Investors now eye data from the US, the world’s top oil consumer with a 21% share of global crude demand, and the Eurozone, where 11% of all crude goes. The Conference Board’s US consumer confidence index is expected to log a minor increase at 92.5, the highest in at least six years. Later this week, key employment data is also eyed, in addition to factory orders.

Meanwhile, key unemployment and CPI figures from the Eurozone were posted today. The unemployment rate was logged unchanged at 11.5%, while consumer inflation, as expected, dropped to 0.3% on an annual basis. Core CPI, however, was lower than forecast at 0.7%. The news sent the euro hurdling down, logging a new two-year low, while the dollar climbed a four-year peak against a complex of other major currencies, extending the recent upwards trend and pressuring commodities across.

Meanwhile, a set of more direct oil demand gauges is keenly awaited. The industry-funded American Petroleum Institute (API) is set to release its weekly readings on US oil inventories later today, ahead of the official Energy Information Administration (EIA) report tomorrow.

A Bloomberg survey suggests crude stocks in the US added 1.5 million barrels in the week through September 26th, while gasoline dropped 0.6m and distillates were unchanged. Crude production reached a 28-year high last week.

Middle East, OPEC

Continued air strikes in Syria failed to widen the risk premium, as investors now shrug off the possibility of the situation complicating and potentially escalating. Meanwhile, output in Iraq, OPEC’s second-top exporter, and Libya firmly kept to recent gains, adding supply pressure to an already oversupplied market.

Previously, OPEC and the International Energy Agency both lowered crude demand growth outlooks for 2015, while also noting ample supplies. OPEC also lowered its own marketable crude projection.

Investors are still closely looking at OPEC for cues on a potential production curb, as most OPEC members look to the $100 per barrel level as the lowest to meet budgetary expenses. The biggest member and de facto leader of OPEC, Saudi Arabia, however, has moved to dissuade markets of an imminent cut in output, as it seeks to keep a dominant market share.

Morgan Stanley, however, issued a note on Monday saying OPEC “will likely need to reduce production further before oil markets are balanced.”

Natural gas

Front-month natural gas futures for settlement in November traded at $4.168 per million British thermal units (mBtu), up 0.34% for the day. Prices ranged from $4.111 to $4.178 per mBtu. The contract added 3.1% on Monday after a further ~3.2% gain last week.

The blue fuel clocked a significant gain on Monday, as investors looked past a sizable injection to natgas inventories in the US last week, and towards a set of cool Canadian weather systems, due to reach the US later this week.

The systems could potentially drive temperatures highs to as low as 50 degrees Fahrenheit over the northern US, while overnight lows drop well below freezing. Though not exceptionally cold, the system boasts enough strength to scare the markets into an early heating hype, as investors are still more sensitive to cold forecasts, after the brutally cold winter last year.

“This coming cooler pattern would generate market hype, it’s likely not quite intimidating enough to bring a sustained and prolonged rally,” analysts at NatGasWeather.com wrote in a note to clients today. “Don’t be shy about taking profits as this [hype] could turn into ‘buy the news, sell the fact’.”

Moderately low on investors’ radar was the upcoming weekly US natgas inventories report, due on Thursday. The Energy Information Administration (EIA) report will likely feature a three-digit weekly build, as mild weather last week highlights the momentum of Fall shoulder season. The report for the following week is also expected to log a 100Bcf+ build, as comfortable weather this week limits both cooling and heating overall demand.

“Cooler Canadian air sweeps into the Plains and develops into a fairly strong weather system that tracks through the Midwest Friday, and the Northeast Saturday. Expect cooler temperatures over some important nat gas demand states through October, 12-13th,” the analysts at NatGasWeather.com wrote. “There will still be very warm temperatures over Texas and California at times due to high pressure and offshore winds, which will drive at least moderate cooling demand.”