Commodities trading outlook: crude oil slides on oversupply, natural gas hits fresh low

West Texas Intermediate crude fell for the first time in three days and Brent dropped to $85 a barrel as fears of a global supply glut offset Iran seeking ways to halt oil’s rout, while Saudi Arabia and Kuwait cut output from an oilfield. Natural gas fell to a fresh 11-month low as weather forecasts called for comfortable weather across most of the US throughout October.

December US crude traded at $81.33 per barrel at 14:02 GMT, down 0.89% on the day, having ranged between $82.73 and $81.29 during the day. The contract gained 0.13% on Friday, up for a second day, and settled the week at $82.06, rebounding from the lowest level in more than two years reached on Thursday.

Meanwhile on the ICE, Brent for delivery in the same month slid 1.30% to $85.04 a barrel. Prices varied in a daily range of $86.70-$84.90. The European benchmark crude rose 0.4% on Friday to $86.16, drifting further away from Thursday’s four-year low of $82.93. Brent’s premium to its US counterpart narrowed to $3.88 from Friday’s close at $4.10.

Oil drew support after state-run news agency Mehr reported that Iranian President Hassan Rouhani instructed Iran’s Oil Minister Bijan Namdar Zanganeh to use diplomatic tools to halt the oil market’s decline, spurring speculations OPEC may address the falling price issue as opposed to previous beliefs. Zanganeh in turn made proposals after Rouhani’s requests, providing the market with short-term support.

Prices also received a boost after output at the Saudi-Kuwait Khafji oilfield was halted temporarily due to environmental concerns, leaving offline production of 280 000 – 300 000 barrels per day, little over 2% of Saudi Arabia’s total capacity. Although the shutdown was not attributed to any shift in OPEC’s production policy and probably won’t warrant a drop in overall output due to spare capacity, it was seen as a bullish factor, given the recent oversupply worries.

However, prices were set for more downside as fears of a global supply glut remained the dominant factor determining the markets direction. The IEA trimmed its global oil demand growth forecast last week for the fourth consecutive month, while the IMF cut its global economic growth estimate for 2015.

Venezuela’s foreign ministry said on October 10th that the country will seek an extraordinary OPEC meeting to discuss falling prices. However, oil ministers from Kuwait and Algeria dismissed possible output reductions. Ali al-Omair, Kuwait’s oil minister, said for the official Kuwait News Agency that while producers would like higher prices, there was “no room” to achieve that by cutting output.

The recent price recovery is not expected to last until markets players are soothed with a definitive message by OPEC that the group will lower its output, analysts said.

Economic data

Upbeat economic data from the US on Thursday and Friday sparked confidence among market players, helping digest earlier bearish EIA supply data. US industrial production rebounded in September, while initial jobless claims and their four-week average fell to the lowest in more than 14 years, underscoring a healthier US labor market.

Another bright spot was US consumer sentiment jumping to the highest in more than seven years. The preliminary Thomson Reuters/University of Michigan index of consumer sentiment unexpectedly rose to 86.4 in October, the highest since July 2007, defying projections for a drop to 84.1 from 84.6 in September.

A separate report showed housing starts rose more than expected at 6.3% in September, reversing a 12.8% decline a month earlier and underscoring solid underlying fundamentals for the US economy.

Market players eyed key economic data for the week, including China’s third-quarter GDP growth rate, as well as, among others, housing and consumer inflation data from the United States. The Asian economy probably grew at the slowest pace in more than five years in the third quarter, data by Chinas National Bureau of Statistics is expected to show.

Natural gas

Natural gas fell for a fifth day as forecasting agencies predicted overall seasonal weather across most of the US with no imminent threat of widespread freezes, paving the way for more above-average inventory injections.

On the New York Mercantile Exchange, natural gas for delivery in November fell 2.44% by 14:02 GMT to $3.674 per million British thermal units, having earlier touched $3.667, the lowest since November 21st. The power-station fuel settled 0.8% lower on Friday at $3.766, closing the week 2.4% lower.

Prices continued to edge lower as weather patterns showing mostly moderate weather throughout October, with only localized overnight lows below the freezing point, failed to scare market players into pushing the energy source higher.

According to NatGasWeather.com, reinforcing cool blasts will hit the Great Lakes Region and Northeast early this week and push lows into the 40s and 30s, locally below freezing point, driving moderate heating demand. Today’s cold start will be followed by highs reaching into 40s and 50s to the north, and 60s to the south.

The rest of the US will enjoy comfortable conditions and as high pressure expands late this week, it will cover even large parts of the northern US, inducing only light heating and cooling national demand during those days.

The Midwest will see highs ranging between 40s and 50s to the north and 60s south, while warmer conditions with highs in the 70s will be felt across the Plains and middle Mississippi Valley.

The southern US will continue to gradually cool, with the until-recently widespread highs in the 80s and 90s becoming rarer, easing the need for cooling. The interior South will see temperatures peak in the upper 60s and middle 70s on Monday, while the remainder of the region will reach the upper 70s and middle 80s. Widespread dry conditions are expected.

Most of the West will enjoy seasonal, or slightly warmer weather. Rain and showers are expected over eastern Washington and Oregon, Idaho and northern Nevada, as well as southern Colorado and New Mexico, while dry conditions are in effect for the rest of the western US. Northern California, Oregon and Washington will see highs in the 60s, while temperatures over the remainder of the region, except the deserts, will peak at the upper 60s and lower 70s.

Market players looked ahead at possible weather systems with increased chance of lowering temperatures significantly across the North around end-October and early-November, but it is still early to get a clear grasp on them.

Supplies

The Energy Information Administration reported on Thursday that US natural gas inventories rose by 94 billion cubic feet (bcf) in the seven days through October 10th, exceeding analysts’ projections for a build in the range of 89-92 bcf and the five-year average gain of 78 billion. This was the 26th consecutive above-average weekly build.

Total gas held in US storage stood at 3.299 trillion cubic feet, narrowing the deficit to the five-year average to 9.9%, down from 10.5% a week earlier, and also shrinking the gap to last year’s 3.643 trillion to 9.4%, from 10.1% during the preceding week.

Due to last week’s mostly seasonal and in some regions above-normal temperatures, analysts’ expectations for the build due to be reported on October 23rd ranged between 95 and 98 billion cubic feet, well above the five-year average net injection of 70 billion cubic feet.