Commodities trading outlook: crude oil rises on Saudi supply cut, natural gas falls

Both West Texas Intermediate and Brent benchmark crudes edged higher in early US trading on Thursday after a person familiar with the matter said Saudi Arabia cut crude supplies in September, although output rose. Better-than-expected economic data from Europe, China and the US also lent support. Natural gas fell.

December US crude traded 0.84% higher at $81.20 per barrel at 13:54 GMT, having earlier fallen to a one-week low of $80.05, close to last Thursday’s more than two-year trough of $79.10. The contract slid 2.4% on Wednesday, the most in more than a week, to $80.52, the lowest settlement since October 13th.

Meanwhile on the ICE, Brent for delivery in the same month stood at $85.69 a barrel, up 1.16% on the day. Prices shifted in a daily range between a one-week low of $84.23 and $86.30. The European benchmark crude lost 1.75% on Wednesday, also the most in more than a week, to settle at $84.71, the lowest since October 15th. Brent traded at a premium of $4.49 to its US counterpart, up from yesterday’s settlement at $4.19.

The oil market rebounded on Thursday after an industry source reported that Saudi Arabia has reduced its domestic supply and exports of crude oil to 9.36 million barrels per day in September from 9.69 million in August.

However, some analysts saw the markets response only as a short-term knee-jerk reaction, given that the kingdoms output rose to 9.7 million barrels last month from around 9.6 million in August. The difference between output and supplies is put into storage.

Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said for Bloomberg: “The market is reacting instantly to any news on oil market fundamentals. So far these gains have been only a short-term reaction, and then the market seems to go back to its bearish sentiment.”

Economic data

The market also drew support as upbeat economic data from the US, Europe and China brightened demand prospects.

The Labor Department reported on Thursday that the number of Americans who filed for initial jobless benefits in the week ended October 18th rose to 283 000 from the preceding period’s upward-revised 266 000. However, underlying labor market strength was evident as the four-week average of initial jobless claims slipped to 281 000, the lowest since May 2000. No special factors influenced the state level data.

A preliminary gauge showed that China’s manufacturing activity edged up to a three-month high in October, although the level of output at factories fell to the lowest in five months.

In Europe, activity in France’s manufacturing and services sectors contracted more than projected in October, but much better-than-expected manufacturing numbers from Germany helped offset it.

The Eurozone as a whole saw its Flash Eurozone Manufacturing PMI rise to a two-month high of 50.7, up from September’s final reading of 50.3, while factory output surged to the highest in three months with the Flash Eurozone Manufacturing PMI Output Index hitting 51.9. The services PMI was unchanged at 52.4.

US inventories

Nevertheless, the market remained pressured after the EIA reported on Wednesday that US crude oil inventories jumped by 7.11 million barrels to 377.7 million in the week ended October 17th, exceeding analysts’ projections for 3-million increase. This was the highest inventory level since July. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, rose to 20.6 million barrels from 19.6 million a week earlier.

The larger-than-projected build came amid a typical for the maintenance period lower utilization rate, while domestic crude production stood near the highest in almost three decades.

Refineries operated at 86.7% of their operable capacity, down from 88.1% a week earlier, while US crude output was at 8.934 million barrels per day, close to last week’s 8.951 million bpd, which was the highest since June 1985.

The report also showed that total motor gasoline supplies fell by 1.3 million barrels to 204.4 million, largely in line with analysts’ projections. Distillate fuel stockpiles, which include diesel and heating oil, rose by 1.05 million barrels to 125.7 million, confounding projections for a 1.5-million drop.

Natural gas

Natural gas fell to the lowest since November as weather forecasts provided no concrete data for early-November widespread freezes, while the outlook for the remainder of October remained unchanged, showing mild weather across most of the US. Market players awaited the release of EIA’s natural gas inventory data, due at 14:30 GMT, set to show the 27th consecutive above-average weekly build.

Natural gas futures for settlement in November fell 1.18% to $3.616 per million British thermal units by 13:54 GMT, having earlier touched a fresh 11-month low of $3.609. The energy source slid 1.4% on Wednesday to $3.659, extending its weekly decline to 3.6% so far this week.

According to NatGasWeather.com, natural gas demand over the next seven days will remain low-moderate, compared to normal, with a neutral trend for the 8-14 day outlook.

The Northeast will see showers and slightly cooler-than-usual readings today as the previously reported slow moving weather system tracks across the region, moving east. The central and eastern US will enjoy above-seasonal temperatures this weekend before additional weather systems arrive next week.

Readings over the central and southern US are also expected to be mild over the next several days, with highs into the 60s and 70s, and 80s for the South. Pacific storms across the Northwest will carry rains and slightly cooler-than-normal readings.

Next week, a weather system tracking across the north-central US will push readings below average and will track into the Northeast, followed by additional cool blasts. The central and southern parts of the country, however, will remain mild, curbing heating and cooling demand. The West will enjoy warm temperatures, while the Northwest will remain cooler and with showers.

The market has drawn support in the recent weeks amid expectations that a cold start to November will narrow weekly inventory injections and push the market up. However, how much cold Canadian air will be tapped by the predicted weather systems is still not clear, with weather data over the past 24 hours becoming less convincing.

“If weather patterns fail to bring cold temperatures throughout the firs tweek of November, we believe this would continue to provide bearish weather sentiment as three straight much larger than normal builds would line up,” NatGasWeather.com analysts said in an e-mailed note.

Supplies

Market players eyed EIA’s upcoming natural gas inventories report for confirmation of the bearish supply-demand ratio. 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. A triple-digit build would be considered strongly bearish, while a net injection of 90 bcf and below – the opposite.

The Energy Information Administration said in its Short-Term Energy Outlook dated October 7th that inventories may rise to 3.532 trillion cubic feet by the end of the month, the lowest for this time of the year in six years. Marketed gas production is expected to jump 5.4% this year to 73.98 bcf per day, the biggest percentage increase and also volume since 2011.