Commodities trading outlook: WTI drops below $80 on Goldman forecast cut, natural gas declines

West Texas Intermediate crude fell to the lowest since end-June 2012 while Brent slid below $85 as Goldman Sachs revised down its price forecasts for the first quarter of next year by $15 amid ample global supply. German business confidence dropping for a sixth month also helped push prices down. Natural gas fell amid forecasts for mostly mild weather this week.

December US fell by 1.73% to $79.61 per barrel on the New York Mercantile Exchange by 13:42 GMT, having earlier declined to $79.44. The contract slid to $79.10 on October 16th, which was the lowest since end-June 2012. The US crude benchmark fell 1.32% on Friday to $81.01, closing the week 1.3% lower, its fourth straight weekly loss.

Meanwhile on the ICE, Brent futures for settlement in the same month slid 1.75% to $84.62 a barrel, having ranged between $86.25 and $84.55 during the day. The European benchmark crude fell 0.8% to $86.13 on Friday and marked its fifth straight weekly decline. Brent traded at a premium of $5.01 to its US counterpart, down from $5.12 at Friday’s close, which was the widest in a month.

Goldman Sachs said on Sunday that rising output from producers outside the Organization of the Petroleum Exporting Countries, including Azerbaijan and Brazil, will result in oversupply next year.

The investment bank slashed its WTI price forecast for the first quarter of 2015 by $15 to $75 per barrel, while also trimming its prediction for Brent by the same amount to $85. Goldman expects WTI to drop to as much as $70 in the three months through June 2015 and its European counterpart to touch $80 as the oversupply is projected to be most pronounced then.

Non-OPEC output outside the US Lower 48 states is expected to jump by 412 000 barrels per day in 2014, 573 000 bpd next year and 505 000 bpd in 2016, while Brazils production will probably increase by 206 000 bpd this year and 325 000 in 2015. Output from the Gulf of Mexico will likely jump by 155 000 bpd next year.

Within OPEC, Iraq will pump 200 000 bpd more, while Libyas production pace is expected to stabilize at around 700 000 bpd. Meanwhile, global demand has only risen by an annualized 630 000 barrels per day so far this year, less than the investment banks initial forecast, and in line with the IEAs latest downward revision for the year, which was the fourth consecutive forecast reduction.

Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said for CNBC: “Goldman Sachs downgrade reinforces the dismal outlook. Bearishness prevails and the market is still in the process of trying to find a new floor.”

The US investment bank also said OPEC will lose its influence as a “first-mover swing producer” to output from US shale formations, while the Energy Department is in the process of examining how a potential lifting on the limit of US crude exports would influence oil pricing.

OPEC members, which supply around 40% of the world’s oil, will convene in Vienna on November 27th to discuss the group’s production policy and decide on a possible cut in production. However, OPEC’s biggest producers, including Saudi Arabia, have signaled their reluctance to cut output and instead reduced prices to buyers.

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 market’s response only as a short-term knee-jerk reaction, given that the kingdom’s 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.

Economic data

Mostly better-than-expected housing data from the US, coupled with upbeat employment numbers, provided some support. On Monday, the National Association of Realtors reported that US pending home sales jumped by 0.3% in September on a monthly basis, rebounding from a 1% contraction registered in August. Analysts, however, had projected a 0.5% rise.

Activity in the US services sector grew at a slower pace than anticipated, with the preliminary Markit services PMI registering at 57.3, compared to 58.9 in September. Economists had projected a slowdown to 58.0.

Last weeks better-than-expected preliminary manufacturing reports from China and Europe also lent some support. However, on Monday the Ifo Institute for Economic Research reported that business confidence in Germany dropped for a sixth month to the lowest since December 2012, a yet another sign of deteriorating economic conditions in Europe. The Ifo institute’s business climate index fell to 103.2 in October from 104.7 in September, underperforming analysts projections for a drop to 104.3.

Market players also eyed FOMC’s two-day policy meeting this week, with broad expectations calling for the conclusion of the central bank’s Quantitative Easing program. Investors will also be looking for clues of when policy makers may begin to raise interest rates.

Natural gas

Natural gas hovered near the lowest in 11 months as weather forecasts remained mostly unchanged and called for mild temperatures across the US, with few exceptions, through the first week of November.

Natural gas for delivery in November traded at $3.571 per million British thermal units at 13:42 GMT, down 1.44% on the day, having fallen to an 11-month low of $3.557 earlier in the session. The energy source declined 3.8% last week.

According to NatGasWeather.com, natural gas demand over the next seven days will rise from low to moderate, compared to normal, while keeping a neutral weather trend between November 3rd and November 9th.

The southern and eastern parts of the US will enjoy above-normal temperatures in the next few days, with highs reaching the 70s and 80s, inducing light late season cooling demand.

More importantly, pacific storms will track across the northern Rockies and Plains on Monday, carrying rain and below-normal temperatures, and will move into the Midwest. Once the weather system reaches the Great Lakes on Wednesday, a second much colder Canadian system will enter the Northeast, introducing the first threat of below freezing temperatures and light snowfall, driving considerably higher heating demand.

Although the below-usual readings are projected to be contained within the Northeast and Northwest, which will render the cold pattern less impressive compared to what market players would want, the cold blast is projected to also push into the Southeast this weekend, sending lows down into the 30s.

However, NatGasWeather.com reported that as the aforementioned weather systems exits the Northeast next week, there probably won’t be enough cold threats for a possible follow-through buying into the natural gas market, at least through November 9th. The central and southern US are expected to be warmer than usual.

Meanwhile, the EIA is expected to report the 28th consecutive above-average weekly build this Thursday, given last week’s mostly seasonal and above-seasonal readings across the US. Natural gas inventories are expected to have risen by around 90 billion cubic feet in the seven days through October 24th, which would narrow the five-year average deficit by another 20+ bcf.