Commodities trading outlook: crude oil drops on rising supply, natural gas slips following bearish EIA data

Both West Texas Intermediate and Brent crude benchmarks were set for weekly losses, pressured down by abundant global supplies and a stronger dollar. Slowing factory growth in China and the Eurozone also helped push prices down. Natural gas fell after the EIA reported a larger-than-expected build in nationwide inventories and as readings across some high consuming areas are expected to drop below normal next week.

On the New York Mercantile Exchange, WTI crude for settlement in October stood at $93.62 per barrel at 12:25 GMT, down 0.36% on the day, having traded in a narrow daily range between $94.04 and $93.50 a barrel. The US crude benchmark rose for a second day on Thursday, having added 0.55% to settle at $93.96. Prices are down 1.7% so far this week.

Meanwhile on the ICE, Brent for delivery in the same month was down 0.18% at $102.45 a barrel, having shifted between $102.72 and $102.24 a barrel. The contract rose 0.34% on Thursday to $102.63. Prices are down more than 1% so far this week. Brent’s premium to its US counterpart widened to $8.83 from Thursday’s close of $8.67.

On Wednesday, the Energy Information Administration reported that total motor gasoline inventories rose for the first time in three weeks, having added 0.6 million barrels in the week through August 15th to 213.3 million, defying analysts’ expectations for a 1.4-million drop. Distillate fuel stockpiles, which include diesel and heating oil, fell by 1.0 million barrels to 121.5 million, compared to a projected 0.3-million decline.

US crude oil inventories fell by 4.5 million barrels last week to 362.5 million, beating analysts’ forecasts for a 1.75-million drop. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, rose to 20.2 million barrels from 18.4 a week earlier. Domestic crude production jumped to 8.577 million barrels of crude oil per day, up from 8.556 million last week and more than 1 million above year-ago levels.

Additionally, the American Petroleum Institute said in its monthly report on Thursday that US crude production surged to the highest in 28 years in July.

Further pressuring prices on the supply side, OPEC raised its crude output in July, despite geopolitical tension in some of its member countries. Iraq’s output remained near record high levels as the country’s southern parts, which account for most of nationwide production, were unaffected by clashes with Islamic State in the north. Saudi Arabia, the Organization’s top producer, had its output raised to 10 million barrels per day in July.

Meanwhile, Libyan crude production also rose as the country managed to reopen its biggest export terminal Es Sider, among others, and loaded a second tanker. Albeit still below its 1.4-million-bpd levels from a year earlier, Libya’s output is gradually rising, having reached 612 000 bpd.

Manufacturing activity growth

A preliminary gauge showed Chinese factory growth eased to a three-month low in August, fueling fears of softening demand in the world’s second-top consumer. The Flash China Manufacturing PMI registered at 50.3 in August from July’s final reading of 51.7. At the same time, the Flash China Manufacturing Output Index slid to 51.3 from 52.8 in July, also a three-month low.

Output, new orders and new export orders increased, but at a slower rate, while employment in the sector decreased at a faster rate. China is the world’s second-biggest oil consumer and will account for 11% of global demand this year.

In the Eurozone as a whole, manufacturing activity growth fell to the lowest since July 2013. The flash manufacturing PMi slid to 50.8, trailing projections for a moderate drop to 51.3 from 51.8 in July.

Providing some support on the demand side, US jobless claims for the week ended August 16th slid by 14 000 to 298 000, the Labor Department reported, beating projections for a drop to 300 000 from the previous period’s upward revised 312 000.

Meanwhile, manufacturing activity in the Philadelphia region expanded at the fastest pace in more than 3-1/2-years with the Philadelphia Fed Manufacturing Index rising to 28.0 in July from 23.9 in June. Analysts had projected a drop to 19.2.

Market players eyed the upcoming speech of Fed Chief Janet Yellen, due at 14:00 GMT, for any signals of an interest rate hike that would further strengthen the US dollar. The September US dollar index contract stood at 82.255 at 12:30 GMT, up 0.06% on the day. The US currency gauge ranged between 82.315 and 82.125, close to Thursday’s 13-month high of 82.420.

Minutes from FOMC’s July meeting showed on Wednesday the Federal Reserve might end its monetary stimulus earlier than expected but intends to keep the benchmark interest rate low for a “considerable time” after that. However, some participants voiced their discomfort with the committee’s forward guidance on keeping the benchmark interest rate at rock bottom for an extended period of time, saying a hike in borrowing costs might come sooner than they had initially expected.

WTI may rise next week amid speculation that US inventories will decrease during the week ended August 22nd, a Bloomberg survey showed. According to thirteen out of 35 respondents, prices will jump during the next five-day period, while 12 analysts and traders expect a decline and the remaining 10 were neutral.

Geopolitics

Although the oil market shrug off most of its risk premium, new developments kept prices underpinned to some extent.

In Ukraine, a Russian humanitarian aid convoy crossed the border without permission, allegedly being escorted by rebel fighters. Russia said the aid was intended for civilians in еаstern Ukraine and warned Ukraine not to take any action against it, without mentioning the consequences. The International Committee of the Red Cross said it did not participate in the convoy in any way.

Ukrainian Security chief Valentyn Nalyvaychenko said that “that this is a direct invasion”, but added that Ukraine will not initiate any attacks on the convoy to avoid confrontations.

Meanwhile in the Gaza Strip, Hamas sources said 18 people have been executed due to their alleged collaboration with Israel after an Israeli airstrike killed three senior Hamas leaders on Thursday. Officials said that at least two more Palestinians were killed overnight, bringing the total death toll to over 2 070 Palestinians, most of which civilians, and 66 Israelis, mostly soldiers, since the offensive on Gaza began on July 8th.

Natural gas

Natural gas also fell but headed for a weekly gain as short-term weather forecasts called for mostly warmer-than-usual temperatures across many high-consuming states.

On the New York Mercantile Exchange, natural gas futures for settlement in September were down 0.67% by 12:26 GMT to trade at $3.863 per million British thermal units. The energy source rose to a 1-week high of $3.955 on Thursday and closed the day at $3.889, up 1.73%. Prices ranged between $3.893 and $3.850 on Friday and are up 2.3% so far this week.

The US Energy Information Administration (EIA) posted its weekly readings on natgas storage levels on Thursday, to reveal 88 billion cubic feet (Bcf) of natural gas were added to inventories in the week through August 15. The build was larger than the expected 83 Bcf, and is almost double the 5-year average gain for the week, while also marking the sixteenth straight week of higher-than-average injections.

US weather

According to NatGasWeather.com’s August 22nd – August 28th weather outlook, very warm temperatures across the southern and central US will continue to drive regionally strong cooling demand as highs extend into the mid 90s and lower 100s. However, readings across much of the US will ease by the middle of next week as weather systems track through the northern US, bringing below normal temperatures. The first cool wave will be felt over the Northeast this weekend.

Overall cooling demand during the next seven days will remain moderate compared to normal thanks mainly to the 3-10 degrees Fahrenheit above-normal temperatures across the southern US and Midwest.

However, more above-average injections are to come in the next weeks as much cooler conditions are already pushing into the Rockies and will gradually extend into the Plains and Midwest next week, bringing highs down.

During the August 29th – September 4th span, NatGasWeather.com expects the cooler weather system that had previously established over the Midwest and Northeast to dissipate and give way to several days of warming, especially over the southern and eastern US. However, temperatures are not projected to get hot to an extent that would cause natural gas prices to spike too high as additional Canadian weather systems will try to enter the northern US early September, carrying below-usual temperatures.

Natural gas drew some support as a low pressure area east of the Windward Islands has a 60% chance of becoming a cyclone formation within the next 48 hours, but according to broad expectations it will remain well away from key natural gas infrastructure in the Gulf of Mexico.

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