Commodities trading outlook: crude oil and natural gas futures

WTI and Brent futures were higher and headed for weekly gains during midday trade in Europe today, as upbeat US economic data and souring of the tone over the crisis in Ukraine supported prices. Meanwhile, natural gas futures dropped, but were still headed for a big weekly gain on the back of high temps in the US and bullish storage data.

West Texas Intermediate futures for delivery in October traded at $94.97 per barrel, up 0.44%, at 12:22 GMT on the NYMEX. Prices ranged from $94.48 to a two-week high of $95.15 per barrel. The US benchmark added 0.7% yesterday and is headed for a ~1.4% weekly gain.

Meanwhile, October Brent on the ICE in London, stood for a 0.31% increase at $102.78 per barrel. Daily low and high were $102.49 and $103.01 per barrel, respectively. The contract’s premium to its US counterpart narrowed to $7.81. The European brand also added 0.7% on Thursday and is headed for a ~0.5% weekly increase.

“The biggest impact is coming out of the US,” Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said for Bloomberg. “It’s a good sign that the US is recovering. In the last weeks the price action has been mainly driven by the fundamental situation, and not reacting much to geopolitical factors. There’s less of a fear factor.”

Preliminary figures on US GDP growth for the second quarter of 2014 were posted yesterday, to log the highest reading in almost four years at 4.2% growth on an annual basis, well above expectations. Meanwhile, jobless claims were little changed from a week ago, recording 298 000 new applications. Pending home sales also clocked a better-than-expected monthly growth.

Later today figures on consumer spending will be released, analysts expecting continued growth for income, expenditures.

Earlier, the US Energy Information Administration (EIA) posted its weekly report on oil stocks on Wednesday. Commercial crude supplies were shown to have dropped 2.1 million barrels in the week through August 22, beating estimates of a draw of 0.9m-1.9m barrels. Meanwhile, gasoline stocks dropped 1 million barrels , while distillates, a category which includes diesel and heating oil, were up 1.3m.

A souring of relations in Europe offered some support to crude prices as well, with developments in Ukraine bumping up the risk premium.

Ukraine

Speaking at a press conference yesterday, US President Barack Obama said it is clear that Russia is responsible for the conflict in eastern Ukraine, amid more reports and data of Russian involvement.

“There is no doubt that this is not a home-grown, indigenous uprising in eastern Ukraine,” he said. “The new images of Russian forces inside Ukraine make that plain for the world to see.”

Reports of dozens of Russian armored vehicles entering Ukraine yesterday added to pressure on Russia, after several other such cases recently and the capture of 10 Russian paratroopers by Ukrainian military inside Ukraine. Meanwhile, NATO released new satellite images, showing Russian self-propelled artillery in Ukraine, and Secretary-General Anders Fogh Rasmussen accused Russia of “blatant violation of Ukraines sovereignty”.

For the first time in quite a while, Russian media have questioned the actions of the Kremlin and scrutinized its ambiguous and shady stance on the reports, reminding of the similar circumstances amid which Chechnya and Afghanistan have been invaded in the past by Russia and the USSR, respectively.

Russia has repeatedly denied accusations that it supports the rebels in any way. A growing number of Russian heavy weaponry, including the system used to bring down the civilian airliner in June, and so-called “volunteers”, in addition to Russian troops reported on numerous occasions as fighting alongside the rebels and mysterious burials of Russian soldiers, who officially died on “military exercises”, raise serious questions.

Investors, however, seem to disregard the quite real possibility of a direct military confrontation between Russia and Ukraine, and all the geopolitical and economical risks that it brings, focusing instead on supply and demand figures.

“Geopolitical risk premium in oil has deflated prematurely … but geopolitical tension has not disappeared and remains an upside risk for oil prices.” BNP Paribas analysts said in a note.

Natural gas

Front-month natural gas futures for delivery in October traded at $4.021 per million British thermal units (mBtu), down 0.57%. Prices ranged from $4.020 to $4.068 per mBtu. The contract added 1.02% on Thursday, reaching a six-week high of $4.101, and is headed for a ~3.3% weekly gain.

“We are getting a little bit of a weather spike for support,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said for Bloomberg. “We’ve got a multiweek high; this is progress as far as the bulls are concerned.”

The US Energy Information Administration (EIA) report from Thursday, which covers the week through August 22, logged an injection of 75 billion cubic feet, the smallest weekly build since early May, though continuing the larger-than-average builds series for the nineteenth week. Storage levels were reported at 2 630 trillion cubic feet, just 16.5% short of the 5-year average, and are headed for a near-complete replenishment ahead of winter heating season.

“It will be nothing but bigger builds from here on out,” analysts at NatGasWeather.com wrote in a note to clients today. “We expect much bigger builds to start lining up as they again approach 90-100 Bcf several weeks out.”

Next week’s build is also expected to be leaner, as several days of warm temps over the northern US drive fairly strong cooling demand.

High temperatures in the summer generally prompt increased cooling demand, which in term bumps up overall natural gas consumption, as 30% of all US natgas is burned in power stations, generating electricity for air conditioners, among all other things.

US weather outlook

NatGasWeather.com projected easing temps over the southern and central US in the next several days, as the cool Canadian system that tracks through the Midwest and Northeast. Meanwhile, the East Coast is set for several degrees of warming, before the Canadian system reaches the area to lower readings. Following the system, more high pressure will be building up, allowing for higher temps. Overall cooling demand over the next seven days will be moderate.

“There is not going to be a real hot pattern setting up over the US that would put fear into the markets weather wise,” the group said. “If anything, it’s likely much cooler temperatures will push into many high population cooling demand regions during the second week of September.”