Commodities trading outlook: crude oil and natural gas futures

WTI futures were headed for weekly gains, while Brent was in the red from a week ago, narrowing the gap between the two benchmarks to the least in almost one year. Meanwhile, natural gas futures looked to settle sizable gains this week as early winter hype grabbed investor attention.

WTI futures for November delivery on the New York Mercantile Exchange traded at $92.67 per barrel at 13:24 GMT today, up 0.16% for the day. Prices had ranged from $92.23 to $93.31 per barrel. The US benchmark is on track to settle the week ~1.1% higher.

Meanwhile on the ICE in London, November Brent stood at $96.89 per barrel, down 0.11%, with prices between $96.57 and $97.50 per barrel. The contract’s premium to its US counterpart narrowed to $4.22. The European brand is headed for a ~1.3% weekly decline.

Final readings on US GDP growth for the second quarter of 2014 were released today, meeting expectations of a 4.6% growth on an annual basis, logging a 4.1/2-year high and reinforcing confidence in the recovery of the US economy, which accounts for 21% of global oil demand.

More positive economic data on housing, durable goods orders and jobless claims further supported outlooks for the US economy, but also strengthened the dollar. A pricier US currency depletes the investment appeal of all dollar-denominated commodities, such as oil, making them more expensive to holders of other currencies.

Meanwhile, surprise draws at US crude inventories proved quite supportive earlier this week. The EIA report, which covers the week through September 19th, revealed crude stocks had lost 4.3 million barrels, as compared with expectations of a 0.7m-1m draw. The draw also marks the 14th weekly decrease out of 17, and is the biggest weekly decrease since mid-July.

Production of crude logged a minor increase, however, to set a new highest level for the past 28 years at 8.867 million barrels per day, signaling that ample supplies will be weighing on contracts for a considerable time.

Meanwhile, the broadening of action against ISIS was thought to widen the risk premium in crude prices, but it has so far failed to spook markets. Investors seem to regard the actions as positive for the security of the region.

Iraq, OPEC’s second-top oil exporter and the most-hurt by ISIS country, actually logs increasing outbound shipments. Libya, also an OPEC member, also clocks soaring production after operations at its largest oilfield were resumed.

Natural gas

Front-month natural gas futures for settlement in November traded at $3.996 per million British thermal units (mBtu), down 0.45% for the day. Prices ranged from $3.969 to $4.040 per mBtu. The contract is on track for a ~1.3% weekly gain, after adding 3.7% over the past two sessions.

Natgas prices again defied broader expectations yesterday, after rallying begind a perceivably bearish weekly US report.

The US Energy Information Administration (EIA) reported the build at natural gas inventories for the week ended September 19th to largely meet expectations at 97 billion cubic feet (Bcf). The figure also represents the 23rd straight week of above-average injections, and with 2.988 trillion cubic feet of natural gas in storage, the deficit to the 5-year average was narrowed to just 12.5%. The series also logs the highest 20-week build in more than 20 years.

The next two weeks will likely see builds in the triple digits, analysts say, as mild temps for this and the following week ease both heating and cooling.

Investors are also closely monitoring a southbound cool Canadian system, due to reach the US late next week. The initial blast will be over low-natgas use states, though by October 6th the system will have moved over the Midwest, and the Northeast later on, adding to the possibility of sizable heating demand.

“The markets should know by now cooler temperatures are coming to the northern US, with below freezing temperatures to many states and highs in the 50s, potentially only in the
40s,” analysts at NatGasWeather.com wrote in a note to clients today. “In reality, it’s not exceptionally cold, but will likely garner enough hype to get the markets attention.”

With total natural gas in storage a sizable amount below the 5-year average, the market is exceptionally sensitive to signs of another brutally cold winter. The possibility of early cold could provide enough upside to completely disregard bulky builds to come, as bulls look to grab early winter hype.

“For now, we are seeing a greater threat of colder temperatures than warmer ones,” the analysts at NatGasWeather.com wrote. But the pattern for next week “clearly will provide very good nat gas build weather as the next two come in well over 100 Bcf.”

Weather patterns project strengthening high pressure over the southern US, already breaking into the Midwest and Northeast. As a result, temperatures across the regions will be rising to quite comfortable, allowing for bumper natgas builds in the following weeks. The West will have a cooler weekend, as offshore systems draft clouds and rains inland, cooling California and the region after the recent hot spell. Overall, US temps will be quite pleasant through to late next week, with little of either cooling or heating.