Commodities trading outlook: crude oil and natural gas futures

WTI and Brent futures slid towards multi-year lows during midday trade in Europe today, pressured by the rallying dollar, which was boosted by above-par US payrolls figure. Meanwhile, natural gas futures were to the upside, banking on a cooler pattern set for the US.

WTI futures for November delivery on the New York Mercantile Exchange traded at $90.63 per barrel at 12:54 GMT today, down 0.42% for the day. Prices had ranged $90.22 to $91.79 per barrel. The US contract reversed all of Thursday’s significant losses to close for a 0.31% gain yesterday, though it also logged the lowest price in 1.1/2 years at $88.18. The brand is now headed for a ~3% loss this week.

Meanwhile on the ICE in London, November Brent stood at $92.16 per barrel, down 1.35%, with prices between $92.16 and $94.06 per barrel. The contract’s premium to its US counterpart narrowed to $1.53, the lowest in more than a year. The global benchmark closed Thursday’s session for a 0.8% loss, with the November future reaching a two-year low at $91.55. Brent is on track for a ~4.7% weekly loss.

The key figure on US nonfarm payrolls for September was released today, revealing the US economy had added 248 000 new jobs, compared to expectations of a 215 000 reading, boosting the US dollar to a new four-year peak. Meanwhile, the unemployment rate was logged at a six-year trough at 5.9%, also beating expectations.

The rallying dollar again pressured commodities across, reversing crudes gains from earlier today and adding to bearish sentiment.

Markets were pressured by somewhat shocking news from Saudi Arabia since Wednesday. The world’s top crude exporter cut the list price of its crude for Asia, Europe and North America. The news caught the market off guard, erasing the positive sentiment from a bullish Energy Information Administration (EIA) weekly US oil report.

Some market analysts had expected Saudi Arabia to cut output, and lift global crude prices, to accommodate smaller OPEC members, though at the cost of its own market share. The Kingdom is the only oil exporter with sufficient production with quick-shut capabilities, which makes possible significant, and timely, production cuts, or increases, which could significantly impact global prices.

“There’s need for strong production cuts, and the only country that can deliver that cut is Saudi Arabia,” Carsten Fritsch, commodity analyst at Commerzbank AG in Frankfurt, said for The Wall Street Journal. “A price drop below $90, maybe $85, will cause alarm bells.”

The price cut, however, indicates that Saudi Arabia is not keen on suffering to keep other OPEC members afloat, and global prices will probably have to dive deeper to stoke a reaction from the Kingdom, pressuring crude contracts.

Last month both OPEC and the International Energy Agency (IEA) lowered their projections of crude demand in 2015, amid growing supplies from Libya, Iraq and most notably – the US, stoking worries on the market to send futures tumbling.

“OPEC appears to be gearing up for a price war,” said Mr Fritsch. “We therefore do not expect prices to stabilize until this impression disappears and OPEC returns to co-ordinated production cuts.”

On Tuesday crude slumped again, logging the worst day in almost two years, with both benchmarks closing for ~3% loss. Analysts agree that a complex of factors contributed to the slump. A four-year strong dollar, weakening demand outlooks in Europe and China, second- and third-top oil consumers, respectively, rising output from OPEC and technical covering at the end of the quarter were all cited as possible factors.

Natural gas

Front-month natural gas futures for settlement in November traded at $3.972 per million British thermal units (mBtu) at 12:56 GMT, up 1.02% for the day. Prices ranged from $3.948 to $4.030 per mBtu. The contract dropped 2.26% on Thursday and was down 2.3% for the week through the session’s close.

Natural gas prices slumped Thursday, after the US reported a bigger-than-expected build of natural gas in storage.

The US Energy Information Administration (EIA) reported on natural gas storage levels for the week through September 26th today, logging the weekly build at 112 billion cubic feet, above the expected 105-109 Bcf, prompting a dive for natgas prices. The build was the twenty-fourth straight bigger-than-average injection, and narrowed the deficit to the five-year deficit to just 11.4%, down from 12.5% last week and more than 50% in March.

“We thought if prices sold off after the EIA report it could turn into a nice buying opportunity with the coming cooler pattern upon us. Today might serve as a good test of this,” analysts at NatGasWeather.com wrote in a note to clients today. “It’s certainly bearish deficits are now less than 399 Bcf, and they will look even more so when another 20-30 Bcf gets whacked off with next week’s huge build.”

While next week’s build will be quite bigger than average, the following reports will post leaner figures, as cooler weather makes due through the northern US. A set of cooler Canadian systems will be tracking in quick succession through the third week of October, with each tapping progressively more of the very cold, Arctic air over northern Canada. While its too early to call Winter, the pattern will provide significant upward pressure on natgas prices.

“Additional weather systems should follow through the third week of October, while likely getting progressively colder and more intimidating,” the analysts at NatGasWeather.com wrote.”We need to keep watching intently to see when these cool blasts turn into cold outbreaks, as we aren’t far off.”