Weekly Oil & Gas Market Highlights: October 13, 2011 Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Data sources: Bloomberg; CME Group

Oil & Gas Highlights

• Crude Futures rallied this week only to give up some of their gains Thursday following the Energy Information Administration’s (EIA) announcement that U.S. oil inventories rose 1.3 million barrels last week, which raised concerns over dampening demand.  The market was further buoyed by positive news from the U.S. Labor Department’s report that payrolls increased by 103,000 workers and the announcement over the weekend by German Chancellor Merkel and French President Sarkozy that they intended to finalize a comprehensive European debt solution with a detailed plan by the end of the month.  However, the rally faltered on Thursday as EIA announced that crude inventories rose over the week by 1.3 million barrels and the Chinese General Administration of Customs announced that Chinese crude imports declined 300,000 barrels per day (bbls/d) from August.  China’s economic growth slowed by an estimated 0.2 percent Quarter-over-Quarter following a slowdown in the growth of exports.  Overall, oil prices have declined 25% from a 52-week high in April.  Upside uncertainty is driven by concerns over continued turmoil in the Middle East and downside risk remains over the lowering of world economic growth projections.   An unplanned outage at Sunoco’s Marcus Hook refinery pushed up the price of reformulated gasoline blendstock by 2.0% or 5.4 cents, but the price of regular gasoline fell to $3.42 per gallon for a fifth straight week of declines.  The national average diesel fuel price also declined falling to $3.72 per gallon, but was $0.66 per gallon above the price last year.

• EIA’s Short-Term Energy and Winter Fuels Outlook forecasts OECD oil consumption will decline over 2011-12 while demand growth in emerging economies drive total demand up.  Working inventories of natural gas stood at 3.4 trillion cubic feet at the end of September down 2.6 percent from last year.  However, EIA projects that by the end of the injection season inventories will approach last year’s highs.  The average 2011 Henry Hub spot price is expected to be $4.15 MMBtu, which is 0.24 per MMBtu lower than last year’s average.  However, domestic natural gas production is expected to slow in 2012 leading to price recovery to an average of $4.32 per MMBtu next year.  As the U.S. heads into the heating season, average U.S. household heating costs are expected to be higher than last year by 3 percent for natural gas, 7 percent for propane, and 8 percent for heating oil.
  • Non-OPEC liquids production is projected to increase by half a million barrels a day in 2011 and 850,000 barrels a day in 2012.  OPEC supplies will decline by only 30,000 barrels as day in 2011 as a result of increased Saudi production totaling 9.9  million barrels of oil per day (MMbbl/d), an increase of 800,000 barrels per day over second quarter production.  EIA predicts excess capacity of 2.8 MMbbl/d in the last quarter of 2011.  However, a faster than predicted rebound in Libyan production will drive excess capacity to 3.5 MMbbl/d in the fourth quarter of 2012.
  • U.S. liquids fuel consumption for 2011 is projected to fall 1.2 percent or 230,000 bbl/d as GDP growth forecasts are again revised downward.  However, EIA expects consumption to increase 90,000 bbl/d in 2012.  Overall, liquid fuel imports have declined to 49 percent of total U.S. consumption from 57 percent in 2008 as a result of increased domestic production and sluggish recessionary demand.
• In its Monthly Oil Market Report, OPEC cut world oil demand estimates by 180,000 bbl/d.  This is the fourth cut in a row and the largest cut this year.  However, total oil demand is expected to grow by 0.9 MMbbl/d in 2011.  Increased concerns over the sluggish global economy pushed OPEC’s Reference Basket price below $100/b in early October.  Non-OPEC oil supply is forecast to increase by 0.4 MMbbl/d in 2011 rising 0.8 MMbbl/d in 2012 with anticipated production growth in Brazil, Canada, Columbia, and the U.S.  World economic growth projections remain unchanged at 3.6 percent for 2011, but were revised downward to 3.7 percent for 2012 down from 4.1 percent in the previous report.

Natural Gas Highlights

• The Henry Hub spot price fell to $3.54 per MMBtu on October 12, but displayed signs of rallying toward the end of the week driven by a growing number of nuclear power plants offline for refueling.  Following the largest net injection since June 12, 2009, working natural gas in storage rose 112 billion cubic feet (Bcf) from last week to 3,521 Bcf.  The rapidly growing stocks are a result of mild temperatures across the country with a national average temperature of 67.7 degrees, which is 1.7 degrees below normal, but 0.3 percent warmer than a year ago.  The combination of mild temperatures and rapidly accumulating stocks supports a bearish outlook for this year’s shoulder season market.  However, the nuclear power plant refueling seasons could support increased gas demand with around 21 reactors and 20,200 megawatts (MW) offline, 300 MW above last year’s outages.  Operating reactors are at around 80 percent of capacity.
  • The natural gas rotary rig count rose by 12 rigs to 935, that highest level since December 2010. Horizontal rigs gained 13 to a record high of 1,148.
  • Total working gas in storage rose to 3,521 Bcf on Friday, October 7.  However, stocks are 56 Bcf below last year, but 68 Bcf above the 5-year average.
  • The LNG market averaged just over 0.5 Bcf per day this week with most sendouts coming from the Everett terminal in Massachusetts and Georgia’s Elba Island terminal.

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