Weekly Oil & Gas Market Highlights: August 11, 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

• Oil prices continued to seesaw this week in an extremely volatile market. The week opened with crude hitting an eight month low in New York after Standard & Poor’s lowered the U.S. credit rating, stoking fears of demand destruction from the world’s largest petroleum consumer. Demand fears abated and crude futures jumped after the Department of Energy (DOE) announced total products supplied surged 652,000 barrels or 3.3% to 20.3 million barrels a day (MMbbl/d), the highest level since December 24. Bullish supply figures also provided upward pressure on crude prices as U.S. stockpiles fell 5.23 million barrels, or 1.5%, to 349.8 million barrels last week, the biggest one-week drop since December 17. With supply and demand fundamentals trumping macro fears, Goldman Sachs Group Inc. maintained its 2012 forecast for Brent crude to average $130 a barrel. Merrill Lynch maintained its 2012 average forecast for U.S. crude at $102 a barrel and its forecast for Brent next year at $114.
  • Brent oil shed about $13 a barrel as Europe’s debt woes persisted and the European benchmark contract hit a record $22.90 premium to U.S. futures.
  • Finance officials from the Group of Seven industrial countries are taking efforts to boost the global economy and ease the sovereign-debt crisis looming over markets by purchasing Italian and Spanish securities. The U.S. Federal Reserve said it would avoid raising interest rates and would use additional tools if deemed necessary, hinting at the possibility of a third round of quantitative easing.
  • The U.S. average retail price of regular gasoline fell for the first time in six weeks, losing almost four cents to reach $3.67 per gallon. The average price is $0.89 per gallon higher than last year at this time.

Oil Prices Fall, Global Demand Forecasts Increase

• The Organization of Petroleum Exporting Countries (OPEC) said global demand for oil will continue to increase this year due to demand from China and other emerging markets even if demand falters in the U.S. and Europe. Iran, holder of the OPEC presidency in 2011, said there should be a “fair price for oil,” hinting that it will take measures to bolster crude prices. Collectively OPEC members have not set a price level that would trigger a reduction in production, some say $80-90 per barrel is appropriate while others suggest $100 is appropriate. While OPEC failed to come to an agreement over quotas during its June meeting in Vienna, it has steadily increased production since to 9.85 MMbbl/d. Much to the chagrin of Iran, the cartels price hawk, Saudi Arabia took the lead in increasing oil production. In fact, Saudi Arabia is narrowing the gap with Russia, which produces 10.26 MMbbl/d, to become the world's top oil producer. Iranian Oil Minister Rostam Qasemi, said “Saudi Arabia isn’t the whole OPEC. Iran and other member states of OPEC should play a more active role.”
  • OPEC forecasts global demand will rise by 1.4% to 88.1 MMbbl/d in 2011 and 1.5% to 89.4 MMbbl/d. Energy Information Agency (EIA) sees a 0.176 MMbbl/d increase in global liquid fuels consumption in 2012, revised to 89.825 MMbbl/d from 89.739 MMbbl/d due to increased demand from China.
  • Saudi Arabia has increased production in recent months to fill increased demand at home and Asia, and fill the gap as a civil war continues to curtail production in Libya. Both governments in Russia and Saudi Arabia rely heavily on oil revenues and have neared record production levels in recent years.
  • Iran is OPEC's second largest oil exporter, and home to the world's second largest natural gas reserves.

Natural Gas Highlights

• Natural gas prices fell across the country on cooler weather, a bearish storage report, and weak economic news, for the week ending Wednesday. On Thursday, natural gas futures broke $4 per million cubic feet (Mcf) for the first in a week with above-normal temperatures set to return in the 11-day to 15-day forecast. Texas has been scorched by hot weather that has blanketed the South and shows no signs of relief, increasing forecasts for electricity demand for cooling. Robust domestic natural gas production made up for declines in LNG and Canadian pipeline imports. Higher prices in Europe and Asia have diverted LNG cargoes away from the U.S.
  • The Henry Hub spot price fell 17 cents from $4.26 per million Btu (MMBtu) last Wednesday, August 3, to $4.09 per MMBtu yesterday, August 10. At the New York Mercantile Exchange, the price of the near-month contract for September 2011 fell by $0.087 per MMBtu, from $4.090 last Wednesday to $4.003 yesterday, according to the EIA.
  • The natural gas rotary rig count increased by 6 to 883 as of Friday, August 5, according to Baker Hughes Incorporated.
  • Total working gas is within the 5-year historical range at 2,783 billion cubic feet (Bcf) as of Friday, August 5, 2011, according to EIA estimates. This represents a net increase of 25 Bcf from the previous week. Stocks were 197 Bcf less than last year at this time and 80 Bcf below the 5-year average of 2,863 Bcf, according to the EIA.

Power Plant Closures Set to Increase in Coming Months

• Coal-fired power plant closures are expected to increase in the coming months in response to new clean air standards recently finalized by the Environmental Protection Agency (EPA). The Cross-State Air Pollution Rule will result in higher costs for utilities and possibly double-digit rate hikes for consumers. The EPA rule, which aims to improve air quality, has already forced coal facilitates in Georgia, Texas, Ohio, North Carolina and Georgia to retire old units rather than paying for expensive pollution-control equipment. While coal still makes up about 46% of the U.S.’s total generation of electricity, use in the first quarter is already down to thirty-year lows. In addition to the EPA rules, steadily rising coal prices and cheap natural gas have cut into demand. Opponents of the new EPA rules say they are cost prohibitive. Furthermore, many question what will replace the 50 gigawatts that would be taken off-line if 20% of the country's coal-fired electricity generating capacity is retired this decade. Proponents say the $280 billion in annual health and environmental benefits by 2014 outweigh the costs. The projected costs to utilities and ratepayers is about $800 million on top of roughly $1.6 billion a year in capital investments already under way as a result of a previous standard, known as the Clean Air Interstate Rule. The EPA regulations are set to go into effect Oct. 7, 2011, with the first emissions reductions to be phased in as early as 2012.
  • Electric utilities announced the closure of dozens of coal-fired plants this week in response to the new rule. Some of the closures include: American Electric Power Company, retiring about 6,000 MW of generating capacity; Duke Energy, retiring a 862 MW factory in New Richmond, Ohio; and, Georgia Power, a subsidiary of The Southern Company, shutting down a 871 MW generator by 2018 - 18 years before the end of its necessary retirement, according to the publication Business Insider.
  • According to the Clean Air Interstate Rule’s measurements the highest levels of toxic air pollution from coal-and oil-fired power plants are in Indiana, Ohio, Pennsylvania, Florida, Kentucky and Maryland.
  • The American Coalition for Clean Coal Electricity, a trade association that includes coal companies and utilities, funded a study that concluded that the new costs would lead to a 13% drop in coal-fired generation. It said electricity prices would increase by double digits for ratepayers in Indiana and more than 20 other states.

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