Weekly Oil & Gas Market Highlights: January 12, 2012 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

• NYMEX WTI futures ended down hovering around $99 per barrel after futures spent most of the past five days above $100 per barrel as it bounced between the bearish fears of the eurodebt crisis and the bullish signals of Iran tensions and the Nigerian strike.  Thursday afternoon prices plunged as European officials said there would be a six month delay in the implementation of sanctions to provide time for some nations to find alternate sources.
• A week ago on Thursday, oil prices climbed in early trading as a result of continuing tensions with Iran and an ongoing general strike in Nigeria over the removal of government fuel subsidies.  The concerns helped Brent end up $0.80 on the day at $113.06 per barrel in contrast to WTI which ended down $0.25 per barrel at $101.56.  Nigerian President Goodluck Jonathan announced an end to fuel subsidies beginning on January 1, which sent local petrol prices surging from $1.50 per gallon to over $3.60 per gallon overnight in a country where 70% of the population lives below the poverty level and most live on less than $2 per day.  The government removed the subsidies in order to provide necessary financing for infrastructure and to ease foreign reserve pressures.  The 2010 government budget was $28 billion with government revenues of only $20 billion.  The fuel subsidies cost the government $8 billion per year.  In positive economic news, the U.S. Department of Labor released statistics showing that new jobless claims dropped 15,000 to 372,000, the 8th time in the past nine weeks that the figure has been below 400,000.  Non-farm payrolls were also up by 200,000 in December.  However, the Energy Information Administration’s (EIA) late Thursday report revealed rising stockpiles of oil (up by 2.2 million barrels), gasoline (up by 2.5 million barrels), and distillates (up by 3.2 million barrels).  U.S. weekly products supplies were around 18 MMbbl/d at levels rarely seen since 1997 – 98 and 1 MMbbl/d lower than last year.  Gasoline demand was around 8.5 MMbbl/d.  The news sent WTI prices plunging by over a dollar.
• On Monday, an Iranian court sentenced a 28-year old American citizen to death as an alleged CIA spy.  Last month, the regime arrested Iranian-American citizen Amir Mirza Hekmati, a former U.S. military translator, and accused him of working for the CIA.  The Obama administration said the charges were complete fabrications.  However, markets are finding a tonic to further oil upside in reports from oil market analysts stating that if Iran closes the strait of Hormuz, current global stocks and SPR releases could provide market stability for around 3-4 weeks keeping the overall impact of such a closure below the 15-16 MMbbl/d actually shipped through the strait.  In any case, market analysts believe an Iranian blockade of the strait could be relieved within a month by military action.  On Sunday, Secretary of Defense Panetta said closure of the Strait of Hormuz would be a “red line” that Iran should not cross.  The market found positive economic news coming out of a meeting between French President Sarkozy and German Chancellor Merkel as they discussed the latest draft of new Eurozone fiscal requirements that now include provisions limiting structural deficits to less than 1% of GDP.  As the two emerged from the meeting, they announced that economic growth would also be a priority for resolving the debt crisis.  As U.S. unemployment has begun to fall below 9%, European unemployment is still above 10%.  European unemployment is highest in Spain (22%), Greece (19%), and Lithuania (15%).  Fitch ratings has reduced its 2012 EU GDP growth forecast to 0.4% while Howard Archer of IHS Global Insight has stated that EU GDP contracted in the last quarter of 2011 according to data showing construction flatlining and industrial production trending downward 1.3% from September through November. As the debt crisis has progressed, the French approach has been to call for a greater role for the European Currency Bank to provide access to credit while Germany has sought to enforce stricter government budgeting with penalties for violators.  The same day of the joint announcement, Germany paid negative yields of 0.0122% to investors for its six-month bonds amid heavy bidding.  Other countries with recent negative yields are Switzerland and the Netherlands.  Rattled investors are seeking havens for their assets and given the current outlook for the Eurozone, a modest negative yield may seem a small price to pay for security.  In contrast, French bond yields have increased as concerns mount over the possible loss of its triple-A rating.
• Crude moved higher Tuesday following rallying markets in Asia, Europe, and the U.S. as markets found support in the improving economic picture for the U.S.  EIA increased its 2012 oil price forecast to $100.25 per barrel in its January Short Term Energy Outlook.  EIA projects U.S. GDP growth of 1.8% in 2012 with world GDP growth of 2.9%.  The Dow Jones Industrial Average had its highest close since July on positive expectations for the earnings season.  The euro also rallied versus the dollar lending support to crude prices.  Further crude upside came from the continued strike over fuel subsidies in Nigeria with the head of NUPENG, the smaller of Nigeria’s two oil industry unions, stating that the union is considering shutting down oil production.  Nigeria exports 2.1 MMbbl/d of oil production and is the fourth largest supplier of oil to the U.S. with 980,000 bbl/d or 43% of the country’s exports going to the U.S. market.  The next largest destinations for Nigerian crude are India with around 300,000 bbl/d (14%) and Brazil with 170,000 bbl/d (8%), and Spain with 100,000 bbl/d (5%).  The news sent crude prices up with WTI narrowing the gap with Brent.
• U.S. Treasury Secretary Timothy Geithner met with Chinese Premier Wen Jiabao on Wednesday to secure China’s support for Western-backed oil sanctions against Iran.  China is Iran’s largest oil export market purchasing some 500,000 bpd (22%) of Iran’s 2.5 MMbbl/d exports.  Iranian crude imports represent 10% of Chinese oil imports.  51% of China’s total imports come from the Middle East.  Chinese Vice Foreign Minister rejected a ban on oil transactions with Iran.  However, China may end up being the biggest benefactor of Western sanctions by using the circumstances to extract a reduced price for the same volumes of Iranian oil.  Already Chinese refiners are demanding more favorable terms and steep discounts for Iranian oil.  As the contracts are renegotiated, China has reduced its purchases of Iranian crude for January and February in order to apply negotiating pressure.  Later in the day, an Iranian nuclear scientist died as a result of a magnetically-attached car bomb secured to the vehicle by a hit man on a motorbike.  The incident, targeting a chemical engineer, is the fifth such daylight attack on scientists working on Iran’s nuclear program in the past two years.  Tensions also rose in Nigeria as the President of Nigeria’s largest oil workers union Pengassan said that workers were on “red alert … one of the very first steps in the [oil production] shutdown process.”  EIA’s crude inventories report sent bearish signals on news that oil stocks rose 5 million barrels last week along with gasoline and distillate stocks.  Oil stocks were higher than a year ago for the first time in six months and total petroleum product supplied was at 17.8 MMbbl/d a low not seen since May 2009 and only seen ten years prior to that in May 1999.  Gasoline demand sunk to 8.1 MMbbl/d a level not seen since 2003 and one more regularly seen in the late 1990’s.
• The U.S. won Japan’s support for sanctions Thursday as Treasury Secretary Timothy Geithner continued his Asian visit.  China, Japan, and India are the largest purchasers of Iranian oil.  Japan is the world’s third largest oil importer receiving around 3.5 MMbbl/d according to METI’s preliminary data for November, of which 230,000 bbl/d (6.4%) originated in Iran down from 270,000 bbl/d (7.7%) in October.  Japan’s Foreign Minister is currently visiting key Middle Eastern oil producing nations to encourage increased output.  JX Nippon Oil and Energy, Japan’s largest refiner, is in discussions with Saudi Arabia to replace Iranian sources in case of an embargo.  JX purchases around 90,000 bbl/d from Iran, which accounts for 40% of Japan’s Iranian crude purchases.  South Korea is also quietly working to diversify its supplies.  NYMEX futures prices continued to rise as Nigeria’s NUPENG oil union called for its members to stop work in support of the ongoing national strike.  Nigeria’s largest oil workers union, Pengassan, stated that it would ask its workers to stop work on Sunday, January 15 if an agreement was not reached with President Jonathan to reinstitute the subsidies.  However, futures prices plunged dramatically falling over $2.00 within fifteen minutes until it encountered resistance at the $99 dollar mark as European leaders announced they would postpone implementation of any Iranian oil sanctions for six months in order to provide Greece, Italy, and Spain time to locate alternate sources of supply.  Italy is likely to be exempted altogether in order to recover $2 billion worth of oil in payment of debts owed by Iran to Eni.  The three are the most dependent on Iranian oil of European nations and also the ones being hardest hit by the eurodebt crisis.
  • The average retail gasoline price rose more than $0.08 last week to $3.38 per gallon.  Prices were $0.29 higher than a year ago.
  • The average retail diesel price also rose, increasing by $0.045 to $3.83 a gallon, breaking a seven week declining trend.
  • Residential heating oil increased $0.09 to $3.93 per gallon and $0.11 higher than a year ago.
  • Propane stocks dropped 0.9 MMbbls to 54.3 million as prices moved up half a penny to $2.87 per gallon, which is almost $0.11 higher than a year ago.

Natural Gas highlights

• NYMEX February 2012 futures dropped 32.3 cents per MMBtu to close at $2.774 per MMBtu on Wednesday as a result of warmer temperatures, burgeoning stock builds, and consistently upward trending production volumes.  The Henry Hub spot price closed down 15 cents to $2.81 per MMBtu.
• Domestic natural gas production was slightly higher than last week up 0.1% at 64.1 Bcf and 10.3% higher than a year ago. Canadian LNG imports were down 8.3% over last week and down 31.3% from last year.  The natural gas and oil rig counts both increased by 2 to 811 active gas units and 1,191 oil directed rigs.
• Working natural gas in storage fell 95 Bcf to 3,377 Bcf, 398 Bcf higher than a year ago.
• Natural gas consumption was down as a result of warmer temperatures that exceed the 30 year average by 6.4 degrees and were 4.6 degrees higher than from a year ago.  Residential and Commercial sector led the decline with an 11.3% drop.  However, power sector demand increased 3.3%.

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Learn more

Deloitte MarketPoint LLC and the Deloitte Center for Energy Solutions have developed an assessment of the potential economic impact of LNG exports from the United States based upon various assumptions. Made in America: The Economic Impact of LNG Exports from the United States summarizes the findings of alternative scenarios regarding U.S. LNG exports and offers related strategic insights.

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