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Weekly Oil & Gas Market Highlights: May 26, 2011

Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Crude oil, USD per bbl Noon (EDT) on Thursday, 5/26/11 Noon (EDT) on Thursday, 5/19/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $100.27 (June-2011 Contract) $98.94 (June-2011 Contract)
WTI Cushing Spot $100.05 $98.95
Dated Brent Spot $114.59 $111.79
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 5/26/11 Noon (EDT) on Thursday, 5/19/11
Front-Month NYMEX Henry Hub Futures $4.28 (June-2011 Contract) $4.14 (June-2011 Contract)
Henry Hub Spot $4.36 $4.15

Data sources: Bloomberg; CME Group

Oil market highlights

  • The week opened with oil prices up on unrest in the Middle East and North Africa after violence escalated in Yemen and NATO strikes intensified in Libya. Oil continued its climb throughout the week on the back of a commodity rally, weak dollar, and larger than expected distillate draw. Despite a sizable drop in retail gasoline and diesel prices this week, the partisan energy debate continued in Washington. One side accused the administration of trying to raise energy prices by stifling domestic oil and gas production and pursuing climate change policies, while the other said excessive speculation in the oil futures market was behind recent spikes in oil prices. Meanwhile, investment bank Goldman Sachs raised its forecasts for oil prices citing global economic growth, emerging market demand, and tight OPEC spare capacity. Although oil prices in the U.S. have yet to approach their July 2008 highs of over $145 per barrel, oil is expected to remain at or slightly above $100 for the foreseeable future, according to a report by Vanguard, an investment management company. Oil prices could push significantly higher, the report continued, if there are additional supply disruptions in oil producing regions or stronger-than-expected global economic growth.
    • Midweek, oil prices rose to their highest level in two weeks as U.S. inventories of distillates fell unexpectedly. Distillate stocks, which include heating oil and diesel fuel, fell 2.04 million barrels to 141 million barrels last week, the lowest since April 2009, according to the U.S. Energy Information Administration (EIA). A larger-than-expected build in gasoline stocks and an unexpected modest gain of 616,000 barrels in crude stocks did little to slow oil’s price climb.
    • Concerns over weak gasoline demand ahead of the U.S. driving season that kicks off this weekend with the U.S. Memorial Day holiday, helped lower gas prices. The U.S. average retail price of regular gasoline dropped 11 cents to hit $3.85 per gallon, marking the largest weekly decline since December 2008. The average price is $1.06 per gallon higher than last year at this time. The national average diesel price fell for the third consecutive week, dropping more than 6 cents last week to $4.00 per gallon. This was the largest weekly decline in the national average diesel price since May 2010, according to EIA's This Week in Petroleum.
    • This week Goldman Sachs raised its year-end forecast for Brent to $120 per barrel from $105 and its 2012 forecast to $140 from $120 with strong underlying demand from the global economy seen as insulating oil prices from European debt worries. U.S. light crude peaked at just under $115 per barrel at the start of May while Brent surpassed $127 in April.
Decreased Dependence on Foreign Oil
  • U.S. dependence on imported oil has dramatically declined since peaking in 2005 due to a significant contraction in consumption that resulted from the financial crisis of 2008, increased domestic biofuels production, and increased natural gas liquids and refinery output, according to EIA's This Week in Petroleum. U.S. dependence on imported oil fell below the 50% mark last year for the first time since 1997. The EIA projects that continued improvements in energy efficiency, driven in part by tighter fuel economy standards, will prove increasingly important in moderating future demand growth, offsetting the upward impact of economic recovery. A reduction in foreign oil dependence, however, is not a panacea for U.S. supply concerns. Production in the Western world is not keeping up with global demand. In addition, global oil consumption driven by increased demand in China and India, jumped by 2.3 million barrels a day (bbl/d) last year, the second biggest increase in 30 years. As a result, the world is increasingly dependent on OPEC production, especially Saudi Arabia - the world’s largest oil exporter.
    • U.S. dependence on imported oil fell from 60.3% in 2005 to 49.3% in 2010.
    • As the economy heats back up, demand has bounced back somewhat from a low of 18.8 million bbl/d in 2009, when the U.S. economy bottomed out.
    • Ethanol net inputs grew from 230,000 bbl/d in 2005 to 779,000 bbl/d in 2010, helping to displace traditional hydrocarbon fuels and so reducing petroleum import needs, according to the EIA.
    • Strong gains in the deepwater Gulf of Mexico and the Bakken formation brought decades of contraction in domestic oil production to a sudden halt, and even led to a rebound. U.S. crude oil output increased by an estimated 334,000 bbl/d between 2005 and 2010, further eroding the need for imported crude oil, according to the EIA.

Natural Gas Highlights

  • Mild spring weather and returning nuclear supply kept gas prices steady early in the week. As warmer weather reached the Northeast and South natural gas demand increased at electric power plants in order to meet air-conditioning needs. Prices moved higher at most trading locations in the lower 48 States, with the biggest increases occurring in the Southeast. The pace of U.S. domestic production continued to exceed prior-year levels by about 6%. Supplies from shale gas fields helped boost domestic production above 64 billion cubic feet (Bcf) per day on average during the report week. Domestic production has not declined substantially despite reductions in overall rig counts compared with this time last year due to greater efficiencies in the drilling process and large production from shale plays, according to the EIA.
    • During the report week, the Henry Hub spot price increased $0.21 to $4.36 per million Btu (MMBtu). At the New York Mercantile Exchange (NYMEX), futures prices increased as the weather outlook suggested higher weather-related consumption for the remaining days of May. Natural gas futures dropped from a three-week high on Thursday after EIA showed U.S. inventories increased more than forecast last week.
    • A glut of shale gas being produced in the U.S. has kept prices in the $4 dollar range. However, increased production costs coupled with increased demand is likely to drive prices up in the next couple of years, said Ken Medlock, a fellow in energy studies at the James A. Baker III Institute for Public Policy at Rice University at the 2011 Deloitte Energy Conference on May 20.
    • As of Friday, May 20, working gas in underground storage was 2,024 Bcf, which is 1.3% below the 5-year (2006-2010) average, according to EIA estimates.
Natural Gas Debate Heats Up in Washington
  • As the debate about the environmental impacts of natural-gas drilling continues, U.S. energy companies have brought shareholders into the discussion. Proponents of hydraulic fracturing, also known as "fracking," suggest there is "no evidence" that fracturing poses a risk to aquifers, as long as the wells are constructed properly. Opponents want energy companies to be more environmentally friendly and to disclose more information about the risk of air and water pollution. As of Tuesday, 185 House lawmakers, including 104 Democrats and 81 Republicans, were sponsoring a congressional bill that would provide tax breaks to trucking companies for 18-wheelers that run on natural gas instead of oil. Large industrial users of natural gas, particularly chemical makers, fear the bill will boost demand for natural gas, raising the prices they have to pay for the fuel. The new bill in congress proposes five years of tax breaks of up to $64,000 per natural-gas truck to transport companies and up to $100,000 per fueling station for owners of the stations.
    • The oil and gas industry is embarking on a campaign to persuade Americans that drilling for massive new supplies of natural gas is safe.
    • Michigan's Department of Environmental Quality set new rules for energy companies that produce natural gas by “fracking,” including additional requirements for public disclosure and protecting water resources.
    • Lisa Jackson, U.S. Environmental Protection Agency Administrator, told a House committee Tuesday that she favored natural gas production and said she didn’t know of any “proven case” in which hydraulic fracturing had affected drinking water.
    • Deployment of horizontal rigs, which are used in both oil and natural gas shale formations, dropped only slightly from 1,041 last week, which was the highest level of rigs drilling horizontally in the 20 years for which Baker Hughes has data.

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