Weekly Oil & Gas Market Highlights: December 1, 2011 Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior fourteen days

Data sources: Bloomberg; CME Group

Oil & Gas highlights

• NYMEX futures’ breach of the $100 mark on November 17 was short-lived due to fears around the deepening of Eurozone crisis and speculation that the Seaway pipeline reversal will not end the supply glut in Cushing. However, since early this week, futures have been trading close to $100 after a coordinated effort by central banks to infuse liquidity in Europe and heightened political tensions in the Middle East. Crude futures recovered from its two-week low on November 24 as U.S. crude inventories declined to its lowest level since January 2010, according to the Energy Information Administration. The recovery in futures was also driven by an unexpected rise in business confidence in Germany—the Information and Forschung Institute’s German business climate index, based on a survey of 7,000 executives, rose for the first time in four months to 106.6, higher than the consensus estimate of 105.2. Futures posted initial losses on Friday amid concerns on European sovereign crisis, but recovered later in the day due to tensions in the Middle East. A clash in the oil-rich eastern province of Saudi Arabia between Shiite Muslims and security forces killed four. Oil prices rose later in the day after France called for a European embargo on Iranian crude to stop the OPEC nation’s nuclear program. On Monday, futures reached an intraday high of $100.74 a barrel as U.S. consumers spent a record $52.4 billion during the Thanksgiving weekend. The Arab League’s sanctions on Syria, after the country refused to stop its crackdown on protestors, also drove prices. The penalties included a freeze on financial assets and a travel ban on senior officials. However, NYMEX futures lost most of its gain after IMF Managing Director, Christine Lagarde, announced the agency had not received any loan request from Italy and closed positive at $98.21. Tuesday saw NYMEX futures rise for the third consecutive day to $99.79 a barrel, as U.S. consumer confidence climbed from 40.9 in October to 56 in November, the highest jump in more than eight years. Prices also inched up on fears of oil supply disruption by Iran, as Iranian protestors ransacked the British Embassy in Tehran. Positive economic news from round the globe helped NYMEX futures cross $100 a barrel on Wednesday, despite the 3.9 million barrels increase in crude inventories reported by the Energy Information Administration. Concerns over European debt crisis subsided after a concerted effort by the central banks of the U.S., the Eurozone, Canada, the UK, Japan, and Switzerland to reduce the borrowing cost for European banks and improve liquidity in the system. According to ADP Employer Services, U.S. companies added 206,000 jobs in November, the highest in 2011. China, the second largest consumer of oil, decided to cut the reserve requirement ratio for banks by 0.5 percentage points, which may add $55 billion to the financial system.

  • Average retail gasoline price dropped marginally by $0.06 to $3.31 per gallon, which is $0.45 higher than one year ago.  Gasoline stocks were up 0.2 million barrels to 209.8 million barrels.
  • The national average retail diesel price fell by a mere $0.05 to $3.96, $0.80 higher than one year ago.
  • Residential heating oil also fell by $0.04 cents per gallon to $3.90, $0.78 cents above last year’s price.
  • Residential propane price inched up slightly by $0.005 to $2.85 per gallon while propane inventories rose 0.386 million barrels to 59.77 million barrels, down 5.6 million barrels from a year ago.
• Earlier this week, France proposed that the European Union (EU) freeze central bank’s assets and halt oil purchases from Iran, after the U.S., Britain, and Canada announced new sanctions on Iran's energy and financial sectors. At stake is crude supply from the OPEC nation, whose exports of 2.58 million barrels a day in 2010 were exceeded only by Saudi Arabia and Russia. EU members, split on France’s call for an oil embargo, failed to reach an agreement. Greece and Italy, which source more than 13% of their crude oil needs from Iran, expressed reluctance on fear that an embargo could drive up fuel costs and further dampen their sluggish economies.
  • On November 30, Fitch said an EU oil embargo on Iran would have a "much smaller negative impact" on European oil companies than the recent Libyan crisis because their upstream production or CapEx is "negligible" in the country. However, Fitch warned the ban would prove costly for European refiners as they use Iranian crude to optimize their feedstock supplies, which would force them to pass the higher costs to customers.
  • Prices for Russia's benchmark medium-heavy crude Ural, which European refiners can use as an alternative to Iranian oil, rose to trade at a premium of 50 cents above the Brent on November 24. Historically, Urals trades at a discount of $5 per barrel to the Brent marker, due to its lower quality.

Natural Gas highlights

• On November 21, the Henry Hub spot price closed $2.94 per MMBtu, falling to less than $3.00 for the first time in two years, due to expectations of reduced demand as a result of moderate temperatures. However, post-Thanksgiving weekend, spot prices climbed due to unexpected low temperatures in the Southeast and closed at $3.53 per MMBtu. The Southeast gas consumption in November was 17% higher than last year, as temperatures were 10 degrees below normal. Despite the increase in demand from Southeast region, the country wide residential and commercial demand for the week dropped 7.2% over last week, while demand from the power sector dropped 10.3%. The Industrial sector posted a marginal fall of 0.1%.

• The natural gas rotary rig count dropped by 6 to 865 active units. Natural gas production increased 1.2%, averaging 65 Bcf per day, which is 9.4% above last year. The decrease was partly offset by declines in Canadian gas imports and LNG imports which averaged 4.7Bcf per day during the week.
• NYMEX January 2012 futures were down 5.8 cents to $3.55 per MMBtu from $3.608 per MMBtu last Wednesday. Working natural gas in storage fell for the first time in this winter heating season to 3,851 per MMBtu as of November 25. However, the stocks are 261 Bcf above the five-year average.

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Learn more

The euphoria that has surrounded shale gas in recent years has been tempered by questions about the profitability of recent investments and prospects for future successful development. Read Navigating a Fractured Future: Insights into the Future of the North American Natural Gas Market, which addresses many of the questions and summarizes the findings of multiple scenarios regarding the future of North American and global gas markets and offers related strategic insights.

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