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Weekly Oil & Gas Market Highlights: February 27, 2014

Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators

Front Month Futures February 27,
2014
February 20,
2014
% Change
Oil – WTI
(USD per barrel)
$102.40 $102.92 -0.5%
Oil – Western Canadian Select*
(USD per barrel)
$77.40 $79.17 -2.2%
Oil – Brent
(USD per barrel)
$108.96 $110.30 -1.2%
Natural Gas – U.S. Henry Hub
(USD per MMBtu)
$4.51 $6.06 -25.6%

Data sources: Bloomberg; CME Group
* Western Canadian Select (WCS) is a blend of Canadian heavy conventional and bitumen crude oils blended with sweet synthetic and condensate oils traded in Hardisty, Canada.

Crude oil prices

WTI crude futures softened this week following weak economic data from China, the second largest source of petroleum demand center after the United States. Mounting economic and political tensions in Ukraine also pushed down the prices while rising supply to the Gulf Coast via the Keystone XL pipeline eased the WTI discount to Brent.

Daily closing price
Note: Intra-day prices (every 6 hours)
Data source: Bloomberg

  1. Last Friday, WTI crude futures fell as investors bid prices down believing the market was due for a correction following last week’s rise. Prices had been driven up on expectations that continued below-average temperatures across the central and eastern part of the U.S. would boost demand for heating oil. However, weekly data from the Energy Information Administration (EIA) last week showed only a 339,000 barrel decline in distillates, which include diesel and heating oil, where analysts had expected to see a much larger decline. WTI crude futures for April delivery fell $0.55 to close at $102.20 per barrel.
  2. On Monday, China Petroleum Stockpile Statistics reported commercial crude inventories rose 3.57% in January from December and petroleum product stockpiles increased nearly 11%. The news of rising stockpiles, coupled with reports that Chinese banks are reducing loans to real estate and related industries such as cement and steel, have increased concerns about sluggish crude demand growth in the world’s largest oil importing country. Later in the day, crude received support as investors noted crude stockpiles at Cushing, the main pricing point for WTI, fell to their lowest levels since October. The opening of the southern leg of the Keystone XL pipeline is easing a bottleneck in supplies, allowing more crude to reach Gulf Coast refiners via pipeline. WTI crude closed up $0.62 at $102.82 per barrel.
  3. On Tuesday, crude futures fell as Chinese data showed new home values in the country slowing for the first time in a year. China’s demand for commodities, including crude oil, is a major driver of market prices, and fears of a slowdown in the country due to a tightening of credit are raising concerns about crude demand. Later in the day, futures rose as oil production in Libya, which had recovered to 0.60 MMbbl/d in January, fell to just 0.23 MMbbl/d due to continued protests, which have disrupted oil production and exports from the country. Libya’s oil production is down from 1.6 MMbbl/d nearly a year ago. WTI crude futures fell $0.99, closing at $101.83 per barrel.
  4. On Wednesday, crude futures rose as the EIA reported crude inventories at Cushing fell 1.08 MMbbl last week. Stockpiles at Cushing have fallen 7 MMbbl over the past four weeks as the Keystone XL pipeline continues to ramp up its crude flow rate from an initial 288,000 bbl/d to 700,000 bbl/d. U.S. PADD 3 crude stocks at the Gulf Coast, where most of the nation’s refining capacity is located, increased by 1.55 MMbbl to 177.7 MMbbl. Total crude inventories in the nation rose by 68,000 barrels to 362.4 MMbbl, which was below analyst expectations. WTI crude futures for April delivery rose $0.76 to settle at $102.59 per barrel.
  5. On Thursday, crude futures fell as a risk-off, where investors seek lower-risk investments during high-risk scenarios, hit the broader European market due to rising tensions in Ukraine. On the economic front, Ukraine’s interim Prime Minister, Arseniy Yatsenyuk, reported the government is close to defaulting on its $12 billion debt dues. The current state debt is $75 billion while its foreign currency reserves are only $15 billion. The country is looking for $35 billion in aid from the West to stabilize its financial system. Political tensions are also mounting in the nation after gunmen occupied government buildings in its Crimea region, home to the naval base for Russia’s Black Sea fleet, and Russia put its fighter planes on alert. Brent futures bore most of the impact, falling 0.8% on the London exchange. The Brent price decline, combined with the drawdown in WTI supplies at Cushing, is helping to narrow the Brent premium to WTI. During the day, the Brent premium narrowed to just over $6 per barrel, down from $7.55 per barrel last week. WTI crude futures fell $0.19 to close at $102.40 per barrel.

Natural gas prices

Near-month Henry Hub natural gas futures fell more than 25% this week, the highest weekly decline in the history of gas futures, primarily due to revised weather forecasts of warmer-than-expected temperatures in March. News about a lower-than-expected drop in gas inventories also added to the decline in prices.

Daily closing price
Note: Intra-day prices (every 6 hours); March month futures expired on February 26, 2014
Data source: Bloomberg

  1. Last Friday, natural gas futures rose as private weather forecasters predicted an intense period of below-average temperatures stretching across the country with sub-zero temperatures in the northern portion of the country through early March. Recent cold weather has led to strong draws on natural gas inventories, which are now 40% below last year’s levels. Baker Hughes reported the gas-directed rig count rose to 342, up by 5 rigs from the prior week. Henry Hub natural gas futures closed up 7.1 cents at $6.135 per MMBtu.
  2. On Monday, natural gas futures fell 11% in the largest one-day price decline since August 2007, as revised weather forecasts from the National Weather Service showed temperatures higher than earlier predictions in the 10–14 day forecast for the Midwest. Natural gas futures, which have risen nearly 30% this year, tumbled on the news as investors grew concerned the front-month contract may be over bought. Henry Hub natural gas futures fell 69 cents to close at $5.445 per MMBtu.
  3. On Tuesday, natural gas futures fell ahead of the expiration of the March contract, which had been bid up in the previous two weeks, driven by cold weather expectations. However, last week’s mild temperatures were likely to have had a limited impact on overall gas demand, which was expected to be reflected in EIA’s natural gas inventory report this week. Henry Hub natural gas futures fell 34.9 cents to close at $5.096 per MMBtu.
  4. On Wednesday, natural gas futures fell for a third day on forecasts of warmer-than-expected temperatures. Private weather forecasters predicted less-intense cold weather than expected across the U.S. through March 12. Traders also closed positions on the March contract, which expired at the end of trading. Henry Hub natural gas futures for March delivery closed down 24.1 cents at $4.855 per MMBtu. The April contract, which moved into the front-month position fell 15.5 cents to close at $4.535 per MMBtu.
  5. On Thursday, natural gas futures fell as the EIA released its natural gas inventory report, which showed natural gas inventories falling 95 Bcf to 1,348 Bcf. However, the decline in inventories was below analyst forecasts. The fall in gas inventories also was below last year’s draw of 125 bcf. However, current stocks are 40% below last year’s levels and nearly 35% below the five-year average inventory at this time of year. Henry Hub natural gas futures for April delivery fell 2.4 cents to close at $4.511 per MMBtu.

Futures curve

The forward curve for WTI crude continues to be in backwardation, with December 2014 WTI futures 7% lower than near-month (April) futures due to rising North American crude supplies. The EIA expects U.S. crude production to average 8.42 MMbbl/d in 2014 – the highest since 1987 – boosted by increased drilling in tight oil plays. Natural gas futures sprung out of backwardation as the colder-than-normal U.S. winter comes to an end – the near-term (April) prices are 4% lower than the December 2014 futures.

Data source: Factset

Weekly U.S. crude oil and natural gas data

Crude oil
Indicators This Period Prior Period % Change
Refinery Inputs (MMBPD) 15.3 15.18 0.79%
Gasoline Demand (MMBPD) 8.54 8.03 6.35%
Distillate Demand (MMBPD) 3.62 3.62 NC
Production (MMBPD) 8.06 8.15 -1.10%
Imports (MMBPD) 7.04 7.42 -5.12%
Stocks (million barrels) 362.4 362.3 0.03%
Rotary Rig Count 1,425 1,423 0.14%
Natural gas
Indicators This Period Prior Period % Change
Working Storage (Bcf) 1,348 1,443 -6.58%
Rotary Rig Count 342 337 1.48%
Horizontal Rig Count 1,182 1,183 -0.08%
Consumption (Bcf)* 2,301 (Nov 13) 1,861 (Oct 13) 23.64%
Gross Withdrawals (Bcf)* 2,558 (Nov 13) 2,580 (Oct 13) -0.85%
Canadian Imports (Bcf)* 205.2 (Nov 13) 214.7 (Oct 13) -4.42%
LNG Imports (Bcf)* 2.7 (Nov 13) 5.6 (Oct 13) -51.79%

Notes:
* The EIA does not provide weekly natural gas consumption, withdrawal and import numbers. Thus, the latest available monthly numbers are reported above.
Data source: U.S. Energy Information Administration (EIA)

Comments and questions welcomed. Please contact DeloitteCenterforEnergySolutions@deloitte.com

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About the Deloitte Center for Energy Solutions
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Through the Center, Deloitte’s Energy & Resources Group leads the debate on critical topics on the minds of executives–from the impact of legislative and regulatory policy, to operational efficiency, to sustainable and profitable growth. We provide comprehensive solutions through a global network of specialists and thought leaders.

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