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Weekly Oil & Gas Market Highlights: September 22, 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, 9/22/11 Noon (EDT) on Thursday, 9/15/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $80.68 (October-2011 Contract) $89.36 (October-2011 Contract)
WTI Cushing Spot $80.98 $89.22
Dated Brent Spot $108.01 $113.94
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 9/22/11 Noon (EDT) on Thursday, 9/15/11
Front-Month NYMEX Henry Hub Futures $3.73 (October-2011 Contract) $3.92 (October-2011 Contract)
Henry Hub Spot $3.79 $4.01

Data sources: Bloomberg; CME Group

Oil & Gas Highlights

  • Oil prices fell below $80 a barrel in New York for the first time since August in an extremely volatile week of mixed supply and demand signals and gloomy economic news. Oil prices held gains early in the week on a larger than expected draw on U.S. crude supplies, which fell to their lowest level since January, according to the Department of Energy (DOE). Crude-oil stockpiles decreased 7.34 million barrels to 339 million in the week ended Sept. 16. Reversing gains, oil production increased 13% to 5.75 million barrels a day last week - the highest in eight years and U.S. gasoline stockpiles surged 3.3 million barrels to 214.1 million barrels last week. Fears of future demand destruction bolstered the affect of bearish supply numbers as data revealed that U.S. job gains have stagnated and lower estimates of second quarter growth. In an effort to mitigate “significant downside risks” to the U.S. economy, Federal Reserve policy makers announced a plan on Wednesday to replace short-term debt in their portfolio with longer-term treasuries. However, these risks appear to have outweighed any short-term rewards and oil plummeted as investors quickly sold off equities and volatile commodities.
    • The U.S. average retail price of regular gasoline decreased this week, sliding six cents to $3.60 per gallon. The average price is $0.88 per gallon higher than last year at this time. The national average diesel price totaled $3.83 per gallon after decreasing less than a penny. The diesel price is $0.87 per gallon higher than last year at this time, according to the Energy Information Administration (EIA).
  • The U.S. is not alone in its economic woes. Global media headlines - stagnation, recession, volatility, contagion exposure - painted an equally grim picture definitive of an ailing globally integrated economy. The International Monetary Fund (IMF) downgraded their forecasts for global GDP to 4% for 2011 and 2012. Meanwhile, investors nervously await Greece's fate as the European Union and IMF missions ponder their decision to grant it another round of bailout funds. Weak global economic projections translate into weak global oil demand. The 17 countries using the euro accounted for about 12% of world use, according to BP Plc’s Statistical Review of World Energy. The U.S. and China were responsible for 32% of global oil demand in 2010. China, which surpassed the United States as the world's largest energy consumer in 2009, is the predominant driver of growing energy demand. Some analysts question whether China can continue its rapid growth as forecasts suggest that China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, according to Bloomberg.
    • China and India together are forecast to consume 31% of the world's energy in 2035, up from 21% in 2008. By 2035, China's projected energy consumption is 68% higher than U.S. energy consumption. Global energy consumption grows 53% between 2008 and 2035, representing an average annual growth rate of 1.6%, according to the EIA.
  • Economic growth from non Organization for Economic Cooperation and Development (OECD) countries will spur global energy consumption, forecast to increase 53% from 2008 to 2035, according to the EIA’s latest International Energy Outlook (IEO). Market participants hoping to ride this wave should expect volatile seesawing of prices due to demand uncertainties in the near- to midterm. Demand from OECD countries is forecast to flatten out due to increased efficiencies in consumption and slower economic growth. Major increases in energy demand from China and India will make up the majority of demand from developing countries. However, growing debt from China and India might slow energy consumption in the near-term. Transportation will continue to drive demand for liquid fuels, which are forecast to increase to 112 million barrels per day (bpd) in 2035 from around 81 million bpd in 2008. Renewable energy sources are forecast to grow 2.8% a year from a 10% share in 2008 to 15% in 2035. But fossil fuels, with a 79% share, remained the single-largest source, even though it was less than its 85% share in 2008. Other important EIA forecasts, include:
    • Liquids remained the largest share of energy consumed worldwide, primarily because of continued strong transportation use, but are projected to fall from 35% of total energy consumed in 2008 to 28% in 2035.
    • Natural gas has the fastest growth rate (1.6%) among fossil fuels over the 2008-2035 projection period.
    • Renewable energy is projected to be the fastest growing source of primary energy over the next 25 years, but fossil fuels remain the dominant source of energy.

Natural Gas Highlights

  • Natural gas demand declined this week on mild autumn temperatures across the country. Natural gas spot prices followed the decline at most market locations across the U.S. as consumption fell this week by 0.7% on reduced air conditioning demand. Prices at the Henry Hub fell from $4.01 per million British thermal units (MMBtu) last Wednesday, September 14, to $3.78 per MMBtu yesterday. At the New York Mercantile Exchange, the price of the near-month futures contract (October 2011) dropped from $4.039 per MMBtu last Wednesday to $3.73 per MMBtu yesterday. Production of natural gas this week was robust, as dry production rose by 1.1%, according to BENTEK. Production remains substantially greater than year-ago levels. Canadian imports rose by 0.3%, with imports to the Midwest increasing by almost 10%.
    • Canadian LNG exports continue to fall, averaging 385 million cubic feet (MMcf) during the report week, which is more than 54% less than the same week last year. Though imports from Canada increased this week, they too remain below last year’s levels due to robust domestic production.
    • The natural gas rotary rig count rose by 20 this week to 912 active units, reversing three consecutive weeks of declines, according to Baker Hughes Incorporated.
    • Total working gas was 35 billion cubic feet (Bcf) below the 5-year historical range at 3,201 Bcf as of Friday, September 16, 2011, according to EIA estimates. Stocks are now 129 Bcf less than last year at this time.
  • Technological advances have significantly expanded the recoverable U.S. natural gas resource base to meet the highest projections of demand, according to a study by The National Petroleum Council (NPC) released on September 15, completed at the request of U.S. Energy Secretary Steven Chu. The 18-month long study of North American natural gas and oil resources, involving more than 400 experts, concluded that despite the domestic oil resource base is being larger than previously thought, domestic oil and gas resources will be necessary to meet future demand. Even as efficiency improvements reduce demand and renewable sources become more available, domestic oil would not displace foreign oil use entirely, it could reduce the dependence on imported petroleum. The NPC recommended that policies should support prudent development of energy resources, improvements in efficiency and work to gain public trust with environmentally responsible developments.
  • House Republicans will vote on legislation that requires the president to set up a cabinet-level committee to examine how the Environmental Protection Agency's (EPA) stricter smog standards will affect electricity and gas prices, electric reliability and the economy. In addition, Republicans suggest the economic costs of EPA regulations outweigh the benefits for both smog and cross border emissions and pollution from power plants. In response, the White House said House Republicans' efforts would hurt necessary health protections and threatened to veto an attempt to thwart pollution regulations. Democrats have argued that the health benefits of environmental regulations need to be considered in weighing the health costs. The bill proposes to amend a federal law that prevents the EPA from considering economic costs when setting health-based air pollution standards, such as for ground-level ozone, the main ingredient in smog.
    • The bill would change that. It's likely to pass the House, but its chances in the Democrat-controlled Senate are less certain.
    • Senate Democratic leaders vowed Wednesday to block the House's attempts to stall the EPA.
    • Meanwhile, a key House panel on Wednesday cleared two other bills aimed at EPA rules reducing pollution. Those bills would delay efforts to control pollution from cement plants and industrial boilers

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

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.

Save these dates!

December 15, 2011
Deloitte Oil & Gas Conference – Houston, TX
For more information on the 2011 Deloitte Oil & Gas Conference please contact OilandGasConference@deloitte.com

About the Deloitte Center for Energy Solutions
The Deloitte Center for Energy Solutions provides a forum for innovation, thought leadership, groundbreaking research, and industry collaboration to help companies solve the most complex energy challenges.

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.

With locations in Houston and Washington, D.C., the Deloitte Center for Energy Solutions offers interaction through seminars, roundtables and other forms of engagement, where established and growing companies can come together to learn, discuss and debate. www.deloitte.com/energysolutions.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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