Weekly Oil & Gas Market Highlights: March 29, 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 crude futures for May ended down as market participants have begun to largely stand on the sidelines as the futures price trend remains unclear due to conflicting signals from bearish demand fundamentals, a possible coordinated strategic oil release, and tight global spare capacity.  Fear is also working in the market as a result of uncertainty over the simmering tensions between Iran and the West and fears of demand destruction resulting from high oil prices.
• Last Friday’s futures trading saw prices rise on a weakening dollar versus the euro.  However, market participants are still uncertain about whether the overall trend should be up as a result of geopolitical tensions and supply issues or down as a result of current weak macroeconomic and demand signals.  The International Energy Agency (IEA) announced that there were no plans for an imminent release of strategic oil stockpiles, which removed downside concerns of such an action.  Mid-morning futures prices spiked up 3% to $108.25 per barrel as Reuters reported that Iranian crude exports had fallen by 300,000 bbl/d (14%) from 2.2 MMbbl/d in February to an estimated 1.9 MMbbl/d in March using tanker shipment data.  The IEA estimates that total Iranian crude exports could drop by 1 MMbbl/d by the end of 2012.  Some market analysts worry that the sanctions may increase internal pressure in Iran to develop a nuclear bomb faster, which may trigger an Israeli strike.
• Monday trading saw futures prices fall in Asian trading on profit taking from Friday’s rally.  Asian traders took their cues from bearish demand outlook rather than news of an Iranian export decline.  Money managers in the market reduced their net long positions by 4% during the last week according to the Commodities Futures Trading Commission.  However, the market remains braced within a narrow price band just above around $105 as supply disruption concerns keep a floor under the price and macroeconomic concerns provide a ceiling.  The amount of global spare capacity in the market is currently only 1.7 MMbbl/d, which magnifies the effect of supply news.  Also on Monday, Reuters reported that the Royal Bank of Scotland (RBS) has halted payment to Greek shipping company Eurotankers over a shipment of Iranian heavy crude to Mangalore Refinery and Petrochemicals.  India's Great Eastern Shipping Company is trying to pay Eurotankers for the contract, which RBS considers to be a new contract since it was made on the spot freight market.  The U.S. has recently publically warned India about purchases of crude from Iran.  Monday trading volume hit a 2012 low with under 285,000 contracts traded.
• Crude futures traded listlessly on Tuesday as trading volume fell to half of Monday’s level in early market trading, ahead of the release of the Energy Information Agency’s (EIA) weekly oil stocks report.  Trading volumes picked up later in the day as traded contracts increased to 350,000.   During the day, Department of Energy’s Acting Assistant Secretary of Fossil Energy, Charles McConnell, testified to the House Appropriations Subcommittee on Energy and Water Development that the U.S. was considering a release from the Strategic Petroleum Reserve.
• Wednesday, the market took bearish cues from French Industry Minister Eric Besson, who stated that the U.S. government had proposed releasing oil from the country’s strategic reserves.  He stated that France needs to receive a report from the IEA about the state of supplies before a decision is reached.  Later in the day, the EIA released its weekly oil inventories report, which showed a very large 7.1 MMbbl gain over the past week to 353.4 MMbbl, the highest increase since the summer of 2010.  The bears were unleashed as prices dropped 2.5% following the announcement.  Refineries however are increasing utilization to capitalize on rising products prices.  Refinery capacity rose 2.3% last week to 84.5%, while East Coast production capacity dropped 1.19 MMbbl/d (~27%) as a result of refinery closures or idling, given poor refining economics in the region due to its reliance on premium-priced Brent.  Meanwhile, Enbridge is planning to expand its pipeline capacity to bring Canadian crude to the Gulf Coast, which some analysts believe cut narrow the Brent/WTI price ratio by half.  Although the capacity additions and reversals would raise the price of WTI relative to Brent, it should put downward pressure on gasoline as PADD III refiners switch from Mayan and Louisiana Light Sweet (LLS) crude for feedstock to less expensive Canadian oil.
• Thursday, crude futures fell as the dollar rose due to euros seeking a safe haven currency as fears over the Spanish deficit is beginning to grow.  Crude futures plunged when French Prime Minister Francois Fillon said that Western governments are moving closer to an agreement about a coordinated release of strategic petroleum reserves.  The UK Department of Energy and Climate Change also said that they are studying the issues, but have not yet taken a decision.  Germany’s Economy Minister Tanja Kraus said that Germany hasn’t yet been approached about the issue.  The WTI futures price broke through the support it has maintained at ~$105 plunging more than $1.80 in an hour of trading.
  • EIA reported NYMEX crude futures were down $0.19 last week to $106.87 as crude stocks rose 7.1 MMbbl to 353.4 million.  However, stocks are 2.3 million barrels lower than a year ago.
  • The average retail gasoline price was up $0.051 last week to $3.918 a gallon.  Prices were up $0.32 over last year.  Year on year prices have maintained a fairly consistent 0.30 or more premium over the prior year thus far in 2012.  Gasoline stocks fell 6.3 MMbbl to 223.4 million barrels, which is up 6.3 MMbbl  from the same time last year.
  • The average retail diesel price was up by $0.005 remaining at $4.14 a gallon.
  • Distillate stocks were down 0.7 MMbbl to 135.9 million barrels.

Natural Gas highlights

• EIA reported Henry Hub spot prices dropped last week by $0.17 to $2.04 per MMBtu as nuclear power plants idled last week came back online.  Temperatures were 14.1 degrees warmer than the 30-year average and 8.9 degrees warmer than a year ago.
• Domestic Natural Gas production rose 0.2% last week and is up 5% year on year.  U.S. gas imports from Canada were up 20%.  The natural gas rotary rig count fell by 11 rigs to 652.  Oil-directed rigs were up by 4 to 1,313.
• Working natural gas in storage rose 57 Bcf to 2,437 Bcf, which is 816 Bcf higher than last year.  Overall stored natural gas volumes were 900 Bcf (58.6%) higher than the 5-year average.
• Domestic natural gas consumption rose 2.4% percent from the previous week with the residential/commercial sector rising the most (10.4%) followed by the power sector (3.2%) and the industrial sector (1.3%).

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