Weekly Oil & Gas Market Highlights: February 2, 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 March ended down for the week, closing at $97.61 per barrel on Wednesday, February 1 after plummeting from highs briefly above $101 per barrel on Tuesday as crude oil market fundamentals reasserted control over geopolitical concerns this week.
• Crude oil futures moved sideways last Friday trading in a narrow band above and below the $100 mark throughout the day.  Futures prices received a slight boost on news that the U.S. economy grew at 2.8% in the fourth quarter of 2011, slightly below expectations of 3%.  Annual U.S. GDP growth during 2011 was 1.7% for the year.  During a normal business cycle, as opposed to a period of recession, 3% GDP growth is considered adequate from job creation, but below a rate that would accelerate inflation.  However, the reason for the increase was the accumulation of inventories by companies rather than actual sales.  GDP growth minus inventory accumulation was only 0.8%.  As a result, expectations are that the first quarter growth for 2012 will be below 2%.  As the country seeks to find employment for the 8.5% officially unemployed, according to Okun’s law, which states that for every 1% increase in unemployment GDP declines by roughly 2-3%, U.S. GDP needs to grow at ~5% in order to reduce unemployment by 1%.  Personal incomes increased by only 0.8% in 2011 while inflation was at ~3.2%.  A European recession could have a negative impact on U.S. economic expansion as exports of manufactured goods to the Eurozone nations would suffer.  Crude traders looked for news out of Iran over the weekend as that country’s parliament geared for a Sunday debate about pre-empting Europe’s plans to implement oil sanctions on July 1 by cutting off direct exports of crude to European nations immediately.  However, the sanctions would be largely symbolic as Iranian oil could easily be re-sold to European buyers once lifted and at sea.  Over the weekend, the Iranian Parliament agreed to postpone a vote on the measure.
• March crude opened lower on Monday as Iran allowed International Atomic Energy Agency inspectors back in to the country and OPEC Secretary-General Abdalla el-Badri calmed the market by declaring the world oil market “well-supplied” with OPEC producing ~30.6 MMbbl/d.  Crude prices dipped ahead of a meeting of European leaders over pessimism that they would be able to reach a deal on a 500 billion euro (~$660 billion) rescue fund and Germany’s proposal for a deficit control treaty.  A decision on a budget overseer for Greece was delayed as they awaited the outcome of discussions between the Greek government and the troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF).  Germany wants an European Union (EU) appointed overseer of Greece’s budget because the country’s government deficit has surpassed EU targets for the past two years.  The measure is bitterly opposed in Greece.  The EU and IMF have given the Greek government a list of prior actions required before they can receive additional funds including measures such as reducing government spending by 1% of GDP and cutting 150,000 government employees over the next three years.  Negotiations are still ongoing over Greek debt restructure with bondholders currently reported to be considering a 69% reduction in the face value of their holdings and a 3.6% coupon rate on new 30-year notes, down from 4.25% that had been discussed earlier.  Analysts believe that when the final numbers are reported for 2011, the European economy will have contracted 0.5% during the year.
• On Tuesday bulls herded together and charged in a move to rally the market.  Kicking off the up side was news out of Europe that 25 of 37 EU member countries had agreed to stricter budget measures and that a new 500 billion euro (~$660 billion) European Stability Mechanism would enter force in July earlier than had been thought.  Germany also backed off demands for an EU-appointed commissioner to oversee the Greek budget.  European leaders also agreed that government spending cuts were not enough, but that the Eurozone must also focus on economic growth.  Governments pledged support for job training, development funds to create jobs, reducing the regulatory burdens on business, and encouraging lending to small business. However, there was still no deal on Greece’s debt restructuring.  Negotiators for Greek bondholders said there should be a deal within the next week.  Traders found further upside over concerns about the disruption of South Sudanese oil production even though the U.S. receives no oil from Sudan.  Since December 8, 2011 Sudan has been confiscating South Sudan’s oil exports estimated to be worth more than $850 million.  Sudan has prevented four ships from leaving port Marsa Bashayer just South of Port Sudan and is keeping another four tankers from docking.  Sudan demands that land-locked South Sudan pay to $32.20/bbl to the country as a transit fee.  As a sign of goodwill, Sudan released two of the ships, but South Sudanese President Salva Kiir Mayadit has said that production will not resume.  Sudan currently is producing some 350,000 bbl/d with China receiving ~260,000 bbl/d from the country and the rest going to India and Malaysia; the United States does not receive any oil from Sudan.  Last week South Sudan signed an agreement with Kenya to build an alternate pipeline through Kenya to Lamu Island on the Indian Ocean.  As oil prices surged more than 2% during trading, WTI traded briefly over $101 per barrel.  However, soon after trading opened in New York, a massive bear raid began on the NYMEX WTI futures contract.  Within two hours of trading, WTI dropped almost $2.50 per barrel to $98.65 with trading volumes briefly spiking to 260,000.   Analyst’s expectations were for another bearish crude stocks report from the Energy Information Administration (EIA) on Wednesday.  For New York traders, overnight news of Europe’s current employment rate of 10.4% or ~23 million people, with unemployment in Spain at 25% and 50% for people under 25 years old, overshadowed news of the European deal out of Brussels.  The Consumer Board also announced that consumer confidence fell to 61.1 from 64.8 in December, a figure lower even than the lowest analyst prediction.  Putting further downward pressure were traders seeking to readjust their portfolios out of crude and into gasoline and other petroleum product futures on expectations of declining refinery demand as a result of high gasoline stockpiles and hopes to ride a gasoline upside as the stockpiles begin to clear.
• In overnight trading, WTI futures tried to stage another rally on news that China’s Purchasing Managers index rose slightly to 50.5 beating expectations of 49.5, which would have indicated contraction.  However, EIA’s weekly crude inventory stocks report sent prices crashing again on new that stocks rose 4.2 million barrels last week, higher than analyst expectations of a 3 million barrel rise.  Demand for finished oil products slumped to 17.7 MMbbl/d, the lowest levels since the turn of the millennium, while stockpiles of gasoline rose 3 million barrels and crude inventories at Cushing increased another 1.5 million barrels.  With the underlying market fundamentals relentlessly bearish, WTI crude futures fell below $97.50 per barrel as the WTI/Brent spread widened to ~$14 dollars.
• On Thursday futures prices continued to drift lower on the bearish market demand signals and ahead of an expected announcement by the Department of Commerce that unemployment rose last week.  Further deflation of prices was supported by news that Shell and the United Steelworkers union agreed to a new three-year contract that includes a 2.5% increase in pay in the first year and then 3% raises for the next two years.  If no agreement had been reached as many as 69 refineries would have been idled while negotiations continued.
  • The average retail gasoline price was up $0.05 for the week to $3.49 per gallon.  Prices were up $0.338 year on year.  Gasoline stocks were also up by 3.0 million barrels to 230.1 million barrels, which is down 6.1 million barrels year on year.
  • The average retail diesel edged up slightly by $0.002 holding steady at $3.85 a gallon, up $0.41 from a year ago.
  • Residential heating oil was up by $0.428 from last week to $3.95 per gallon and $0.43 higher than a year ago.
  • Propane stocks dropped 1.7 MMbbls to 48.9 million, which is 11.06 million barrels higher than a year ago.  The price stayed nearly flat rising by only 1/10th of a penny to hold steady at $2.86 per gallon, which is $0.05 higher than a year ago.

Natural Gas highlights

• Henry Hub spot prices fell during the week from $2.61 to $2.32 per MMBtu as a result of warmer than average temperatures.  The NYMEX March 2012 futures price also fell closing at $2.282 on Wednesday down from $2.769 the prior week.
• Domestic Natural Gas production was up slightly by 0.1%.  The natural gas rotary rig count declined by 3 rigs to 777 while the oil rig count increased by 2 to 1,225.
• LNG imports declined 12.4% last week down 28.35% year on year.
• Working natural gas in storage fell 132 Bcf to 2,966 Bcf, which is 586 Bcf higher than last year and 601 higher than the five-year average.
• Natural Gas consumption fell 13.6% with demand falling across all major sectors as a result of warmer temperatures.  Temperatures were 5.3 degrees warmer than the 30=year average and 9.1 degrees warmer than a year ago.

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Learn more

Deloitte MarketPoint LLC and the Deloitte Center for Energy Solutions have developed an assessment of the potential economic impact of LNG exports from the United States based upon various assumptions. Made in America: The Economic Impact of LNG Exports from the United States summarizes the findings of alternative scenarios regarding U.S. LNG exports and offers related strategic insights.

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