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Weekly Oil & Gas Market Highlights: August 2, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) August 2, 2012 July 26, 2012 % Change
Oil – WTI
(USD per barrel)
$87.13 $89.39 -2.53%
Oil – Brent
(USD per barrel)
$105.90 $105.26 0.61%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$2.92 $3.09 -5.50%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude futures fell 2.5% this week as both the European Central Bank (ECB) and the U.S. Federal Reserve refrained from announcing stimulus measures, raising concerns about global oil demand. However, new economic sanctions on Iran’s oil sector and a 6.5 million barrels drawdown in U.S. oil inventories capped the fall in oil prices.

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

  1. On Friday, July 27, crude futures rose in Asia trading, driven by a weaker dollar versus the euro. ECB President Mario Draghi stated that the bank is ready to restart a bond buying program to provide additional relief to the Eurozone debt crisis. However, despite the positive statement, crude traders were wary, claiming there is a difference between saying something and actually implementing it. Futures prices received a further boost as the U.S. GDP figures for the second quarter showed a 1.5% growth rate. The rate was lower than the 2.4% in the first quarter, but higher than the 1.3% analysts had expected. Initially, however, prices fell on the news as some analysts speculated that the positive growth figures meant there were few prospects for further quantitative easing by the Federal Reserve.
  2. Crude futures were mixed on Monday as investors awaited key economic indicators from the Federal Reserve’s Open Market Committee (FOMC) on Wednesday and the results of meetings between the Bank of England and the ECB on Thursday. OPEC will release July data later in the week as well.
  3. Crude futures fell in Asian trading on Tuesday, ahead of the meetings of several central banks. Many investors believe the FOMC and the ECB will engage in further easing. However, futures fell nearly 2% during the day as positive economic news from the U.S. led some investors to question claims of further easing. Consumer confidence in the U.S. rose to 65.9 in July, up from 62.7 in June.
  4. On Wednesday, crude futures rose after the U.S. imposed new sanctions on foreign banks acting on behalf of Iranian banks in the petrochemicals industry. China’s Bank of Kunlun and Iraq’s Elaf Islamic Bank were affected by the sanctions. Crude futures continued to rise as OPEC reported that July oil production was down, with Iran accounting for the biggest drop. Current reports indicate that Iran’s supply dropped by 150,000 barrels in July, pushing the country to third place among OPEC oil producers, for the first time since 2000. OPEC itself is producing ~1.2 MMbbl/d above its 30 MMbbl/d target and Saudi Arabia alone is producing above10 MMbbl/d, the highest amount in over a quarter century. Later in the day, the Energy Information Administration (EIA) announced that crude stocks declined by 6.5 million barrels last week, far exceeding analyst expectations, but only half of what had been anticipated by the American Petroleum Institute. Gasoline stockpiles also declined by 2.2 million barrels last week; distillates followed a similar trend. After reaching intraday highs, prices began to retreat again as the FOMC stated that it would be willing to take additional actions to stimulate growth, but did not start a bond buying program.
  5. Oil futures fell on Thursday as the ECB announced that it would not engage in any further easing, but pledged full support for the euro. The bank also stated it may undertake further actions to support the European economy.

Natural Gas Prices

Natural gas futures fell 5.5% and closed at $2.92 per MMBtu after the EIA reported a 28 Bcf increase in weekly stockpiles, 5 Bcf higher than market expectations. The failure to hold the crucial $3 per MMBtu level, cooler weather outlook, and growing storage overhang have made analysts skeptical about the upside in prices.

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

  1. Natural gas futures fell on Friday as the EIA reported an inventory build of gas in storage, although the build was below average, year-on-year, for the 13th week in a row. Continuing summer heat has helped boost prices as cooling demand has stayed high. The low natural gas price cut into producing companies’ earnings reports during the week, while some petrochemical companies reported that their ethylene production costs have dropped nearly 50%. Natural gas-fired power producers are also reaping the benefits of low fuel costs. Some analysts have said that any natural gas price above $3 will see power plants switch back to coal. NYMEX gas futures closed 9 cents down (2.6%) at $3.01 per MMBtu.
  2. Natural gas futures shot up ~7% on Monday as forecasts indicated above-average temperatures for the next two weeks. However, the current price has risen 15% over the past few weeks and broken through the 200-day moving average. The Intercontinental Exchange (ICE) is working to transition its over-the-counter (OTC) energy trades to futures contracts in response to regulatory reforms that will make trading in the $650 trillion swaps market more difficult (Source: Reuters).
  3. On Tuesday, natural gas futures traded sideways within a narrow band around $3.20 per MMBtu. According to the EIA, gross natural gas production in May remained unchanged from April. Wet gas production was 72.39 Bcf/d, just a tick above April’s production of 72.38 Bcf/d. Gas production in the U.S. hit a new high of 72.74 Bcf/d in January and then fell as gas-directed drilling rigs declined. However, volumes are still just below record highs. At current prices, dry gas production is not economical and gas is being extracted only as a by-product of growing liquids production. Stranded gas in some regions is being flared rather than brought to market until new pipelines can carry it to market.
  4. Natural gas futures fell 1.2% on Wednesday as traders took profits from the nearly eight-month high on Tuesday. After falling to a 10-year low of $1.90 per MMBtu in April, natural gas prices began climbing and have since staged a bull run of over 65%. Total U.S. natural gas storage is ~80% full, a level not usually reached until September. Some traders anticipate that the mounting volumes of gas in storage could drive futures prices much lower, particularly after the recent run-up in the natural gas price.
  5. Futures slumped nearly 8% on Thursday and closed below $3 per MMBtu after the EIA reported a 28 Bcf increase in natural gas inventories, topping analysts’ expectation of 23 Bcf. The ongoing increase in inventories, prices closing below the crucial $3 per MMBtu level, and fading peak summer demand suggest a weak and volatile trading month for natural gas.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to the limited storage capacity (current natural gas inventories are 15% higher than the five-year average).  Despite the price rally in June and July, March 2013 natural gas futures are still 17% higher than spot price, compared to just 3% for oil.

Data source: Factset

Weekly U.S. Crude Oil and Natural Gas Data

Crude Oil
Indicators This Period* Prior Period* % Change
Refinery Inputs (MMBPD) 15.57 15.80 -1.45%
Gasoline Demand (MMBPD) 8.82 8.66 1.85%
Distillate Demand (MMBPD) 3.75 3.48 7.58%
Production (MMBPD) 6.32 6.36 -0.69%
Imports (MMBPD) 8.41 9.63 -12.74%
Stocks (million barrels) 373.6 380.1 -1.71%
Rotary Rig Count 1,416 1,414 0.14%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,850 (May 12) 1,944 (Apr 12) -4.71%
Gross Withdrawals (Bcf)** 2,527 (May 12) 2,450 (Apr 12) 3.27%
Canadian Imports (Bcf)** 240.34 (May 12) 246.91 (Apr 12) 2.09%
LNG Imports (Bcf)** 16.21 (May 12) 7.55 (Apr 12) 114.65%
Working Storage (Bcf) 3,217 3,189 0.88%
Rotary Rig Count 505 518 -2.51%
Horizontal Rig Count 1,151 1,164 -1.12%

Notes:
*The EIA did not release a natural gas report this week due to the U.S. Independence Day holiday. Thus, this period data is for the week ending June 27 and prior period data is for the week ending June 20.
**The EIA does not provide weekly natural gas consumption, withdrawals, and imports numbers. Thus, the latest available monthly numbers are reported above.
Data source: U.S. Energy Information Administration (EIA)

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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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