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Weekly Oil & Gas Market Highlights: September 27, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) September 27, 2012 September 20, 2012 % Change
Oil – WTI
(USD per barrel)
$91.85 $91.87 -0.1%
Oil – Brent
(USD per barrel)
$112.01 $110.03 1.8%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.30 $2.80 17.9%

Data sources: Bloomberg; CME Group

Crude Oil Prices

Crude oil futures were choppy and range-bound as investors weighed falling demand and the Eurozone debt crisis against the Middle East unrest and additional stimulus optimism. U.S. crude oil inventory levels of more than 365 million barrels and a 2% fall in domestic refinery input widened the Brent-WTI spread to over $20 per barrel.

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

  1. Oil futures traded largely sideways last Friday, rising and falling between ~$93 and $93.50 per barrel. In Asian trading, futures rose slightly in response to the selloff earlier in the week and on concerns about continued violence in the Middle East. The current unrest in Libya has led some traders to speculate that the turmoil may delay further recovery of oil production as foreign companies avoid operating in the country. In London trading, crude futures rose on optimism that the European Commission (EC) and Spain would work together to meet bond market conditions for further lending to the Spanish government. In New York trading, futures rose along with the broader commodities market as the U.S. dollar weakened against the euro. WTI crude futures for November closed at $92.89 per barrel on NYMEX.
  2. On Monday, crude futures fell 1% on concerns about falling demand in Asia and Europe due to continued economic difficulties. Over the weekend, China announced that its economy is continuing to struggle despite the easing measures implemented over the summer. In Europe, Spanish Prime Minister Mariano Rajoy failed to officially request a bailout for the country; investors are now awaiting Moody’s decision on whether or not to downgrade Spain’s sovereign debt. Meanwhile, Germany and France failed to reach an agreement on a timetable to introduce a common banking oversight regime. Germany’s Ifo Institute released data showing that business confidence in the country declined for the fifth straight month in September. Some traders believe that even with the third round of quantitative easing (QE3), there is not enough demand to support current prices. Prices marginally recovered in the last few hours of trading after the U.S. Department of Treasury made a statement that the Iranian military is linked to the National Iranian Oil Company (NIOC) and that it may subject those doing business with the NIOC to secondary sanctions. Also, Brent futures outpaced WTI as maintenance over-runs in the North Sea exerted upward pressure on Brent prices, widening the spread between the two contracts to nearly $20 per barrel.
  3. On Tuesday, crude futures surged through the first half of trading in anticipation of positive economic indicators from the U.S. later in the day. The Conference Board announced that the U.S. Consumer Confidence Index rose from 61.3 in August to 70.3 in September. However, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, stated in a speech to a Philadelphia-based financial group that QE3 was unlikely to provide much benefit to employment in the U.S. Crude futures tumbled by more than a dollar and closed at $91.37 per barrel on concerns about U.S. demand.
  4. Crude futures continued to fall on Wednesday as Asian traders took note of Plosser’s comments. The market optimism over the Fed’s announcement of further easing through QE3 has largely dissipated. In Europe, Olli Rehn, the commissioner for Economic and Monetary Affairs, restated EC’s commitment to solve the debt crisis, but stated that the current macroeconomic outlook for the Eurozone is not optimistic. In Spain, violent protests broke out against the government’s austerity measures ahead of the public announcement of the government’s budget and economic plan on Thursday. The Spanish region of Catalonia announced a snap election (election called earlier than expected) on secession from Spain. The action is believed to be supported by nearly half the population. In Greece, trade unions are holding a general strike over continued government austerity. Crude futures traded sharply lower following the release of Energy Information Administration (EIA) data showing that oil stocks declined by 2.4 MMbbl last week. The news might have been bullish for crude prices; however, a closer examination of the data showed that the decline was due in part to a steep decline in crude imports to 7.6 MMbbl/d, the lowest level since December 2011, as a result of falling refinery utilizations and declining refinery demand during the week. Concerns about geopolitical tensions pushed prices up later in the day as President Obama, addressing the UN General Assembly, stated that the U.S. was committed to stopping Iran from developing a nuclear weapon. The EU is discussing a proposal that calls for a freeze on the assets of the Iranian Central Bank.
  5. On Thursday, WTI crude futures prices rose over 2% as Shanghai Securities News stated that the Chinese government is expected to announce additional stimulus measures to support the economy of the world’s second-largest oil consuming nation. Later in the day, the Spanish government approved Prime Minister Rajoy’s austerity budget that includes plans to reduce the spending of government ministries and tax lottery winnings as a way to reduce the country’s deficit. The 2013 deficit target is 4.3% of the GDP, down from 6.3% for 2012. In U.S. trading, oil futures climbed largely as a result of expectations about East Coast gasoline demand. Refinery shutdowns in the Atlantic Basin, coupled with maintenance at Europe’s largest refinery (the 400,000 bpd Pernis refinery in the Netherlands) are expected to boost prices. According to EIA data, East Coast gasoline supplies are at an all-time low in nearly four years.

Natural Gas Prices

U.S. Henry Hub natural gas futures settled at 2012 highs of $3.30 per MMBtu as a cooler weather forecast in the Midwest trumped the bearish weekly inventory build-up. Further, the 20-cent premium in the front-month November month contract over October’s expiration supported the price rise.

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

  1. Last Friday, natural gas futures ended higher for a second day as buyers made purchases in an oversold market as the cooling season drew toward an end. Weather forecasts for October indicate above-normal temperatures, which further supports the current price. However, many traders believe that the continued upside will be difficult to maintain until substantial heating demand increases power consumption. Additionally bearish for natural gas futures, the price of Central Appalachian coal is at a two-year low, hovering around $2.10 per MMBtu in energy equivalent terms. Loss of demand for power burn is forcing more gas into an already saturated market.
  2. On Monday, natural gas futures fell 1.7% and closed at $2.84 per MMBtu over concerns about record-high supplies. Nuclear power plant outages were 6,000 MW above the same time last year, which is bullish for natural gas prices. However, coal is more cost competitive than natural gas for power burn currently. Many market participants awaited EIA’s weekly natural gas stocks report, due later in the week, to determine whether weekly stock builds continue to lag average builds for this time of year.
  3. On Tuesday, natural gas futures rose ~3% as traders closed positions ahead of the expiration of the October contract. Nuclear power plant outtages were 6,200 MW above the same level last year, but the overall power demand fell as temperatures began to moderate. Traders are turning their attention to storage builds, noting that last week’s 67 Bcf build was the largest increase in the past three months. Traders are waiting to see whether storage builds continue to lag average builds for this time of year or if they return to normal levels. Domestic natural gas in storage in 2012 is expected to exceed last year’s all-time high of 3,852 Bcf.
  4. NYMEX Henry Hub futures climbed higher on Wednesday, boosted by extended weather forecasts that predict cooler weather in the Midwest and East Coast in early and mid-October, which is the start of the heating season. The October contract expired up 9.9 cents during the day at $3.02 per MMBtu, gaining 6.5% in the last two days of trading. However, many analysts note that gas in storage is at a record high for this time of year, with storage at 82% of capacity. The EIA also predicts that gas production in 2012 will be 4% higher than last year, reaching a new record at nearly 69 Bcf/d.
  5. On Thursday, natural gas futures rose ahead of EIA’s weekly natural gas report on expectations of another lagging inventory build for the week. However, futures tumbled as the agency announced that last week’s gas injection was 80 Bcf, the largest week-over-week increase so far in 2012. Working gas in storage is now at 3,576 Bcf, approaching last year’s all-time high and pushing storage to 84% of capacity.However, much of the day’s gain in the futures price was the result of a ~$0.20 increase due to the carry from the expiration of the October contract to the November contract.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to cooler weather forecasts and limited storage capacity (current natural gas inventories are ~9% higher than the five-year average). June 2013 natural gas futures are 14% higher than current prices, despite the recent price rally, compared to just 2% 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) 14.62 14.92 -1.96%
Gasoline Demand (MMBPD) 8.77 8.63 1.60%
Distillate Demand (MMBPD) 3.70 3.69 0.52%
Production (MMBPD) 6.51 6.27 3.70%
Imports (MMBPD) 7.60 9.85 -22.88%
Stocks (million barrels) 365.2 367.6 -0.65%
Rotary Rig Count 1,402 1,413 -0.78%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,847 (Jun 12) 1,852 (May 12) -0.27%
Gross Withdrawals (Bcf)** 2,424 (Jun 12) 2,532 (May 12) -4.27%
Canadian Imports (Bcf)** 250.04 (Jun 12) 240.37 (May 12) 4.02%
LNG Imports (Bcf)** 8.26 (Jun 12) 16.21 (May 12) -49.04%
Working Storage (Bcf) 3,576 3,496 2.29%
Rotary Rig Count 454 448 1.34%
Horizontal Rig Count 1,149 1,133 1.41%

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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