Weekly Oil & Gas Market Highlights: November 10, 2011 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 futures continued to climb gradually during the week as markets struggled to decide if near term supply shortages or macroeconomic signals should have more weight in determining the price. Energy Information Administration (EIA) announced on November 9 that last week’s crude stocks declined 1.4 million barrels to 338.1 million down 0.04% from last week and 7.3% from a year ago. Last Friday’s trading volumes were 30% below their 200-day average even as prices closed up on the day. Trade volumes have been improving after the failure of MF Global last week. NYMEX futures rose in Asia on Monday on news that Prime Minister Papandreou survived a no-confidence vote and would form a unity government. However, uncertainty crept into the market as Italy’s government bond yield surged above 6%. Markets continued to follow the tightening short-term supply signal on Monday as Brent briefly rose to a three week high above $113 and WTI rose to a three month high before both retreated again over macroeconomic concerns. The geopolitical risk premium rose as regional stability issues pushed crude up higher on news of a simultaneous bombing in the city of Damaturu in northern Nigeria that killed 136 people. Traders were concerned that continued violence in northern Nigeria could disrupt oil production. Prices also rose ahead of the International Atomic Energy Agency’s report on Iran’s nuclear program. The report, released Wednesday, provided information that Iran worked on nuclear weapons design and expressed “serious concerns”. France, Germany and the UK pledged to increase pressure on Iran, but stopped short of providing support for military action. Rumors spread that Israel may be planning to attack Iran’s nuclear facilities, but analysts believe the negative consequences of such an action at this time may indicate the Israel is only keeping the option on the table. Wednesday saw positive economic news out of China as the Central Bank announced that inflation in October was only 5.5%, down from 6.1% in September. China’s General Administration of Customs also released its October crude sales data, which showed that October imports surged 1.7% to 4.92 MMbbl/d (20.8 mmt), which was 26.8% above last October. Recent shortages of diesel fuel in China have induced refineries to operate at full capacity in order to maximize output. However, the monthly increase was viewed as more significant that the YoY increase since last year’s October figures were considered to be abnormally low as a result of a statistical aberration caused by October deliveries arriving at the end of September.

• The Interest rate on the 10-year Italian bond crept above 7% on Wednesday as Italy is now two trillion dollars in debt and faces a 400 billion deficit next year. The 7% figure is significant since that is the same rate of interest that triggered multi-billion dollar bailouts from the European Union  and International Monetary Fund for Greece, Ireland, and Portugal. As a result, Berlusconi lost his parliamentary majority during a routine vote on a budget issue, which passed, but short of a majority. As the chance of a no-confidence vote loomed, Berlusconi announced that he would resign as Prime Minister after the Italian Parliament adopts economic reforms. Markets declined around 3% on the news as Italy is the 8th largest economy and accounts for 20% of the eurozone’s economic output. France and Germany held discussions about splitting the currency bloc into separate strong and weak states. However, NYMEX futures prices began to rise again on Thursday buoyed by the belief that a successor to Berlusconi would be better equipped to enact the necessary deficit reduction measures that would stem the rising interest rates.
  • The average retail gasoline price dropped $0.028 to $3.424/gallon, which is $0.55 higher than one year ago. Gasoline stocks dropped 2.1 million barrels.
  • The national average retail diesel price also declined but only by a mere $0.005 with prices holding steady at $3.89, $0.77 higher than one year ago.
  • Residential heating oil rose $0.03 cents per gallon to $3.88, which was $0.80 cents above last year’s price.
  • The residential propane price inched up slightly by less than a penny to $2.82 per gallon while propane inventories fell 0.1 million barrels to 60.2 million barrels.
• On Tuesday, the Department of Interior announced a new 5-year offshore oil and gas plan for 2012-17 that focuses on expanding drilling in places where drilling already occurs. On the East and West coasts, lease sales have been postponed, but the plan would allow for seismic tests to determine the resource size off the Eastern coast. The industry was disappointed by the decision in the Atlantic where a bipartisan group of Virginia lawmakers have supported a lease sale.  A total of 15 lease sales are planned involving 220 million acres. Two lease sales will be in the Arctic region off the Northern coast of Alaska. However, as a result of pressure from environmental groups, those leases would be delayed until 2015/16. The remaining sales would be in the Gulf of Mexico. In October, the Bureau of Safety and Environmental Enforcement approved thirteen new drilling permits, the most in a single month since the drilling moratorium was lifted.

Natural Gas Highlights

• The Henry Hub spot price rose $0.16 per MMBtu to $3.55 during the week. The net effect of warmer than normal temperatures in the East and cooler than normal temperatures in the West was an increase in the use of natural gas for power burn as well as residential and commercial heating. Overall, temperatures were 2.1 degrees below the 30-year average. The natural gas rotary rig count dropped by 27 to 907 active units. Natural gas production was up 0.4% overall even as the off lining of the offshore Independence hub for maintenance has reduced gas from the Gulf of Mexico by 0.5 Bcf.

• NYMEX near-term futures were down 9.7 cents to $3.652 per MMBtu. The bearish shoulder season continues with the five-month NYMEX strip at their lower levels since 2001-2. Supporting the price decline was the rise in working natural gas in storage by 37 Bcf to 3,831 as of November 4. This is 6 Bcf below last year, but only 16 Bcf below the all-time monthly high of 3,847 Bcf in the month of October 2010.  Total gas stocks are currently 215 Bcf above the five-year average.
• A Department of Energy (DOE) official announced before the Senate Committee on Energy and Natural Resources that the Department had commissioned a study from EIA on the impact of LNG exports on the U.S. economy. The study would consider price volatility, price levels, and what would be the impact on businesses to make a public interest determination. The study asks EIA to consider the increase in price that may come from an incremental increase in demand resulting from exports. By law, DOE approves energy-related export applications. However, U.S. bilateral free trade agreements (FTA) prevent DOE from denying applications to export to FTA countries. Last month, DOE approved an application for Cheniere Energy to export LNG to Britain’s BG group for 20 years.

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Learn More!

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November 22, 2011
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December 15, 2011
Deloitte Oil & Gas Conference – Houston, TX
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