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Weekly Oil & Gas Market Highlights: July 19, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) July 19, 2012 July 12, 2012 % Change
Oil – WTI
(USD per barrel)
$92.66 $86.08 7.64%
Oil – Brent
(USD per barrel)
$107.80 $101.07 6.66%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.00 $2.87 4.35%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude futures rose to a seven-week high and closed above $92 per barrel. Expectations of lower interest rates in the U.S. and China, growing tensions in the Middle East, rise in new home construction in the U.S., and decline in U.S. oil and gasoline stocks drove oil prices up.

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

  1. Crude futures rose 1.2% last Friday due to growing concerns over sanctions on Iran. The U.S. Department of Treasury barred 11 Chinese, Emirati, Malaysian, and Swiss companies, in addition to the four announced on Thursday, from doing business with U.S. firms, identifying them as front companies working with Iran to evade the oil sanctions. About 80% of the Iranian economy is dependent on the oil and gas industry and petroleum exports are a significant portion of government revenues. Crude futures also rose as China’s second-quarter GDP increased ~7.6%, in line with analyst expectations. Analysts expect further monetary easing from China or the U.S., which will boost the oil demand.
  2. Over the weekend, the United Arab Emirates (UAE) opened the 1.5 MMbbl/d Fujairah pipeline that bypasses the Strait of Hormuz and thereby avoids any possible Iranian military action to prevent oil passage. Saudi Arabia and the UAE claim the new pipeline increases the total pipeline capacity bypassing the Strait of Hormuz to 6.5 MMbbl/d, resulting in less risk for oil exporters in the Persian Gulf region.
  3. On Monday, crude futures rose on speculation that Federal Reserve Chairman Ben Bernanke would hint at another round of quantitative easing when he testifies before the Congress on Tuesday. NYMEX crude futures were up 1.5% for the day, settling at $88.43 a barrel.
  4. On Tuesday, prices increased in the first half as the U.S. Navy fired at a fishing boat near the Strait of Hormuz, fuelling tensions in the Persian Gulf. However, futures lost some gains in the second half as Bernanke in his testimony avoided discussion of quantitative easing. Futures settled at $89.22 per barrel, an increase of 0.9%.
  5. Crude futures trended lower on Asian trading as Bernanke’s testimony failed to hint at more quantitative easing. In positive economic news, the Department of Commerce stated that U.S. home construction increased 6.9% in June, an annual rate of 760,000 units. Futures rose in the second half of Wednesday as the U.S. Energy Information Administration (EIA) reported a 0.8 MMbbl drawdown in stocks, although the decrease was less than the 1 MMbbl decline analysts expected. Gasoline news was bullish, with stocks declining 1.8 MMbbl after a forecast increase of 1.2 MMbbl. However, the report contained bearish news of a 2.6 MMbbl rise in distillate stocks, double that of analyst expectations.
  6. Oil advanced strongly on Thursday, banking on the positive housing starts and strong gasoline demand data from the EIA. Futures climbed throughout the day with Middle East tensions coming to the boil as Israeli Prime Minister Benjamin Netanyahu blamed Iranian-backed Hezbollah for a bus explosion in Bulgaria that killed five Israeli tourists. Meanwhile in Syria, a bomb exploded during a high-level security meeting of Assad loyalists in Damascus, killing the Minister of Defense. The White House stated that Assad is “losing control” of Syria. Futures closed at $92.66 per barrel, rising 3.1%.

Natural Gas Prices

Natural gas futures rose 4.3% during the week and closed just below $3 per MMBtu. The shutdown of four nuclear reactors on the U.S. East Coast and temperature of above 96 degrees in New York led to a surge in natural gas demand and prices. Natural gas inventories remained at historic highs as rising production from wet shale plays continues to offset strong power demand.

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

  1. Natural gas prices were relatively flat on Friday after the EIA announced a higher-than-expected build of natural gas in storage. Although the recent builds are below the adjusted seasonal norm, total storage is at record highs for this time of year and is currently ~75% full, a level usually reached in September. Gas storage had reached an all-time high of 3.8 Tcf last year. The EIA estimates that by October of this year, working gas in storage could climb to a new record of over 4 Tcf.
  2. Natural gas prices fell 2.5% on Monday as temperature forecasts in the Midwest and Northeast were milder than expected. Additionally, U.S. natural gas production is at an all-time high of 68.98 Bcf/d. The EIA predicts that natural gas supply will increase by 2.8 Bcf/d (4.2%) in 2012, while consumption will rise by 3.3 Bcf/d (4.9%). Although dry gas production has become uneconomic for most producers, increased drilling in wet shale plays for the premium-priced oil and natural gas liquids is making it difficult to stem the tide of growing dry gas volumes.  Natural gas rig count is down by 3.7%; however, the horizontal rig count is near an all-time high of 1,185 due to increased drilling in liquids rich shale plays.
  3. Natural gas futures trended down on Tuesday as weather forecasts for the latter part of the week projected slightly cooler temperatures than what analysts had anticipated. Analysts are eyeing another below-average gas storage build this week as a cue to market activity. Natural gas futures closed down for the second day in a row.
  4. On Wednesday, natural gas futures shot up 8% to an intra-day high of $3.02 per MMBtu on news that four nuclear reactors with 3,500 MW of power were shut down in New York, Pennsylvania, Maryland, and South Carolina. Fueling the gain, temperatures in New York City reached 96 degrees, leading to a surge in power demand for cooling. To meet the demand, Consolidated Edison reduced the voltage to ease the overall grid load. Just after 10:00 AM in New York, futures prices rose $0.10 per MMBtu and then surged $0.13 in under a minute, leading some to speculate that an error had occurred. However, the CME Group, leading provider of benchmark futures and options products, said that there was no error and the system functioned as designed, briefly pausing trading for 5–20 seconds to prevent a cascade of stop orders. August natural gas futures ended $0.18 (6.3%) higher during the day at $2.97 per MMBtu.
  5. Futures prices edged lower on Thursday as temperatures moderated slightly in the Northeast and on profit-taking after Wednesday’s big run-up in natural gas prices. The EIA reported that marketed production of natural gas rose 7.9% year-on-year (YoY) to ~66.2 Bcf/d, which is the largest YoY increase since 1984, according to its recently released Natural Gas Year in Review. In its weekly natural gas report, EIA data showed a below-average build in working natural gas in storage of 28 Bcf. However, stocks are still near historic highs.

Futures Curve

Henry Hub natural gas is in “super contango” due to limited storage capacity (current natural gas inventories are 25% higher than the five-year average). Despite the recent price rally, March 2013 natural gas futures are still 17% higher than spot price, 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) 15.54 15.77 -1.46%
Gasoline Demand (MMBPD) 8.63 8.92 -3.25%
Distillate Demand (MMBPD) 3.37 3.24 4.01%
Production (MMBPD) 6.25 6.25 0.00%
Imports (MMBPD) 8.94 8.63 3.59%
Stocks (million barrels) 377.4 378.2 -0.21%
Rotary Rig Count 1,427 1,419 0.56%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,944 (Apr 12) 2,110 (Mar 12) -7.85%
Gross Withdrawals (Bcf)** 2,450 (Apr 12) 2,539 (Mar 12) -3.51%
Canadian Imports (Bcf)** 246.91 (Apr 12) 246.88 (Mar 12) 0.01%
LNG Imports (Bcf)** 7.55 (Apr 12) 19.27 (Mar 12) -60.82%
Working Storage (Bcf) 3,163 3,135 0.89%
Rotary Rig Count 522 542 -3.69%
Horizontal Rig Count 1,166 1,174 -0.68%

*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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