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Weekly Oil & Gas Market Highlights: February 17, 2011

Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Crude oil, USD per bbl Noon (EST) on Thursday, 2/17/11 Noon (EST) on Thursday, 2/10/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $85.40 (Mar-2011 Contract) $87.60 (Mar-2011 Contract)
WTI Cushing Spot $85.39 $87.52
Dated Brent Spot $103.21 $101.12
Natural gas, USD per MMBtu Noon (EST) on Thursday, 2/17/11 Noon (EST) on Thursday, 2/10/11
Front-Month NYMEX Henry Hub Futures $3.87 (Mar-2011 Contract) $4.01 (Mar-2011 Contract)
Henry Hub Spot $3.93 $4.23

Data sources: Bloomberg; CME Group

Oil market highlights: Risky business

  • Oil prices first declined and then rebounded over the past seven days along with evolving perceptions of geopolitical risk in the marketplace. Prices fell early in the period after Hosni Mubarak resigned from the Egyptian presidency, easing the market’s concerns that civil unrest would disrupt the transit of oil through the Suez Canal or the SuMed pipeline. However, oil prices rose again in subsequent days as protests spread to (or intensified in) Iran, Yemen, Bahrain, and Libya. Unlike Egypt, Iran and Libya are major oil producers, with Iran’s output second and Libya’s eighth among OPEC members. Reports that Iran was planning to send military ships through the Suez Canal to Syria—increasing tensions with Israel—further stirred the pot on Wednesday and Thursday. Oil prices likely will remain elevated as long as growing unrest in the region continues to stoke fears of potential oil supply disruptions.
    • The front-month NYMEX Light, Sweet Crude Oil Futures Contract rose by 1.6% to settle at $86.36 per bbl on Thursday. Brent prices slipped today but still remained above $102.00 per bbl.
    • Benchmark US futures prices for gasoline (circa $2.50 per gallon) and for heating oil (circa $2.70 per gallon) remain lofty despite ample US inventories. These prices—which are for products delivered in New York Harbor (and that are often produced by East Coast refineries with crude slates that include significant volumes of Brent-linked grades)—are garnering support from high Brent prices.
  • Although it contracted today, North Sea Brent’s price premium to US benchmark WTI remains at extraordinary levels—fluctuating in the $13.00-16.50 per bbl range—owing largely to regional factors. Most industry pundits agree that the massive storage overhang at the Cushing, Oklahoma hub—the physical delivery point for the NYMEX Light, Sweet Crude Oil Futures Contract—and the resulting weakness of WTI prices account for the lion’s share of this spread; however, the strength of Brent prices also is contributing. Unplanned production outages in the North Sea—which Bloomberg estimated this week have reduced the region’s output by 2.0%—likely have bolstered Brent prices. Some analysts also cite strong Brent demand arising from the grade’s relatively high distillate yields as a supporting factor.
    • The Brent-WTI price premium shows little sign of vanishing anytime soon. Crude oil inventories at Cushing remain high and may be set to keep climbing in the months ahead as refiners perform seasonal maintenance and as more Canadian oil arrives at the hub. TransCanada recently completed the second phase of its Keystone Pipeline, which extends the system from Nebraska to Cushing and raises its capacity to nearly 0.6 million bbl per day. The company announced last week that the system has begun commercial deliveries of crude to Cushing.
    • On the other hand, increases in Cushing crude stocks could be more limited in the near term—perhaps granting a bit of relief to WTI prices—if, as some pundits speculate will happen, Midwestern refiners decide to defer maintenance in order to avail themselves of relatively “cheap” WTI crude and ramp up production of summer products early. The region’s refiners may have some incentive to do this given mounting analyst expectations that WTI’s discount will narrow—though not disappear—later this year as crude is shipped from the Midwest to the Gulf Coast by train and truck.
  • Chinese trade data continue to give oil market participants reason to believe that the nation will lead world petroleum consumption higher in 2011. China’s government released figures early this week showing that the nation’s total exports increased by 38.0% year over year in January 2011—suggesting that the country’s economy is still growing at a strong pace. Oil market participants sent prices higher as they promptly interpreted this news to mean that Chinese fuel demand is set to keep expanding briskly. Readings such as this continue to spur the bullish bias that pervades global oil markets (and which was in place before the flare-up of tensions in North Africa and the Middle East).
    • Almost as if to support perceptions of strong oil demand in the country, the General Administration of Customs in Beijing reported that China’s net oil imports rose to 5.1 million bbl per day in January—27.0% more than a year earlier and one of the highest monthly averages on record. Media reports suggest that robust demand for distillates continues to bolster China’s need for oil imports. Bloomberg reported this week that rising demand for diesel to run irrigation systems in areas of China plagued by drought has augmented the nation’s already-robust consumption of the fuel in early 2011.
    • However, price inflation that continues to accelerate in China poses a downside risk to the outlook for global oil demand. The risk that Chinese authorities will tighten monetary policy further in order to cool the nation’s economy may have risen after recent data showed that inflation reached 4.9% in January—up from 4.6% in December. Measures aimed at slowing China’s economic expansion likely would reduce the pace of oil consumption growth in the country, which could translate into a looser global oil market later this year than is widely expected. The potential for anti-inflationary measures in other emerging economies—such as India—also present a downside risk to world oil consumption.
  • The US Energy Information Administration (EIA) provided a somewhat bullish snapshot of domestic oil fundamentals at midweek. Crude oil and gasoline inventories rose by less than expected and distillate stocks posted a sizeable decline—all of which helped to push the petroleum complex higher. Total US commercial petroleum inventories decreased for the first time in many weeks, slipping by 8.4 million bbl (0.8%) as total domestic petroleum consumption jumped by 3.8% from a week earlier to 20.1 million bbl per day—the highest level so far in 2011. On a four-week moving average basis, consumption increased to 19.3 million bbl per day—1.5% higher than a year earlier.
    • For the week ending Friday, February 11, 2011, US commercial crude oil stocks rose by 0.9 million bbl—significantly less than the forecast of 2.0 million bbl. A decline of 7.2% in US crude imports from the prior week helped to limit the stock build, even as crude inputs to refineries slipped. US refinery capacity utilization fell by 3.5% to 81.2%, aided by planned and unplanned outages. Inventory increases in the Midwest and along the West Coast more than offset decreases on the Gulf Coast and East Coast. Stocks at Cushing climbed by 0.3 million bbl from the prior week to 37.7 million bbl. At nearly 346.0 million bbl, US crude inventories are 3.4% higher than a year earlier and 5.7% above the five-year average.
    • The most bullish aspect of the weekly data was the reported 3.1 million bbl draw in commercial distillate stocks—a draw that was especially bullish in light of the fact that the US government sold nearly 1.0 million bbl from its Northeast heating oil reserve into the market during the report week. An increase in distillate demand of about 8.0% and a decrease in production of nearly 6.0% facilitated the draw. At 161.3 million bbl, distillate stocks are still 5.2% higher than a year earlier and remain well above the five-year average. Gasoline stocks grew only negligibly but, at 241.1 million bbl, remain at their highest level since March 1990. A decline in Gulf Coast gasoline stocks offset a significant gain in Midwest stocks.

Natural Gas market highlights: Prices languish

  • Short-term US gas futures markets continue to witness a daily battle between bullish participants who are focused on this winter’s ongoing string of above-average storage withdrawals and bearish players who are convinced that gas supplies will be ample at the end of the heating season and beyond. Aided by a major warm-up across much of the US over the past several days, the bears maintained the upper hand and prices languished below $4.00 per MMBtu this week. Low and stable price levels in the face of rapidly declining storage inventories suggest that the majority of market participants still expect robust US gas production to keep the nation well supplied in the months ahead.
    • Moderating weather outlooks and expectations of ample gas supply continue to keep benchmark prices under pressure. The prompt NYMEX Henry Hub Futures Contract settled down $0.05 at $3.87 per MMBtu on Thursday despite a report of yet another large storage withdrawal in the US.
  • For the week ending Friday, February 11, 2011, the EIA reported today that Lower-48 working gas inventories dropped by 233 Bcf on a net basis—a few Bcf shy of consensus expectations. Although this withdrawal—which easily surpassed both the year-earlier pull of 190 Bcf and the five-year average draw of 150 Bcf—sent stocks below the 2.0 Tcf mark, the market had anticipated a large decline and actually sent prices lower in response. Many pundits expect the pace of withdrawals to slow considerably in the very near term—starting with the current week (ending Friday, February 18). At 1,911 Bcf, inventories are nearly 7.0% lower than a year ago and trail the five-year average level by 6.3%.
    • In its “Natural Gas Weekly Update” for February 17, 2011, the EIA stated that Lower-48 heating degree days were a remarkable 16.0% higher than normal during the storage report week. In addition to driving up gas demand, cold temperatures in producing regions reduced gas output significantly—augmenting the need for storage gas. However, the pace of withdrawals likely slowed in more recent days as temperatures moderated across much of the US. The EIA reported that sharp declines in both core gas demand and gas demand for power generation led total consumption roughly 17.0% lower during the week ending Wednesday, February 16 (notice this differs from the storage report week). Warmer weather also allowed US gas production to rise by 4.3% as well freeze-offs and related issues abated. The EIA bases its weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • While abnormally cold temperatures have led to large withdrawals of gas from storage facilities this winter, strong US gas production and pipeline imports have helped to keep the pace of storage pulls from rising even higher. In its “Natural Gas Market Indicators” update for February 11, 2011, the American Gas Association (AGA) reported that year-to-date US dry gas production of 58.6 Bcf per day is nearly 6.0% higher than a year earlier—and would have been even greater if not for the effects of substantial gas well freeze-offs (on the order of 5.0 Bcf per day at their peak) in the West and Midcontinent in late January and early February. Although the pace of gas-directed drilling activity in the US has retreated from its peaks of last August and September, the Baker Hughes US gas rotary rig count still remains above 900 (at 906 as of Friday, February 11)—lending some support to observers who expect domestic output to remain robust well into 2011.
    • The AGA also reported that imports of gas from Canada rose to help meet stratospheric US space heating requirements in recent weeks. According to the update, imports of Canadian gas increased to more than 9.0 Bcf per day in early February from roughly 7.0 Bcf per day at the beginning of January. The Association stated that, with spot LNG cargoes continuing to eschew the US for higher priced markets (and US LNG sendouts fluctuating around 1.0 Bcf per day), domestic gas production and Canadian imports are playing a bigger role than last year in meeting incremental US heating needs.

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