Weekly Oil & Gas Market Highlights: January 19, 2012 Deloitte Center for Energy Solutions publication

Sign up to receive the weekly Oil & Gas Market Highlights Memo

Key Oil & Gas price indicators for the prior seven days

Data sources: Bloomberg; CME Group

Oil & Gas highlights

• NYMEX WTI futures for February ended up slightly during the week at $100.39 per barrel after briefly dropping below the $100 per barrel mark twice.  The February contract is set to expire on Friday after which March will be the forward month contract.  March crude closed at $100.54 in Thursday trading.
• Markets opened last Friday’s trading subdued after Thursday’s sell-off resulting from the European announcement of a six month delay in implementing any sanctions on Iran. The Nigerian general strike even in its fifth day did not provide an upside to futures prices as it appeared headed for a resolution with negotiations set for later in the day between Nigerian President Goodluck Johnathan and labor leaders.  By midday, European news again pulled crude prices down as S&P announced a downgrade of nine European countries, including France, which sent the Euro sliding to 1.2624 to the dollar.  S&P gave one-notch downgrades to Austria, France, Malta, Slovakia, and Slovenia and two-notch downgrades to Cyprus, Italy, Portugal, and Spain.  The downgrade could impact the European Financial Stabilitization Fund (EFSF) since France is its second largest contributor.  Without a triple-A rating, the EFSF may not have the same ability to raise the funds it needs.  The downgrades come during a season of downgrading that began with the downgrade of U.S. debt in August.  Those holding long positions saw some optimism with the release of higher crude price forecasts from Goldman Sachs.  The bank increased its forecast for WTI to $113 (8%) per barrel over the next three months, $115 for the six month outlook and $123.50 for the twelve-month outlook.  Brent also saw an upward revision, but only 2% for the three-month period to $120/bbl.
• Trading was suspended on Monday for the holiday, but futures promised to open higher on Tuesday when Saudi Oil Minister Ali Naimi said that the country was seeking to stabilize oil prices at around $100 per barrel based on an average price of WTI, Brent, and OPEC crudes, an average which currently stands around $107 per barrel.  The announced price was well above the Kingdom’s earlier public support for a $75 per barrel price stated in November of 2008 as the economic recession was just beginning.  In December the kingdom approved a stimulative domestic budget of $184 billion in order to dampen political tensions as a result of the ongoing Arab Spring.  Analysts estimate that the new budget requires an average price of $78 for Brent crude to meet the spending commitment.  The Saudi Minister also tried to play down concerns over production capacity by stating the country could increase its current production of 9.4 - 9.8 MMbbl/d to 11.4 – 11.8 “almost immediately”.  With respect to oil sanctions on Iran, Minister Naimi stated that the country is not seeking to replace Iranian crude.  However, “if we were asked to” the country could provide 200,000 – 300,000 bbl/d to China easily.  The day before, on Sunday, Iran’s OPEC governor Muhammad Ali Khatibi said that any Gulf country replacing Iran’s oil exports due to any sanctions would make them an "accomplice in further events".  Khatibi also said that it would be “economic suicide” for Europe to participate in oil sanctions amid the Eurozone debt crisis.
• When New York trading resumed on Tuesday, the market found support for crude prices on positive economic news coming out of China.  China’s fourth quarter GDP growth was 8.9%, above the 8.6% forecast by analyst.  Although it was lower than the third quarter’s 9.1% increase, the data showed that China was managing a soft landing for the economy.  Overall the economy grew 9.2% in 2011 down from 10.4% in 2012.  China’s inflation also showed signs of slowing from a July peak of 6.5% to 4.1% in December.  China’s imports of crude fell to 5.1 MMbbl/d in December, from 5.51 MMbbl/d in November.  However, imports of petroleum products hit a 2011 peak of 1.79 million tons in December a 48% increase over November’s 1.21 million tons.
• During Wednesday trading, market concerns about the ongoing tensions between Iran and the West prevented crude prices from moving below the $100 per barrel mark.  South Korean Prime Minister Kim Hwang-sik visited the Middle East to look for alternate sources of crude to Iranian imports.  In meetings with the UAE and Oman, the two countries assured South Korea they would provide assistance with the UAE saying it would “prioritize crude oil supplies to South Korea if more assistance is needed”.  With no proven domestic oil reserves of its own, South Korea is the world’s 5th largest oil importer receiving 97% of its crude through imports and the world’s second largest natural gas importer.   The UAE supplies 10% of South Korea’s crude imports and Oman 2%.  In December 2011, the country imported around 2.5 MMbbl/d, of which around 225,000 bbl/d (9.6%) came from Iran up from around 8% in 2010.  Iranian crude sold at a $3 - $6 per barrel discount to Saudi Arabian and Kuwaiti crude last year.  Iran depends on crude exports for 80% of its foreign currency reserves.  European negotiators are currently discussing July 1, 2012 as the target date for a decision on Iran sanctions for Eurozone nations.  The market continued to rise on positive news of a successful German bond offer.  The country sold its two-year notes at 0.17%, the lowest yield for the two-year note on record as investors seek a European safe haven.  Earlier this month, Germany paid a negative yield for its six month notes.  However, the real test was expected to come the following day as France and Spain held bond auctions.  Markets moved downward as the International Energy Agency lowered its global oil demand growth estimates by 200,000 bbl/d from 1.3 MMbbl/d to 1.1 MMbbl/d due to continuing economic concerns.  Global crude refinery output was also similarly revised  by 170,000 bbl/d to 74.9 MMbbl/d.  News that President Obama concurred with the State Department’s decision to deny a permit for the Keystone XL pipeline sent the market tumbling by over a dollar.  The decision had been widely anticipated, but the timing of the announcement was a surprise.  After expressing disappointment with the decision through selling activity, the market surged steadily in late day trading on positive economic news and Iran concerns to close at $100.59, down $0.12 from the opening price.
• On Thursday, oil prices resumed a brief ride upward on the tide of positive economic news as the Department of Labor announced that unemployment dropped 50,000 to 352,000 last week.  The jobless figure is at its lowest level since April of 2008 at the beginning of the ongoing recession.  However, the Energy Information Agency’s weekly crude stock report sent futures prices on a rapid decline as the petroleum market fundamentals continue to send bearish signals.  Crude stocks for the week declined 3.44 MMbbl/d to 331.2 million barrels on an 0.5% increase in demand to 17.9 MMbbl/d.  However, the products market continues to see gasoline stockpiles rise.  Gasoline stocks rose 3.72 MMbbl/d to 227.5 million barrels, the highest level since March 2011.  Meanwhile overall gasoline demand was around 8 MMbbl/d, the lowest weekly demand since after the September 11, 2001 attack.   U.S. housing data also sent bearish signals as the Department of Commerce reported a 4.1% decline in housing starts for the month of December.
  • The average retail gasoline price rose just under a penny last week to $3.39 per gallon.  Prices were $0.29 higher than a year ago.  Gasoline stocks were up 3.72 million barrels at 227.5 million barrels.
  • The average retail diesel price rose by $0.026 to $3.85 a gallon $0.45 higher than a year ago.
  • Residential heating oil increased $0.02 to $3.95 per gallon and $0.50 higher than a year ago.
  • Propane stocks dropped 1.1 MMbbls to 53.2 million as prices remained unchanged at $2.87 per gallon, which is $0.08 higher than a year ago.
• On January 18, the Department of State recommended President Obama deny a permit to build the Keystone XL pipeline because it did not have enough time to gather the information necessary to determine if the pipeline was in the “national interest”.  President Obama concurred in the recommendation as had been widely anticipated.  The State Department has been reviewing different aspects of the proposed pipeline since 2008.  In December, Congress passed legislation requiring a decision on Keystone XL within 60-days.  The measure was strongly back by Republican members as a way to override the President’s plan to delay a decision on the permit until after the November election.  Given an election year that is being driven by the economy and jobs as well as controversy over subsidized green energy versus traditional energy sources, the pipeline has become a political football.  Canada has the second largest oil reserves in the world holding over 175 billion barrels of oil and it is the largest supplier of oil to the U.S. supplying around 2.3 MMbbl/d.  Environmental groups are opposed to the pipeline over concerns about the carbon intensity of oil sands and potential implications of a planned route that crosses the Ogallala Aquifer in Nebraska.  TransCanada, said the company will reapply for a permit with the U.S. government and expects the pipeline to be in service by the end of 2014.  Should the new permit fail, Enbridge has been exploring a pipeline, called Northern Gateway, to Canada’s West Coast that could deliver crude from oil sands to Asian markets.

Natural Gas highlights

• NYMEX February 2012 futures dropped 30.2 cents per MMBtu almost matching the same pace of decline last week.  Futures closed at $2.472 per MMBtu on Wednesday as a result of storage levels above average, warmer temperatures, and consistent production volumes.  The Henry Hub spot price closed down 32 cents to $2.49 per MMBtu.
• Domestic natural gas production remained flat during the week, but was up 9.09% year on year. Canadian LNG imports were up 6% over last week and LNG sendouts were up 7%.  The natural gas and oil rig counts decreased by 20 to 791 active gas units and oil directed rigs remained unchanged at 1,191.
• Working natural gas in storage fell 87 Bcf to 3,290 Bcf, which is 539 higher than a year ago and 566 Bcf higher than the 5-year average.
• Natural gas consumption was up 20% ked by power burn and residential/commercial demand.  Temperatures were 9.1 degrees warmer than the 30-year average and 13.1 degrees warmer than the same time last year.

Comments and questions welcomed. Please contact DeloitteCenterforEnergySolutions@deloitte.com

Learn more

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.

Save these dates

February 15, 2012
The Dodd-Frank Act: A Path Forward for Energy Companies – Dbrief Register Now

March 21, 2012
Oil & Gas Master Limited Partnership Market Developments – Dbrief  Register Now

About the Deloitte Center for Energy Solutions
The Deloitte Center for Energy Solutions provides a forum for innovation, thought leadership, groundbreaking research, and industry collaboration to help companies solve the most complex energy challenges.

Through the Center, Deloitte’s Energy & Resources Group leads the debate on critical topics on the minds of executives—from the impact of legislative and regulatory policy, to operational efficiency, to sustainable and profitable growth. We provide comprehensive solutions through a global network of specialists and thought leaders.

With locations in Houston and Washington, D.C., the Deloitte Center for Energy Solutions offers interaction through seminars, roundtables and other forms of engagement, where established and growing companies can come together to learn, discuss and debate. www.deloitte.com/energysolutions.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.