Weekly Oil & Gas Market Highlights: March 22, 2012 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 WTI crude futures for May ended up for the week on positive economic news out of China and Europe as well as news that tight global spare capacity was <3 MMbbl/d.  With only a limited number of macroeconomic reports set for the week, crude futures trended downward for much of the week driven by rumors related to a possible release of strategic petroleum stockpiles in the future.
• Closing out last week in Friday, March 16 trading, crude futures continued to rebound from the plunge on false rumors that the U.S. and UK had agreed to coordinate a release of crude from the Strategic Petroleum Reserve (SPR).  Futures prices also followed the broader market in an upward trend, which was further supported by a weaker dollar versus the euro.  The dollar was driven down by news from the Department of Commerce that February inflation was 0.4%, or a 4.8% annualized rate.  WTI futures closed out the week up $1.95 at $107.06 a barrel.
• On Monday, crude futures fell on profit taking after last Friday’s rally.  Futures went higher on news that International Monetary Fund Manager, Christine Lagarde, stated she saw signs the world economy was stabilizing.  However, she sent a mixed message highlighting concerns about a slowdown in emerging-markets and high crude prices that could setback an economic recovery.  Afternoon trading was largely range bound with a lack of new macroeconomic data though prices briefly crossed the $108 per barrel mark.  Bank of America Merrill Lynch increased its WTI crude price forecast for 2012 to $106 per barrel from $103 a barrel observing that the possibility of a double-dip recession was diminishing.  Bulls remain cautious about a potential SPR release perhaps coordinated with the July 1 timing of oil sanctions on Iran or sooner.  As the April contract neared expiration, trading volumes in the May contract were three times that of the April contract signaling higher crude prices to come.
• Crude futures fell ~$2 dollars per barrel on Tuesday as traders sought to lock in profits from recent gains.  Saudi Arabia’s Ali al-Naimi said that there is no supply shortage on the market and that the country could produce up to 12.5 MMbbl/d in the event of a disruption of supplies from Iran.  The news coupled with the possibility of an SPR release timed with the onset of Iranian oil sanctions sent crude futures lower.  In February, Saudi Arabia produced ~9.8 MMbbl/d of crude, which is up from 9.6 MMbbl/d in January.  Morgan Stanley analysts estimate that between 800,000 to 2 MMbbl/d of Iranian crude needs to be replaced in the market during the Summer.  Futures fell 2.3% on the news.
• On Wednesday, WTI futures rose as China increased domestic diesel and gasoline prices, which is expected to stimulate increased crude purchases by Chinese refiners.  Further supporting a rise in crude prices, data from the American Petroleum Institute’s (API) weekly inventory report, showed a 1.3 MMbbl decline in crude stocks for the week ended March 16.  France’s Minister of Energy, Eric Besson, stated that OECD countries are considering a release of some strategic petroleum reserves to ease crude prices, but that no specific plans have been made.  However, current spare capacity below ~3 MMbbl/d along with currently quiet, but still simmering, tensions with Iran are placing a floor under crude prices.  Crude futures rose to $106.57 per barrel as the Energy Information Agency (EIA) released its weekly oil stock report showing that crude stockpiles fell by 1.2 MMbbl last week where analysts had predicted a build in stocks.  Gasoline stockpiles also declined indicating that current high prices have not slowed demand.  The data also showed that total U.S. fuel demand dropped just under 5% to 17.7 MMbbl/d, 8.5% lower than a year ago.
• Crude futures fell on Thursday, as preliminary data from China’s manufacturing composite index dropped to 48.1 in March, which is down from 49.6 in February.  Later in the day London-based Market-Economics released an estimate of the Eurozone purchasing manager’s index, which showed a declined to 48.7 in March down from 49.6 in February.  The news of the declines sent futures prices down 2.6%.  International Energy Agency Director, Maria Van der Hoeven, said in an emailed statement that the organization is not planning a coordinated release of strategic stockpiles.
  • EIA reported NYMEX crude futures were down $0.34 last week to $107.06 as crude stocks fell by 1.2 MMbbl to 346.3 million.  Stocks are 6.5 million barrels lower than a year ago.
  • The average retail gasoline price was up $0.038 last week to $3.867 a gallon.  Prices were up $0.31 over last year.  Despite the rising prices, gasoline stocks fell by 1.2 MMbbl to 226.9 million barrels, which is up 7.2 MMbbl barrels from the same time last year.
  • The average retail diesel price was up by $0.02 to $4.14 a gallon.
  • Distillate stocks were up 1.8 MMbbl to 136.6 million barrels.
  • The retail price of propane was up $0.001 over the week remaining at $2.87 per gallon.
• A minor controversy has emerged over the past week regarding the accuracy EIA’s gasoline demand data, which many analysts believe is underestimating total gasoline demand.  Since the beginning of the year, EIA’s average demand forecast for gasoline has been 8.23 MMbbl/d.  During the week of January 13, EIA provided a figure of just 7,996 Mbbl/d.  This week’s data shows finished motor gasoline supplies at 8.38 MMbbl/d, which is down 7.66% from the week of March 18, 2011.  Robert Merriam, who produces EIA’s Weekly Petroleum Status Report, informed the Wall Street Journal that the agency was consistently underestimating demand from late 2010 to August 2011 when it changed its prior method of using the 5-year average for export demand, which was not accurately reflecting the recent growth in petroleum products exports.   The new method uses monthly export data from the Census Bureau, which is a more accurate measure, but has a two-month lag.  Merriam estimates the fall in the amount of gasoline demand being reported at around 4% rather than 7%.  A 2008 study of 22 years of EIA data by Resources for the Future found that the overall error rate in EIA data of total energy-use is relatively small.  However, the agency fairly consistently underestimates total energy demand by an average of 2% per year over a one to five year time horizon and projections for specific fuel consumption sectors can be as large as 7% either higher or lower.  Demand for transportation gasoline is underestimated 80% of the time (four out of five cases).  The most significant amount of variability was found in measures of electric utility natural gas, residential electricity, transportation distillate, and electric utility renewables.  Less significant variation was found in the fuel consuming sectors for transportation gasoline, commercial electricity, electric utility nuclear, industrial coal, and industrial natural gas.  The EIA’s budget has been reduced by 14% over that past fiscal year, while the Department of Energy’s overall budget of $25.7 billion for 2012 is up ~3% from 2010.

Natural Gas highlights

• EIA reported Henry Hub spot prices rose last week by $0.08 to $2.21 per MMBtu as despite warm temperatures as the market rebounded driven by nuclear power plant outages.  Prices hit a low last Friday of $2.01 per MMBtu at the Henry Hub and crossed the $2 per MMbtu threshold at several pricing points.  Temperatures were 8.9 degrees warmer than the 30-year average and 6.6 degrees warmer than a year ago.
• Domestic Natural Gas production rose 0.1% last week to 63.8 Bcf up 6.5% year on year.  U.S. gas imports from Canada were down 9.7% averaging 4.4 Bcf/d.  The natural gas rotary rig count fell by 7 rigs to 663.  Oil-directed rigs were up 21 to 1,317.
• Working natural gas in storage fell 11 Bcf to 2,380 Bcf, which is 766 Bcf higher than last year.
• Domestic natural gas consumption fell by 9.5 percent from the previous week with the residential/commercial sector falling the most (25%) followed the industrial sector (4.4%).  The power sector saw an increase due to a record level of nuclear power plant outages during the week that added an estimated 1 Bcf/d to natural gas demand.  Nuclear power outages were about 20,900 MW or 21%.

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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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