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Weekly Oil & Gas Market Highlights: June 7, 2012

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 (EDT) on Thursday, 6/7/12 Noon (EDT) on Thursday, 5/31/12
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $85.05 (July-2012 Contract) $86.39 (July-2012 Contract)
WTI Cushing Spot $86.40 $86.53
Dated Brent Spot $100.17 $101.90
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 6/7/12 Noon (EDT) on Thursday, 5/31/12
Front-Month NYMEX Henry Hub Futures $2.32 (July-2012 Contract) $2.44 (July-2012 Contract)
Henry Hub Spot $2.41 $2.39

Data sources: Bloomberg; CME Group

Oil & Gas highlights

The oil market remains sensitive to economic news, especially from the U.S. and Europe. After falling to an eight-month low last week, WTI futures for July gained 1.9% this week on hopes of an economic stimulus for Europe and a decrease in U.S. oil inventories.

  • July WTI futures plunged 3.8% to $83.23 per barrel last Friday, following news that the U.S. unemployment rate for May rose from 8.1%to 8.2%, the first increase since June 2011. Brent futures fell 3.4% to $98.43 per barrel.
  • The sell-off in WTI futures continued in the first-half of Monday as prices fell to $81.21 per barrel after reports announced U.S. factory orders declined 0.6% in April and China’s purchasing managers’ index for non-manufacturing industries dropped by 0.9 points to 55.2 in May. However, the downward trend in prices reversed in the afternoon after an announcement that finance leaders from the Group of Seven (G-7) industrialized nations would discuss Europe’s debt crisis over a call on Tuesday. WTI futures ended the day with a gain of $0.75 per barrel from the closing price on June 1. Similarly, Brent futures recovered from the day’s low of $95.63 per barrel and settled at $98.85 per barrel, up 42 cents per barrel.
  • WTI futures rose for a second straight session on Tuesday to $84.29 per barrel following news that the U.S. service industry index for May advanced to 53.7 points, versus expectations of 53.4 points. The American Petroleum Institute’s (API) report that crude inventories fell 1.8 million barrels last week also supported the climb in oil prices. However, Brent futures slipped by 1 cent to $98.84 per barrel after the G-7 leaders meeting yielded no clear action plan to address Europe’s debt crisis and an announcement that Europe’s retail trade fell 1% in April. Retail trade fell in 18 European states and grew only in Romania (+0.8%) and Germany (+0.6%). The largest decreases were in Austria (-3.5%) and Slovenia (-2.9%).
  • Brent and WTI futures rose 1.8% and 0.9%, respectively, on Wednesday amid speculations of economic stimulus for Europe and Iran’s accusation that inspectors at the United Nation’s nuclear watchdog, the International Atomic Energy Agency, are working for Western intelligence agencies. European Central Bank President, Mario Draghi, said officials are ready to act, if the Eurozone crisis worsens. WTI futures ended with lower gains than Brent as the drawdown in U.S. oil inventories last week lagged analyst expectations.
  • WTI futures rose above $87 per barrel in the first-half of Thursday following news that China reduced its benchmark lending rate by 0.25 percentage points and Australia added 38,900 workers in May. However, the gains were lost in the afternoon after the U.S. Federal Reserve chairman, Ben S. Bernanke, gave no hints of a monetary stimulus to boost growth. Prices slipped further on news that German exports declined 1.7% in April and Fitch slashed Spain’s credit rating by three notches to “BBB”. WTI and Brent futures closed below $85 and $100 per barrel, respectively.
    • The U.S. average retail gasoline price fell 5.7 cents last week to $3.61 per gallon, with the largest decrease of seven cents in the Midwest. The average retail diesel price decreased by about five cents to $3.85 per gallon, with the sharpest fall of just over six cents in the West Coast. However, West Coast diesel prices are still the highest in the country, at $4.10 per gallon.
    • According to the Energy Information Administration (EIA), crude stocks slipped 111,000 barrels to 384.6 million barrels last week, the first fall since mid-March. However, the drawdown was less than the 500,000 barrels forecast in a Reuters poll and 1.8 million barrels estimated by API. The Midwest (PADD 2) continued to be impacted by a supply overhang, with crude stocks increasing by 2.8 million barrels.

Some analysts expect crude prices to further weaken in the second half of 2012 due to slowing demand worldwide. However, continued strengthening of the dollar will partially negate cost savings for crude importing nations.

  • According to the International Energy Agency (IEA), Brent is still a threat to a slowing economy even after falling to $100 per barrel.
  • The U.S. dollar will continue to gain from the euro’s woes, offsetting gains from lower crude prices for importing nations. Since May 1, Brent crude prices have fallen by more than 17%. However, the landed cost of imported crude for countries in the EU and Asia decreased by just 12% due to the strengthening of the dollar against foreign currencies. UBS expects the U.S. dollar to gain against the euro in the second half of 2012, reaching 0.87 EUR/USD from the current level of 0.80 EUR/USD.

Natural Gas highlights

NYMEX Henry Hub futures fell 5.2 cents (2.2%) to $2.27 per MMBtu this week as demand fell faster than supply, leading to a rise in inventories and higher pipeline exports to Mexico.

  • U.S. natural gas consumption declined 2.8% from last week, driven by a decline of 10.1% in power sector demand, which offset higher demand in other sectors. In May, power producers used more coal for electricity generation as coal futures fell by 4.6% while natural gas futures increased by 5.8%. Residential/commercial and industrial sector consumption ended the week up 9.3% and 1.3%, respectively.
  • U.S. dry gas production fell 1.3% this week, led by an ongoing fall in natural gas drilling. Imports from Canada rose 1.5% with increases in shipments to the U.S. West and Midwest regions.
  • Working natural gas in storage increased 62 billion cubic feet (Bcf) to 2,877 Bcf, up 713 Bcf over 2011.
  • Pipeline exports to Mexico from Texas and other Southwestern states hit a seven-year high this week. U.S. exports to Mexico are displaying strong growth since 2011 as Mexico is increasing its natural gas-fired power generation amid declining domestic natural gas production.

Gas drilling has become largely uneconomical at current prices of ~$2.25 per MMBtu, which is forcing drillers to move rigs to lucrative oil plays. Analysts project the natural gas rotary rig count—already at a 12-year low—will fall significantly in the second half of this year.

  • Last week, the U.S. natural gas rotary rig count fell by six to a 12-year low of 588, while the oil rig count rose by three to a new 25-year high of 1,386. The natural gas rotary rig count fell by four in the largest dry shale gas basin (Marcellus).
  • Baker Hughes forecasts the natural gas rotary rig count will fall to 534 by the end of 2012, down 10% from the current level and 34% from a year earlier. Other analysts project a steeper fall in the natural gas rig count than Baker Hughes, based on a weak natural gas price outlook and rising inventories.

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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.

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