Weekly Oil & Gas Market Highlights: January 5, 2012 Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior twenty one days

Data sources: Bloomberg; CME Group

Oil & Gas highlights

• NYMEX WTI futures ended 2011 up by $7.45 or 8.2% at $98.83 per barrel, just shy of the $100 mark.  The rise continues a three year rebound since the commodities crash in 2008.  Over the holidays, crude edged upward on a combination of tightening fundamentals, positive economic signals, and geopolitical concerns emanating from Iran’s nuclear program.  China announced that crude imports reached 5.54 MMbbl/d in November, the second highest oil import figure ever reported by the country.  Meanwhile, the Energy Information Administration (EIA), reported crude inventories fell 10.6 million barrels during the week ended December 16, 2011, the largest drop recorded since February 2001.  The bullish inventories signal was supported by the announcement by the Consumer Board that the consumer confidence index increased to 64.5 in December, from just 55.2 in November.  The index is a survey of consumer opinions of business and employment conditions at the present time and expectations for the next six months.  On December 24, Iran began a ten day military exercise in the Strait of Hormuz as a show of strength in the face of increasing international criticism of its nuclear program.  The Vice President of Iran claimed the country would close the strait, the main transit route of a third for the world’s oil exports (15 – 16 MMbbl/d), if Western nations sanction Iran’s oil exports.
• Last Thursday, crude closed up slightly after plummeting in mid-day trading following EIA’s announcement that oil inventories declined 3.9 million barrels in stark contrast to the massive build seen over the previous week.  Distillate stocks increased as well by 1.2 million barrels.  However, gasoline stocks declined by 700,000 barrels.  But, crude surged again as the U.S. pentagon issued strong statements in response to Iran’s threat to close the Strait of Hormuz.  Pentagon spokesman George Little said, “Any attempt to close the strait will not be tolerated”.  The statement followed an earlier statement by the U.S. Fifth Fleet operating out of Bahrain that “Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated".
• Friday end-of-the-year trading was light with volumes only one third the average level of trading.  The market found positive support for crude prices as Petroplus, Europe’s largest independent refiner by capacity, announced that it was closing three refineries in Belgium, France, and Switzerland due to a credit freeze.  S&P had downgraded the company’s credit rating last month.  European refiners have been squeezed by high oil prices, competition from new high-complexity refineries in the Middle East and Asia, as well as overcapacity in Europe.  Two Petroplus facilities in the U.K. and Germany remain open.  The closures support U.S.-produced petroleum products, which are benefitting from increased volumes of natural gas liquids from shale and low natural gas prices to fuel their operations.  Over the past year, the U.S. has become an exporter of petroleum derived products.
• Over the weekend, President Obama’s signature of the 2012 defense authorization bill that included authorization for Iranian sanctions increased the geopolitical risk factor in the oil market.  When trading resumed on Tuesday, NYMEX crude futures began a rapid climb over rising fears of a closure of the Strait of Hormuz.  The commander of the Iranian armed forces General Ataollah Salehi warned the U.S. not to return its carrier group to return to the Gulf.  Crude oil prices jumped 4.2% to $102.96 per barrel after passing the $103 mark as concerns grew over tensions when the U.S. carrier group inevitably returns.  Further support was provided by the release of China’s official Purchasing Managers Index, which showed a rise into positive territory at 50.3 in December over 49.0 in November.  A number above 50 indicates an expansion of manufacturing activity, while a number below 50 indicate a contraction.  In other positive economic news, a report by the Institute of Supply Management show U.S. manufacturing rose for the twenty-ninth straight month to 53.9.  As the crude price rose, it began to encounter resistance north of $103 per barrel.  Continued concerns over the European debt crisis are exerting a downward pressure.
• On Wednesday, news that French and European diplomats said that they had agreed in principle to embargo Iranian oil sent prices spiking up by more than a dollar before collapsing almost as fast as it became clear there was no agreement on the shape of the embargo or a set timeline for implementation.
  • Due to the New Year’s Holiday, at the time of this publication, the EIA had not yet released its weekly petroleum report so no weekly inventory data is available.
• Oil markets have been shaken in recent weeks by news related to Iran’s nuclear program, which the country claims is for civilian and scientific purposes, but Western governments believe is a cover for a nuclear weapons program.  The most recent flare in tensions began with an International Atomic Energy Agency (IAEA) report on November 8 expressing “serious concerns” over Iran’s nuclear activities citing “credible” information Iran is working on developing nuclear weapons.  An earlier IAEA report in September claimed that Iran had developed over 4,500 kilograms of 3.5% enriched uranium at its Natanz site since February 2007.  Iran was not referred to the Security Council in light of objections from Russia and China.  French President Nikolas Sarkozy, whose country receives 3% of its oil from Iran, requested Western leaders to adopt new sanctions on an “unprecedented scale” that would halt all oil purchases from Iran and freeze the assets of Iran’s Central Bank.  On November 21, the UK required UK credit and financial institutions to sever all ties with Iranian banks including the Iranian Central Bank, Bank Markazi.  The same day, Canada announced a ban on exports of petroleum-related goods to Iran and the U.S. Treasury issued a report stating that Iran is a “primary money laundering concern”, which formed the basis of the Iranian sanctions provisions of the 2012 defense authorization act.  Almost a week after enacting the sanctions, pro-Iranian forces stormed the British embassy in Tehran prompting its closure and the closure of the Iranian embassy in London.  On December 14, the House passed the defense authorization bill including the Iranian sanctions (283-136), which was passed by the Senate the following day (86-13).  The bill bans Bank Markazi from the U.S. financial system and anyone doing business with it.  Iran currently exports 2.2 - 2.5 MMbbl/d, which at today’s price is ~$225 – 250 million per day or $82 –91 billion per year.  About half of Iran’s oil transactions are routed through Bank Markazi.  In order to address concerns that sanctions could cause a spike in oil prices, the act directs the Administrator of the Energy Information Agency to produce a report on the world price and supply of oil within 60 days, so the President can determine if supplies are sufficient to allow significant reductions in Iranian oil purchases.  As the measure moved to the White House for signature, Iran began ten days of military exercises along a 2,000 kilometer stretch of the Strait of Hormuz, through which 15-16 MMbbl/d or one-third of the world’s oil exports travel.  Closure of the strait could cut off oil shipments through the channel temporarily bottling up supplies in the Gulf and diverting them to longer overland routes such as the Petroline pipeline in Saudi Arabia with a 5 MMbbl/d capacity.  On December 27, The Vice President of Iran claimed the country would close the strait if Western nations sanction Iran’s oil exports.  December 31, President Obama signed the bill, but in a signing statement he said he would treat the Iranian sanctions provisions as “non-binding”.  Following signature, the Iranian Rial dropped more than 10% in value before recovering 8%.  The following day Iran’s Atomic Energy Organization announced it had created its first nuclear fuel rod and the military fired 2 long-range shore-to-sea Ghader missiles as well as a surface-to-surface Nour missile.  Following the end of Iran’s military exercise, EU diplomats announced that they agreed in principle to an embargo on Iranian oil.  However, a final decision would not be made until the end of January.  EU countries purchased ~450,000 bbl/d or 6% of their oil imports from Iran in 2011.  The purchases represent about 20% of Iran’s oil exports with the rest going mostly to Asia.  Spain (10%), Italy (13%), and Greece (14%) are the European countries most reliant on Iranian oil.  Italian Prime Minister Mario Monti expressed uncertainty about the embargo as Iran owes Italy’s Eni some $2 billion in debts.  Closure of the straits would have a significant impact on price, but many analysts believe that it is unlikely Iran would do so since it would enrage its neighbors and lead to a swift military response.

Natural Gas highlights

• On January 4, the Henry Hub spot price closed down 11 cents to $3.07 per MMBtu as cold temperatures in the East and mild temperatures in the West held prices within a narrow band during the week. Consumption increased 2.5% over last week lead by a 3.2% increase in the residential and commercial sector. Temperatures during the week were 4.9 degrees warmer than the 30-year average and 6.0 degrees warmer than last year.
• Working natural gas in storage fell slightly to 3,472 Bcf, a decline of 106 Bcf over the week.  The natural gas rotary rig count increased by 8 to 809 active units, the first rise in eight weeks.  Oil rigs declined by 8 to 1,193. Domestic natural gas production was slightly higher than last week, but 7.6 percent higher than last year. Canadian LNG imports increased 2.3% over last week, but were down 9.51% from last year.
• NYMEX January 2012 futures dropped 0.025 cents to $3.096 per MMBtu from $3.121 per MMBtu on Wednesday.

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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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