Weekly Oil & Gas Market Highlights: February 23, 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 April surged over the past week, with Thursday afternoon trading sending futures prices skyrocketing above the $108 per barrel mark.
• Last Friday, Asian traders pushed WTI crude prices up on news of Thursday’s positive jobs figures out of the U.S.  European trading further buoyed prices as optimism increased that EU leaders are close to clenching a deal on a second Greek bailout of some 130 billion euros (~$170 billion), which pushed the euro higher versus the dollar a bullish signal for dollar-denominated crude futures.  While final details of a Greek-EU deal still need further clarification, the European Central Bank said that it would agree to Greek debt restructuring once the deal was in place.  On the conclusion of the Greek bailout and debt restructuring, one of the largest economic issues weighing on crude prices will have been removed.  If new concerns arise there is the potential for demand destruction at higher crude prices.
• Although the oil fundamentals have been bearish, increasingly improving economic news out of the U.S. and geopolitical tensions between the West and Iran over oil sanctions and the Straits of Hormuz are supportive of rising futures prices.
• Further to the South, a strike in Yemen spread from PetroMasila’s block 14 to blocks 10 and 51 halting some 160,000 bbl/d of production.  On Tuesday, there will be a one-candidate Presidential election featuring Vice President Abdo Rabbu Mansour. The so-called Southern Movement, which was created in 2007 and flourished during the Arab Spring in the Middle East, has called for a boycott of the elections as they seek greater autonomy.
• March WTI futures closed up $0.93 on Friday at $103.24 per barrel up ~4.5% for the week.
• Over the weekend, China’s central bank, the People's Bank of China, announced a reduction in the reserve requirement for Chinese banks in order to stimulate economic growth.  The 50-basis point reduction is expected to infuse the domestic economy with an additional $55 - $65 billion in liquidity.
• Iran also sent the price of crude spiking as it announced on Sunday pre-emptive sanctions on the United Kingdom (UK) and France and warned other European nations that they would be similarly cut off unless they signed new long-term contracts ahead of EU oil sanctions on the country set to begin July 1.
• Although trading was closed on Monday in New York for President’s Day, overseas trading continued to push futures prices up on the news out of Iran, the euro made further gains on bailout optimism and the news out of China fueled buying in order to take advantage of any upside from increased oil imports as a result of China’s economic easing policy.  Market traders believe the upside in Chinese demand would make up for any potential downside ariseing over the settlement of the European bailout issue for Greece.  Brent futures rose above $121 per barrel on Monday.  The pre-emptive sanctions will be relatively painless for all parties involved since the UK imports only 11,000 bbl/d of oil from Iran and France only 49,000 bbl/d.  March WTI futures rose to a 10-month high at $104.92 per barrels.  The U.S. Commodity Futures Trading Commission reported that the ratio of net long positions to shorts stands at 7:1.
• During Tuesday trading, NYMEX WTI futures opened higher as futures prices extended their Monday gains on news that EU finance ministers had agreed to the 130 billion euro bailout for Greece.  Futures rose in Asian trading over concerns about the continued conflict between Iran and the West that has led to growing oil sanctions on Iran.  Asian refiners are scrambling to find alternate sources to Iranian crude supplies.  Iran exports 550,000 bbl/d (20%) to China, 327,000 bbl/d (17%) to Japan, 310,000 bbl/d (16%) to India, and 228,000 bbl/d (9%) to South Korea.  Japanese refiners have been avoiding new contracts for oil supply from Iran while China’s International United Petroleum and Chemical Company is near a final deal for oil supplied from the country at a discount.  India, which is not participating in the sanctions, is seeking extra crude supplies from the country as they seek to find a new means to settle the payment of some $10 - $12 billion per year in crude transaction between the two nations.  Mid-day, crude futures rallied over $1 in half an hour to over $106 per barrel as EU finance ministers agreed to the 130 billion euro bailout for Greece.  Economists believe that as a result of the debt burden and needed reductions in government spending, the Greek economy may not grow for 10 years and some question whether Greece can pay off the reduced burden without renewed fears of default and perhaps even a third bailout later in the year.  After the deal was announced, bond yields on Italian and Spanish bonds fell providing some relief to those nations whose debt levels have also been the source of much concern in recent months.  Domestically in Greece, the measures have created widespread discontent in the country and support for the two major political parties has fall to a new low.
• On Wednesday, NYMEX WTI futures traded within a narrow price-band as Asian traders saw prices drop slightly on profit taking after a nine-day run-up in futures prices.  Economic news out of China also put downward pressure on prices as the country’s Manufacturing Purchasing Managers Index rose to 49.7 higher than January’s 48.8, but still below 50, which indicates contraction in the sector.  China’s recent policy of economic easing through a reduction in the reserve requirement for banks may prove the tonic to push it over 50 in the near future.  Futures prices got a slight mid-day bump as Chief UN Nuclear Inspector, Herman Nackaerts, announced that they were not able to come to an agreement with Iran to get access to key military facilities in the country.  A report by Goldman Sachs that OPEC spare capacity is “dangerously low” held prices at recent highs.  OPEC claims its current spare capacity is ~2.5 MMbbld/, but some analysts believe it may be as much a 1 MMbbl/d lower than the official figure.  European manufacturing data also provided a counter balance to further upside during the day as the Composite Purchasing Managers Index fell to 49.7 in January matching China’s figure after a brief uptick to 50.4 in December.
• Thursday, crude futures advanced further on tightening Asian supplies as refiners seek alternatives to Iranian crude.  Positive economic news from Europe supported the upside as Germany’s Ifo Institute announced the German Business Climate Index rose to 109.6 in February from 108.3 in January.  Particularly strong was growth in the construction sector from -3.6 in January to 3.3 in February.  Wholesale, retail and manufacturing sectors saw gains in the indicator as well.  The U.S. Department of Labor announced that new jobless claims were unchanged from last week at 351,000, the lowest level since March 2008.  The total number of people receiving unemployment dropped by 200,000 from 7.7 million to 7.5 million over the past week.  WTI futures prices plunged briefly as the U.S. Department of Energy’s Energy Information Agency (EIA) released its crude inventory data for the prior week.  The data showed a rise in crude stock of 1.63 million barrels to 340.70 million, higher than analyst expectations.  Gasoline inventories declined by 600,000 barrels over the same period while the four-week average gasoline demand fell 6.1%.  However, prices began to surge again in afternoon trading driven by a euro strengthening versus the dollar and a broader market rally.  With the markets surging crude futures skyrocketed $1.55 to close at $107.83 per barrel in New York trading and crossed the $108 per barrel mark in after-hours trading.  Crude prices have gained just under 10% since the beginning of February.
  • EIA reported NYMEX crude futures surged $4.57 last week closing at $103.24 per barrel on February 17 even as crude stocks rose by 1.6 million barrels to 340.7 million.  Stocks are 6.0 million barrels lower than a year ago.
  • The average retail gasoline price was up $0.068 for the week to $3.59 per gallon.  The rise in gasoline prices was particularly acute in California where prices rose by ~$0.20 per gallon.  Prices were up $0.40 year on year.  Gasoline stocks fell by 600,000 barrels to 231.5 million barrels, which is down 6.8 million barrels year on year.
  • The average retail diesel price was up by $0.017 to $3.960 a gallon, up $0.387 from a year ago.
  • Residential heating oil was up $0.012 last week to $4.04 per gallon, $0.427 higher than a year ago.
  • The retail propane price was unchanged still remaining at $2.86 per gallon, which is $0.047 higher than a year ago.   Propane stocks dropped 1.6 million barrels to 44.9 million barrels.

Natural Gas highlights

• EIA reported Henry Hub spot prices increased $0.06 last week to $2.60 per MMBtu as temperatures fell below the 30-year average temperature for the first time since November 2011.  Temperatures were 0.3 degrees lower than last year.  NYMEX March 2012 futures were up 0.21 cents to $2.643.
• Domestic Natural Gas production was relatively unchanged last week with LNG imports from Canada down 11.5%.  The natural gas rotary rig count declined by 4 rigs to 716.  Oil-directed rigs rose 9 to 1,272.
• Working natural gas in storage fell 166 Bcf to 2,595 Bcf, which is 744 Bcf (14%) higher than the 5-year average of 1,851 and 753 Bcf higher than last year.
• Natural Gas consumption was down 15.5%, but up 9.7% year on year.  The residential and commercial sector led the decline with a 20.27% drop, followed by a 16.8% drop in power-related consumption.

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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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