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Weekly Oil & Gas Market Highlights: January 27, 2011

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 (EST) on Thursday, 1/27/11 Noon (EST) on Thursday, 1/20/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $86.15 (Feb-2011 Contract) $88.44 (Feb-2011 Contract)
WTI Cushing Spot $86.14 $88.50
Dated Brent Spot $97.33 $95.72
Natural gas, USD per MMBtu Noon (EST) on Thursday, 1/27/11 Noon (EST) on Thursday, 1/20/11
Front-Month NYMEX Henry Hub Futures $4.35 (Feb-2011 Contract) $4.63 (Feb-2011 Contract)
Henry Hub Spot $4.40 $4.47

Data sources: Bloomberg; CME Group

Oil market highlights: Price correction

  • Petroleum prices fluctuated this week as market participants continued to assess the prospects for increasing “tightness” in the global oil market in the coming months. While market players are maintaining a strong focus on the outlook for demand growth—and hence continue to react to economic data and other indicators of future oil consumption levels—statements by OPEC officials returned some of the market’s attention to the supply side of the equation this week. Indeed, oil prices generally softened early in the week after a key OPEC minister implied that the cartel may be willing to increase oil production to meet rising demand; however, the actual likelihood, timing, and amount of any such increase remain unclear. Nevertheless, the overall sense of bullishness with respect to world oil consumption helped prices to bounce back at midweek—before bearish US economic data pressured prices lower on Thursday.
    • Macroeconomic indicators remain a key driver of daily oil price movements. While most market pundits and participants appear to remain optimistic that an expanding global economy—powered by countries such as China and India—will lead world oil demand significantly higher in 2011, news signaling potential “hiccups” in economic growth continue to affect oil markets. For example, data indicating that the UK’s GDP (unexpectedly) contracted by 0.5% in the fourth quarter of 2010 contributed to early-week oil price pressures. US Commerce Department figures showing that home sales rose by a better-than-expected 18.0% in December helped oil prices to regain some ground on Wednesday. However, data indicating that initial US unemployment claims surged by more than 50,000 (to 454,000) last week combined with a reported drop of 2.5% in US durable goods orders in December to send petroleum prices lower today.
    • After rebounding back above $87.00 per bbl on Wednesday, the front-month NYMEX Light, Sweet Crude Oil Futures Contract fell by 1.9% to settle at $85.64 per bbl on Thursday—its lowest close in nearly two months. Benchmark US futures prices for gasoline also moved significantly lower today, while those for heating oil eased slightly.
  • Although prices for Brent crude oil also slipped today, they did so by significantly less than those for WTI—thereby widening the North Sea benchmark grade’s premium to WTI even further. Indeed, the Brent-WTI futures spread reached record levels (of more than $11.00 per bbl) on Thursday. High and rising inventories of crude oil at the Cushing, Oklahoma hub—which is the physical delivery point of the US benchmark NYMEX “WTI” contract—are placing growing pressure on WTI prices relative to those for other crude streams of similar quality. Some market analysts suggest that increased shipments to Cushing of crude derived from Canada’s oil sands have played a key role in the stock build. According to media reports, some oil pundits believe that Brent prices better reflect the current supply-demand balance in the global oil market than do WTI prices, due to the latter’s distortion by local inventories.
    • According to the US Energy Information Administration (EIA), crude oil stocks at Cushing rose by roughly 2.4% to 37.7 million bbl during the most recent storage report week. Inventories at the hub are now about 14.0% above their lofty year-earlier level.
  • More broadly, the EIA provided a mixed overview of domestic petroleum fundamentals on Wednesday. Total US crude oil inventories surged higher during the report week. However, with the bulk of the crude stock build located along the Gulf Coast—and likely the result, at least in part, of the seasonal inventory restocking efforts of the region’s refiners—and with stocks of marquee refined products coming in close to consensus expectations, market participants initially appeared to interpret the report as more neutral than bearish. Nevertheless, the sharp rise in crude stocks may have added to WTI price pressures on Thursday, as the market assimilated this information more fully. Total US petroleum consumption slipped by 1.6% from the prior week to 18.9 million bbl per day. On a four-week moving average basis, total domestic consumption is now 1.6% higher than a year earlier—down from 3.8% a week ago. Total US commercial petroleum inventories rose modestly for a third consecutive week.
    • For the week ending Friday, January 21, 2011, US commercial crude oil inventories grew by 4.8 million bbl—quadrupling the consensus forecast of a 1.2-million bbl gain. Stocks rose in all regions except for the West Coast. Weekly increases in both domestic production and US crude imports helped to facilitate the build, as did a slower pace of crude inputs to refineries—which declined as the refinery capacity utilization rate slipped by 1.2% to 81.8%. At 340.6 million bbl, total crude inventories are now 4.3% higher than a year earlier and are about 7.0% above the five-year average level.
    • Total US gasoline stocks rose by 2.4 million bbl on the week, in line with the consensus projection of 2.3 million bbl. Aided by a 1.6% weekly decline in demand for the motor fuel, gasoline inventories grew even as US production and imports slipped. At just over 230.0 million bbl, total gasoline stocks remain very close to their year-earlier level and about 4.0% above the five-year average mark. US distillate inventories remained nearly unchanged from a week earlier, beating analyst expectations of a 0.5-million bbl decline. At 165.7 million bbl, distillate stocks are now 5.2% higher than a year ago and are roughly 16.0% above the five-year average reading.
  • OPEC officials are sending mixed signals to the market about the possibility that the cartel will raise oil output to accommodate rising global consumption—and perhaps to quell prices. As reported by multiple media outlets including Bloomberg and The Wall Street Journal, Saudi Arabia’s oil minister said early this week that the global recession has passed, that he expects oil prices to remain relatively stable in 2011, and that OPEC’s policy is to keep world oil supply and demand in balance. Market participants widely appeared to interpret these statements to mean that OPEC may consider raising its output. The Saudi oil minister also said that some of the cartel’s member nations will expand their production capabilities, which in turn will keep OPEC’s total spare capacity at about 6.0 million bbl per day. However, OPEC’s Secretary-General indicated on Wednesday that oil prices currently remain in an acceptable range. Consequently, the chances (and specifics) of any substantial boost in OPEC output remain uncertain.

Natural Gas market highlights: Bears refuse to hibernate

  • US natural gas market bears just might make it through the heating season without hibernating, which would be a noteworthy feat given the colder-than-normal temperatures that have characterized the past two months. Despite ongoing cold weather in some key heating markets—such as the Northeast—the gas market once again proved unable to sustain a price rally this week. Not even today’s report of yet another above-average weekly storage withdrawal in the Lower 48 was enough to bolster benchmark gas futures prices. With the heating season now more than half over, market participants appeared to eschew supportive short-term factors today in favor of expectations that storage levels will remain ample at the end of March (the season’s notional close). With the March 2011 NYMEX Henry Hub Futures Contract now assuming the prompt position, aspiring gas market bulls may be even harder pressed to engender major price rallies in the weeks ahead.
    • After closing at nearly $4.76 per MMBtu last Friday (January 21), the February 2011 NYMEX Henry Hub Futures Contract spent most of this week declining. Capping the swoon, the February Contract slid by about $0.18 per MMBtu on Thursday to expire at $4.32 per MMBtu—the same price at which the March Contract closed.
    • Northeastern spot gas basis to Henry Hub blew out late last week as an arctic air mass approached the region, but significantly eased early this week as temperatures moderated and as pipeline capacity into region became less strained. However, cold Northeastern weather began pushing the region’s gas prices up again at midweek.
  • For the week ending Friday, January 21, 2011, the EIA reported today that Lower-48 working gas inventories decreased by 174 Bcf on a net basis—roughly in line with the consensus expectation. Although this withdrawal surpassed both the five-year average pull of 152 Bcf and the year-earlier draw of 109 Bcf, it nevertheless failed to impress market participants—quite possibly because it paled in comparison to the prior week’s mammoth withdrawal of 243 Bcf. Still, the latest weekly draw all but decimated the year-over-year storage surplus—reducing it to a mere 9 Bcf (0.4%)—owing in part to the unusually small inventory draw of a year before. At 2,542 Bcf, working gas stocks are 1.2% above the five-year average.
    • Not surprisingly, more moderate weather appears to have been primarily responsible for the slower pace of storage withdrawals compared to the prior week. In its “Natural Gas Weekly Update” for January 27, 2011, the EIA reported that total Lower-48 heating degree days were a little below normal during the storage report week; however, temperatures (and hence gas demand for space heating) were unevenly distributed. According to the National Weather Service data used by the EIA, temperatures were significantly warmer than normal in the West but were below normal in most other regions.
    • Preliminary indications are that gas demand has strengthened in recent days. In the same update, the EIA reported that total US gas consumption rose by 3.4% percent during the week ending Wednesday, January 26 (notice this differs from the storage report week). Weekly increases of 4.6% and 1.4% in gas demand from the industrial and power-generation sectors, respectively, led overall consumption higher, while stronger residential demand also contributed. The agency noted that customer demand reached near-record levels on one Northeastern LDC’s system on Sunday and Monday (as the region’s temperatures plunged to frigid depths). Total US gas supply also increased during the week, as domestic production rose by 1.3% and imports of Canadian gas grew by 4.5%. Sendouts from US LNG terminals remain well below their year-earlier levels. The EIA bases its weekly estimates of gas supply and demand on data from Bentek Energy Services, LLC.
  • Despite the hefty storage withdrawals of December and January, many gas market pundits still expect Lower-48 working gas inventories to end the heating season at a healthy level from which to begin rebuilding stocks in the spring—whether this level ultimately proves to be slightly above or even somewhat below the record-setting mark of a year earlier. This expectation—coupled with factors such as a strong preliminary outlook for hydroelectric power generation (i.e., river flows) in the Northwest during the spring and summer of 2011, and the potential for US production to continue at robust levels in the short term—has caused some analysts to speculate that Lower-48 storage inventories conceivably could test working gas capacity at the end of the 2011 injection season. Of course, weather and a plethora of other wildcards—including the timing of any meaningful reduction in domestic gas output—will play a major role in determining whether any such extreme condition comes to pass.
    • After declining for six consecutive weeks, the pace of gas-directed drilling in the US remained somewhat more stable last week. The Baker Hughes US gas rotary rig count registered 906 as of Friday, January 21, 2011—an increase of 4 from the prior week and roughly 9.0% higher than a year earlier.

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