Weekly Oil & Gas Market Highlights: September 8, 2011 Deloitte Center for Energy Solutions publication

Sign up to receive the weekly Oil & Gas Market Highlights Memo

Key Oil & Gas price indicators for the prior fourteen days

Data sources: Bloomberg; CME Group

Oil & Gas Highlights

• Midweek oil futures jumped the most in four weeks in New York on the potential for additional production disruptions from storm activity in the Gulf of Mexico. There is a 40% chance of the storm strengthening into a tropical cyclone in the oil-producing Bay of Campeche area that could bring a supply side disruption of about 850,000 barrels a day over the next week. U.S. crude supplies dropped 3.96 million barrels in the seven days to September 2 as more than half of the oil output in the Gulf of Mexico was shut because of Tropical Storm Lee and imports tumbled to their lowest level since April. President Barack Obama challenged Congress to pass a $447 billion jobs plan “right away” that would boost spending on infrastructure and cut in half the payroll taxes paid by workers and small business owners. These measures fell short of market participant’s expectations and crude prices fell sharply after President Obama’s speech.
  • Brent crude prices, the international benchmark, hit a record-high premium to West Texas Intermediate (WTI) of more than $27 a barrel on Wednesday. Civil war has curtailed production of Libya’s light, sweet crude oil, reducing supply to Europe and bolstering Brent prices.
  • The U.S. average retail price of regular gasoline increased five cents this week to reach $3.67 per gallon. The average price is $0.99 per gallon higher than last year at this time. The national average diesel price also climbed five cents to $3.87 per gallon, according to the Energy Information Administration (EIA).
  • The oil rig count broke its 19th consecutive week of increases, falling by 5 to 1,064, according to Baker Hughes.
• The American Petroleum Institute (API) released a report, suggesting that the solution to the nation’s economic woes is a supportive energy policy. An increase in domestic energy production combined with favorable energy policies could create up to a million jobs, according to the report from API. To realize that goal, the report notes that energy policies must support the expansion of offshore oil drilling, boost production of natural gas and build the XL Keystone pipeline, which will carry oil from Canada to Texas.
  • In addition to the generating billions of dollars, favorable energy policies could reduce dependence on foreign energy sources. The API pointed out that these are bipartisan goals that should find "common ground" in Congress.
  • XL Keystone pipeline would carry crude oil extracted from tar sand in Alberta, Canada, to refiners along the Texas Gulf Coast.
  • Besides creating a million new jobs, the API report suggests that favorable U.S. energy policies could generate an additional $800 billion in revenue over the next two decades and double oil and gas production by 2030.

Natural Gas Highlights

• Natural gas futures fell this week on a mild seasonal slowdown in electricity demand for cooling. Natural gas production in the Gulf of Mexico remains curtailed due to Tropical Storm Lee – initial upward pressure on prices was overshadowed by the impact of cooler weather. The Gulf accounts for just 7% of total U.S. natural gas production, down from 17% in 2008 as U.S. output has shifted to areas on land, according to the EIA. Industry analysts expect downward pressure on the remaining 2011 contracts due to an abrupt end to warm summer weather and additions to storage capacity made during the past several years.
  • Natural gas rigs fell for the second week in a row to 895 as of September 2, according to Baker Hughes.
  • Total working gas is within the 5-year historical range at 3,025 billion cubic feet (Bcf) as of Friday, September 2, 2011, according to EIA estimates. This represents a net increase of 64 Bcf from the previous week. Stocks were 131 Bcf less than last year at this time and 60 Bcf below the 5-year average of 3.085 Bcf, according to the EIA.

Shale Gas Race

• With vast deposits of shale gas and few environmental restrictions to stand in its way, China is aiming to become a world leader in shale gas production. While only the U.S. has been a significant player in the technology driven arena, China's increasing demand for energy, large amounts of capital and lax environmental regulations could potentially give it a competitive edge. In New York and New Jersey, authorities have halted drilling in response to public unease, at least temporarily. Faced with a slowing economy and increasing unemployment, U.S. policy makers are paying closer attention to calls from Congress and the energy industry that environmental laws that seek to block hydraulic fracturing and cut down on smog from utilities are destroying jobs. The Edison Electric Institute, speaking for electricity generators, warns that the EPA’s full slate of proposals could compel the industry to spend $129 billion on upgrades, force the closing of a fifth of coal generators, and lead to blackouts, according to The New York Times. Former Governor Tom Ridge shared that sentiment, calling environmental concerns “hysteria” and stating that natural gas is an integral component of the U.S. national energy strategy that protects national security at Marcellus Shale Coalition's conference this week.
  • About 71% of China’s power comes from coal, creating an acute need for lower-carbon sources of energy. And while the low price of natural gas may slow drilling in the U.S. over the coming year, China’s state oil companies have proved willing to operate at a loss to ensure domestic supply.
  • China’s emerging enthusiasm for domestic shale may be partly a hardball tactic for negotiating with Russian suppliers, with which the country has been struggling to agree on a price for gas imports.
  • Environmental concerns have also blocked hydraulic fracturing, used to extract energy from shale, in France. In Europe mineral rights often belong to the government, making it difficult for landowners to profit from shale development and thus hardening public opposition. Only in Poland is much progress being made.

Comments and questions welcomed. Please contact DeloitteCenterforEnergySolutions@deloitte.com

Learn More!

The euphoria that has surrounded shale gas in recent years has been tempered by questions about the profitability of recent investments and prospects for future successful development. Read Navigating a Fractured Future: Insights into the Future of the North American Natural Gas Market, which addresses many of the questions and summarizes the findings of multiple scenarios regarding the future of North American and global gas markets and offers related strategic insights.

Save these dates!

December 15, 2011
Deloitte Oil & Gas Conference – Houston, TX
For more information on the 2011 Deloitte Oil & Gas Conference please contact OilandGasConference@deloitte.com

About the Deloitte Center for Energy Solutions
The Deloitte Center for Energy Solutions provides a forum for innovation, thought leadership, groundbreaking research, and industry collaboration to help companies solve the most complex energy challenges.

Through the Center, Deloitte’s Energy & Resources Group leads the debate on critical topics on the minds of executives—from the impact of legislative and regulatory policy, to operational efficiency, to sustainable and profitable growth. We provide comprehensive solutions through a global network of specialists and thought leaders.

With locations in Houston and Washington, D.C., the Deloitte Center for Energy Solutions offers interaction through seminars, roundtables and other forms of engagement, where established and growing companies can come together to learn, discuss and debate. www.deloitte.com/energysolutions.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.