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Weekly Oil & Gas Market Highlights: February 24, 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, 2/24/11 Noon (EST) on Thursday, 2/17/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $99.43 (Mar-2011 Contract) $85.40 (Mar-2011 Contract)
WTI Cushing Spot $97.90 $85.39
Dated Brent Spot $114.22 $103.21
Natural gas, USD per MMBtu Noon (EST) on Thursday, 2/24/11 Noon (EST) on Thursday, 2/17/11
Front-Month NYMEX Henry Hub Futures $3.79 (Mar-2011 Contract) $3.87 (Mar-2011 Contract)
Henry Hub Spot $3.83 $3.93

Data sources: Bloomberg; CME Group

Oil market highlights: Prices leap on Libya

  • Driven by growing civil unrest in North Africa and the Middle East, oil prices spent much of the past seven days rising further into the ether. Petroleum traders—already concerned about the possibility of supply disruptions after anti-government protests toppled regimes in Tunisia and Egypt (while also spreading to several other nations within the region) in recent weeks—went on a buying spree as riots in Libya intensified. With civil unrest in Libya escalating into full-blown revolt, some oil companies operating in the country reportedly began to evacuate personnel and curtail production as the week progressed. Reports that Libyan output was being reduced was all market bulls needed to keep benchmark oil prices moving higher on Wednesday and early on Thursday; however, prices eased later on Thursday following reassurances from Saudi Arabia, the International Energy Agency (IEA), and the Obama Administration that shortfalls in Libyan supplies could and would be managed. Although the situation in Libya is dynamic and its outcome uncertain, oil prices likely will remain buoyant and volatile as market participants strive to assess whether the country’s production disruptions will worsen—or spread beyond Libya’s borders.
    • The NYMEX Light, Sweet Crude Oil Futures Contract for March 2011 surged by $7.37 per bbl on Tuesday (following the President’s Day holiday on Monday) to expire at $93.57 per bbl. After rising to more than $103.40 per bbl early in the day, the April 2011 Contract ultimately closed down by 0.8% at $97.28 per bbl on Thursday. Brent crude oil prices of roughly $111.00 per bbl remain well above those for WTI.
  • Conflicting reports as to the amount of Libyan oil production that actually has been curtailed only added to the market’s uncertainty today. Based on estimates from a variety of industry pundits throughout the day, media outlets reported that anywhere from 25.0%-75.0% (0.4-1.2 million bbl per day) of the nation’s oil output had been affected. Libya’s crude oil production averaged roughly 1.6 million bbl per day—or less than 2.0% of total world oil supply—in January 2011, according to the International Energy Agency (IEA). In a statement released today, the IEA’s Governing Board estimated that 0.50-0.75 million bbl per day of oil (or less than 1.0% of the world’s daily consumption) has been removed from the global market.
    • Beyond the curtailment of some Libyan production, the market’s fears that spreading civil unrest potentially could lead to production disruptions in other North African or Middle Eastern countries also are helping to support petroleum prices.
    • Nevertheless, oil prices eased this afternoon after the IEA stated that it is in close contact with major OPEC producers who indicate that they will provide additional supplies as needed. The Agency also noted that it stands ready to draw upon its emergency oil stocks should the need arise.
    • Indications that Saudi Arabia is ready to draw upon its spare production capacity (which the IEA estimates at roughly 3.5 million bbl per day) as needed during the Libyan crisis likely also contributed to this afternoon’s price declines. According to multiple media outlets, a senior Saudi official stated today that the country was engaging in discussions with European refiners about providing any additional oil volumes the refiners may need, and that Saudi Arabia and other OPEC producers would be able to supply any needed volumes and quality of crude in short order. As stated in reports by Bloomberg and The Wall Street Journal, the official also noted that additional oil supplies could be sent to Europe in two ways. One way would involve entering into swap arrangements whereby oil originally earmarked for delivery to Asia from West African OPEC producers such as Nigeria would be sent to Europe instead, while additional Saudi volumes would be shipped to Asia to compensate. A second way would be for Saudi Arabia to ship more oil to Europe via the East-West Pipeline that connects to the port of Yanbu on the Red Sea.
  • Concerns about reductions in Libyan crude output also have helped to keep US gasoline and heating oil futures markets percolating in recent days—even though Libya is not a major oil supplier to the US. Contributing to the action is the fact that a significant portion of Libyan production is of relatively high-quality (light, sweet) crude and is used by European refiners to produce gasoline and other high-value fuels. Some petroleum traders fear that, if Libyan output is curtailed for an extended period, US refiners could find themselves increasingly competing with European refiners for sweet crude grades from other African nations—such as Nigeria—that are major suppliers of crude to the US. Concerns that such a chain of events ultimately could boost US fuel spot prices in the weeks ahead helped to send benchmark US futures prices for gasoline and heating oil to their highest levels in nearly 2.5 years early on Thursday; however, prices retreated later in the day. Benchmark NYMEX heating oil closed down slightly at $2.88 per gallon on Thursday, while benchmark NYMEX gasoline ended the day nearly unchanged at $2.72 per gallon.
  • The US Energy Information Administration (EIA) provided a fairly bullish snapshot of domestic oil fundamentals today, although it was overshadowed by international events. Total US commercial petroleum inventories slipped by 12.1 million bbl (about 1.1%), aided by draws in stocks of marquee refined products. Total US petroleum consumption slipped by 1.1% from the prior week to 19.8 million bbl per day. However, on a four-week moving average basis, total consumption rose to 19.5 million bbl per day—about 1.2% higher than the previous week and 2.3% higher than a year earlier.
    • For the week ending Friday, February 18, 2011, US commercial crude oil inventories rose by 0.8 million bbl—somewhat less than the consensus projection of 1.1 million bbl. A decline in crude oil inputs to refineries—as refinery capacity utilization fell by 1.8% to 79.4% due to planned and unplanned maintenance—helped stocks to rise. Notably,  crude inventories at Cushing, Oklahoma—the delivery point for the benchmark NYMEX Light, Sweet “WTI” Crude Oil Futures Contract—declined by 0.3 million bbl to 37.4 million bbl. At 346.7 million bbl,US crude stocks are 2.7% higher than a year ago and 5.2% above the five-year average level.
    • US gasoline inventories fell for the first time in eight weeks, slipping by 2.8 million bbl as domestic production and imports eased from a week earlier while demand ticked higher. Still, stocks of the motor fuel remain near their highest level since early 1990. Domestic distillate inventories declined by 1.3 million bbl on the week, but remain 4.7% higher than a year earlier and nearly 18.0% above the five-year average.

Natural Gas market highlights: Staying the course

  • With the notional (March 31) end of the heating season now only five weeks away, bearish sentiment continues to dominate US gas futures markets. Expectations that gas demand for space heating will moderate in the weeks ahead while domestic gas production remains robust are helping to keep benchmark US gas futures prices below $4.00 per MMBtu. Futures market bulls may find meaningful gas price rallies—those resulting from short-term bouts of cold temperatures, at least—increasingly hard to come by following today’s expiration of the March 2011 NYMEX Henry Hub Futures Contract. Market participants almost certainly will continue to watch weather forecasts closely in the weeks ahead as the heating season winds down—and nearby gas prices likely will fluctuate along with estimates of season-ending storage inventories. Although the EIA’s early-February projection that Lower-48 working gas inventories will end March at 1,651 Bcf may now seem a bit optimistic, many market participants appear to remain convinced that stocks will enter the 2011 injection season at a decent level from which to rebuild.
    • The March 2011 NYMEX Henry Hub Futures Contract fell by $0.11 to expire at $3.79 per MMBtu on Thursday. The April 2011 Contract—which now assumes the prompt position—slipped by $0.06 to close at $3.87 per MMBtu today.
    • US spot gas prices generally continue to reflect regional weather and heating demand. Gas prices in the Northeast also garnered support from another factor early this week. Northeast prices raced higher due in part to a reported line break on TransCanada’s Canadian Mainline in Ontario that occurred on Saturday. The incident interrupted operations on two of the three pipes that together form the Mainline. The region’s prices have since eased as repairs on the line have progressed and as weather moderated.
  • For the week ending Friday, February 18, 2011, the EIA reported on Thursday that Lower-48 working gas inventories slipped by 81 Bcf on a net basis—within striking distance of the consensus forecast of 83-84 Bcf. This withdrawal was sharply lower than the week-earlier pull of 233 Bcf, the year-ago draw of 174 Bcf, and the five-year average decline of 148 Bcf. Although a relatively small withdrawal had been widely anticipated, the market nevertheless reacted to the storage report by sending prices downward. At 1,830 Bcf, Lower-48 working gas stocks are 2.6% less than a year earlier and 3.2% below the five-year average.
    • As most pundits had expected, the Lower-48’s emergence from early February’s deep freeze slowed the pace of storage withdrawals considerably as demand eased and US gas production recovered from weather-related curtailments. In its “Natural Gas Weekly Update” for February 24, 2011, the EIA reported that Lower-48 heating degree days were roughly 12.0% below normal during the storage report week. The agency stated that total US gas consumption fell by 8.0% during the week ending Wednesday, February 23 (notice this differs from the storage report week), as demand declined in nearly every sector. Total US gas supply slipped by 1.6%, as an increase of 0.8% in domestic gas production was outweighed by declines in imports of Canadian gas and domestic LNG sendouts. The EIA bases its weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • The Baker Hughes US gas rotary rig count has remained fairly stable at just above 900 for the past few weeks, with the company reporting 905 active rigs as of Friday, February 18, 2011—a decline of 1 from a week earlier. The company also reported that the total number of active horizontal rigs in the US (including those drilling for oil as well as those targeting gas) rose by 4 from the prior week to 984—a year-over-year increase of nearly 50%.

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

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