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Weekly Oil & Gas Market Highlights: October 14, 2010

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 (EDT) on Thursday, 10/14/10 Noon (EDT) on Thursday, 10/7/10
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $83.18 (Nov-2010 Contract) $82.45 (Nov-2010 Contract)
WTI Cushing Spot $82.78 $81.95
Dated Brent Spot $83.92 $83.25
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 10/14/10 Noon (EDT) on Thursday, 10/7/10
Front-Month NYMEX Henry Hub Futures $3.73 (Nov-2010 Contract) $3.68 (Nov-2010 Contract)
Henry Hub Spot $3.59 $3.55

Data sources: Bloomberg; CME Group

Oil market highlights: Leaving well enough alone

  • OPEC decided at its regularly scheduled meeting in Vienna on Thursday to leave its official production quotas unchanged for the time being. At first glance, this decision may have seemed like a sure thing—and not only because of the recent hints to that effect of several OPEC members. After all, benchmark crude oil prices generally have strengthened in recent weeks, with prices for both WTI-Cushing and UK Dated Brent holding above $80 per bbl during the past seven days. Given expectations, including OPEC’s own projections, of growth in global oil demand this year and next—as well as the forecasts of some pundits calling for moderating non-OPEC oil output in 2011—the cartel’s decision may not be very surprising; however, it was not necessarily a foregone conclusion. Some OPEC members recently have expressed a desire for prevailing oil price levels of $90 or even $100 per bbl, due in part to the role that the US dollar’s pronounced weakening has had in raising oil prices. In addition, some members have hinted that persistently high OECD oil stocks could justify a lowering of OPEC quotas. Fortunately for oil market bears, the cartel decided today to leave well enough alone and simply called for better member compliance with existing production limits.
    • Weakness in the US dollar and equities market movements have contributed to recent oil price strength. Nevertheless, petroleum prices slipped lower today as a somewhat bearish weekly snapshot of US oil fundamentals—and a negative weekly US employment report—outweighed continuing declines in the dollar. The front-month NYMEX Light, Sweet Crude Oil Futures Contract drifted 0.4% lower to settle at $82.69 today. Benchmark US gasoline and distillate futures prices also eased.
  • Oil market participants may have had to look twice at this week’s petroleum update from the US Energy Information Administration (EIA). Taken in isolation, the most recent oil stock data appear to be at least somewhat supportive; however, these figures were overshadowed by demand estimates that left market bulls wanting.
    • The EIA reported that US crude oil inventories slipped by about 0.4 million bbl during the week ending Friday, October 8, 2010—running counter to consensus expectations of a build of more than 1.0 million bbl. At the same time, total domestic gasoline stocks fell by roughly 1.8 million bbl—surpassing consensus projections of a 1.4 million bbl draw—while total US distillate inventories posted a much smaller-than-expected weekly decline of 0.3 million bbl. Notwithstanding these weekly draws, all three of these categories of oil stocks remain higher than a year ago and well above their respective five-year averages. Total US commercial petroleum inventories decreased by 0.4% but are still lofty by historical standards.
    • The EIA’s weekly US oil demand estimates undermined any perceived bullishness in the inventory data. According to the agency, total domestic petroleum consumption decreased by 0.7% to 18.3 million bbl per day during the report week—its lowest level in more than ten months. Contributing to the weekly decline in overall consumption, US gasoline demand fell by 2.0% to its lowest level since February. Distillate consumption also eased slightly on the week.
  • The International Energy Agency (IEA), OPEC, and the EIA all issued their monthly oil market outlooks for October this week. Giving ammunition to market bulls, all three organizations raised their forecasts of 2010 global oil demand relative to their respective September outlooks. Owing in part to stronger-than-expected preliminary readings of third-quarter oil demand in the OECD, the IEA now sees world oil consumption averaging 86.9 million bbl per day in 2010 and 88.2 million bbl per day in 2011. Similar to (though not exactly the same as) the IEA, the EIA expects global consumption to rise by 1.4 million bbl per day in 2011 due mainly to continued growth in China and other non-OECD nations.
    • News of surging Chinese oil imports also supported oil prices this week. As reported by the Wall Street Journal and other news organizations, data from China’s General Administration of Customs show the country’s total crude oil imports set a new monthly record in September.
    • Upward oil price movements still must contend with robust inventory levels. In its “Oil Market Report” for October, the IEA reported that total OECD commercial petroleum stocks hit their highest level in August since 1998. However, the agency noted that preliminary data suggest stocks fell in September.
  • Oil market participants continue to monitor labor unrest in France. According to reports by Bloomberg, the Wall Street Journal, and other media, the strike by workers at the Fos and Lavera oil terminals in Marseille continues to keep tankers from entering or leaving the port. This strike—together with a broader strike by workers at many of France’s oil refineries in protest over the nation’s planned pension reforms—has affected the country’s fuel production and could lead to regional shortages in the days ahead.

Natural Gas market highlights: Slumping seasonally, and then some

  • With limited fundamental support, US benchmark gas prices at Henry Hub floundered in the $3.50-$3.80 per MMBtu range during most of the past week. After moving up to settle near $3.70 per MMBtu on Wednesday afternoon, the front-month NYMEX Henry Hub Futures Contract fell slightly to close at $3.66 per MMBtu on Thursday. Prices were pressured lower after the EIA reported an above-average storage build for the fifth consecutive week. Along with shoulder-season weather, robust US gas supply, and burgeoning storage inventories, the lack of a current storm threat to oil and gas infrastructure in the Gulf—despite an Atlantic Basin hurricane season that remains active—also appears to be keeping prices in check.
    • As the spotlight gradually begins to shift toward the coming winter, the current NOAA outlook (and some private forecasts) calling for warmer-than-normal Lower-48 temperatures during the 2010-11 heating season may be weighing on the forward price curve. As of Thursday’s closing, NYMEX Henry Hub Futures prices for the November 2010-March 2011 contract months averaged just $4.08 per MMBtu.
  • The EIA reported today that Lower-48 working gas inventories rose by 91 Bcf during the week ending Friday, October 8, 2010. While this net injection eclipsed both the year-earlier build of 60 Bcf and the five-year average gain of 64 Bcf, it was in line with consensus expectations. This substantial injection reduced the year-over-year storage deficit to just 3.2% while boosting the surplus relative to the five-year average to 7.4%. With more than three storage report weeks to go in the notional injection season, Lower-48 inventories already have reached 3,590 Bcf.
    • In its “Natural Gas Weekly Update” for October 14, the agency reported that Lower-48 gas consumption declined by nearly 3.0% during the week ending Wednesday, October 13, 2010 (notice this differs from the storage report week) in spite of stronger gas demand for power generation. The agency also reported that total US gas supply remained fairly stable on the week, as an uptick in imports of Canadian gas and stronger LNG sendouts largely offset a slight dip in domestic gas production. The agency’s weekly supply and demand figures are based on Bentek Energy estimates.
    • As stated in its recently published “Short-Term Energy and Winter Fuels Outlook” for October, the EIA now expects Lower-48 working gas inventories to surpass 3.7 Tcf by October 31, 2010. According to the agency, storage inventories will end the injection season at about 97% of last year’s record level—a prospect that market bulls may find far more frightening than any Halloween ghost story.
  • Although US gas consumption is currently in a seasonal lull pending the arrival of colder temperatures and significant heating demand, domestic consumption appears likely to remain in year-over-year growth in the short term. As reported in its current “Short-Term Energy Outlook”, the EIA expects total US gas consumption to remain ahead of its year-earlier level in the fourth quarter of 2010 en route to posting annual growth of 4.6% for 2010 as a whole. The agency anticipates that year-on-year demand growth of roughly 7.5% in both the industrial and power-generation sectors—the former due to a rebound in industrial production and the latter due in part to the summer’s scorching weather—will push 2010 gas consumption higher. However, the EIA sees US consumption staying more or less flat in 2011 owing mainly to slower growth in industrial gas consumption and a slight decline in gas demand for power generation.
    • On the supply side, the EIA now expects marketed gas production in the onshore Lower 48 to grow by 3.5% in 2010 before dipping slightly in 2011. Total US marketed production is expected to decline by 1.5% in 2011. The agency attributes next year’s projected output decline to an expected easing in the pace of gas-directed drilling and to a liquids-to-gas price ratio that will continue to draw producers to plays with higher liquids content. However, the agency expects a 1.4% increase in imports of pipeline gas and a 7% rise in LNG imports—the latter to a still-modest 1.3 Bcf per day—to offset the pullback in domestic production in 2011.

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