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Weekly Oil & Gas Market Highlights: March 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 (EDT) on Thursday, 3/24/11 Noon (EDT) on Thursday, 3/17/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $106.02 (Apr-2011 Contract) $100.90 (Apr-2011 Contract)
WTI Cushing Spot $105.51 $100.69
Dated Brent Spot $115.39 $113.65
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 3/24/11 Noon (EDT) on Thursday, 3/17/11
Front-Month NYMEX Henry Hub Futures $4.24 (Apr-2011 Contract) $4.11 (Apr-2011 Contract)
Henry Hub Spot $4.18 $3.85

Data sources: Bloomberg; CME Group

Oil market highlights: Staying on edge

  • Geopolitical fears spurred by headlines from North Africa and the Middle East are keeping oil market participants on edge—and oil prices high and volatile. Petroleum prices continued their overall march higher during the past week, albeit with plenty of intraday fluctuation as a tightly wound market reacted to a nearly constant stream of news regarding military and political developments in those regions. Airstrikes by US and allied forces in Libya and intensifying civil unrest in several Middle Eastern countries appeared to exacerbate the market’s concern about oil supply disruptions—both current and potential—and to overshadow other market drivers for much of the past seven-day period. Consequently, the fear premium in benchmark petroleum prices has persisted and shows little sign of shrinking. Although prices eased slightly on Thursday, the potential for substantial price declines may be limited in the near term as oil traders remain wary of being caught short in the event of further supply curtailments.
    • The NYMEX Light, Sweet Crude Oil Futures Contract for April 2011 climbed early this week and expired at $104.00 per bbl on Tuesday. After moving into the prompt position, the May 2011 Contract closed at $105.75 per bbl on Wednesday—the highest front-month settlement price since September 2008—before edging down to $105.60 per bbl today. Brent crude’s premium to WTI narrowed to approximately $10.00-11.00 per bbl.
    • Although analyst estimates of the current fear/risk premium in benchmark crude oil prices vary, some pundits believe that the premium is as much as $15.00-20.00 per bbl for Brent.
    • Benchmark US futures prices for gasoline and heating oil remain above $3.00 per gallon. A large reported draw in domestic gasoline stocks helped to bolster the fuel’s price and narrow its discount to heating oil at midweek.
  • Benchmark oil prices continue to draw strength from the fighting in Libya. Libya’s National Oil Company recently announced that the nation’s oil production has dropped to less than one-quarter of its pre-conflict level of 1.6 million bbl per day, and the International Energy Agency recently noted that the country’s oil exports have all but ceased. Although the market previously had factored in Libyan supply loses for the short term (according to some analysts, at least), this week’s allied air attacks on forces loyal to Colonel Qaddafi reportedly stoked traders’ fears that prolonged fighting could keep Libyan exports offline (or severely limited) for an extended period—and helped to send oil prices higher. Some observers also believe that recent upward movements in prices may in part reflect the market’s awareness of the growing risk of damage to oil infrastructure in Libya that expanded fighting poses.
    • In recent days, several industry pundits have expressed the view that Libyan oil exports will remain curtailed for several months and will not recover fully until 2012.
    • Also bolstering oil prices, market participants remain nervous that civil unrest in Middle Eastern countries eventually could result in further oil supply disruptions. Prices garnered additional support this week from heightened anti-government protests (and related violence) in Yemen, Syria, and Algeria. Yemen declared a state of emergency at midweek, and media reports suggested that one of the nation’s oil pipelines had been damaged by dissidents. Still, Yemen is a small oil producer, and the market’s primary worry regarding the Middle East remains that growing unrest in the region could spill over into Saudi Arabia and disrupt the country’s oil production and exports.
    • OPEC still has no plans to call an emergency meeting to discuss raising oil output. According to a Bloomberg report early this week, Qatar’s deputy prime minister indicated that the global oil market remains adequately supplied for now owing to increased output from Saudi Arabia and other countries.
  • Prompted by events in Portugal and the resulting renewed concern over European sovereign debt, oil traders on Thursday seemed to reconsider the potentially bearish oil-demand implications of negative economic news released earlier this week—which worked against further price gains today. The UK government announced at midweek that it now expects the country’s GDP to grow by 1.7% this year, down from the 2.1% it projected last fall. In the US, data showed that durable goods orders unexpectedly declined in February and that the housing market remains depressed.
  • While events in North Africa and the Middle East are commanding the oil market’s attention, analysts and traders continue to speculate on the oil-demand impacts of the recent natural disaster in Japan. In its “This Week in Petroleum” report for March 23, 2011, the US Energy Information Administration (EIA) stated that the disaster—which damaged a wide range of energy and transportation infrastructure as well as industrial facilities—likely will reduce Japanese oil consumption in the short term. This could help to mitigate the effect of lost Libyan supplies on the global oil market. The agency also stated that Japan’s petroleum demand is widely expected to rebound in the longer term as reconstruction efforts begin and as oil-fired power generation fills in for some portion of lost nuclear output. However, no clear time frame for reconstruction yet exists, adding to uncertainty in the outlook for Japanese demand.
  • The EIA’s midweek snapshot of domestic oil fundamentals showed that the US remains well supplied with crude oil. However, prices rose following the report’s release as market participants focused on other factors—including another larger-than-expected draw in gasoline stocks. Total US petroleum consumption increased by 1.0% from the prior week to 19.3 million bbl per day. On a four-week moving average basis, domestic consumption also was 19.3 million bbl per day—0.5% less than a year earlier.
    • For the week ending Friday, March 18, 2011, US commercial crude oil inventories rose by 2.1 million bbl—surpassing consensus expectations of a 1.5-2.0 million bbl gain—as a 3.5% uptick in crude imports outstripped a 1.2% increase in crude inputs to refineries. Crude oil stocks at the Cushing, Oklahoma hub—the delivery point for the NYMEX “WTI” Contract—edged up to 40.2 million bbl. At 352.8 million bbl, total US crude stocks are 0.4% higher than a year ago and 4.7% above the five-year average. Headlining the report, total US gasoline inventories demolished market expectations of a 2.0-million bbl decline and plummeted by 5.3 million bbl. A 2.8% rise in consumption helped to draw down the motor fuel’s stocks. At 219.7 million bbl, gasoline inventories are 2.2% less than a year earlier and are slightly below the five-year average. US distillate stocks remained essentially unchanged on the week.

Natural Gas market highlights: Springing to life

  • Following a winter of discontent, US gas market bulls certainly have found the past week to be a breath of fresh—if somewhat chilly—spring air. Fortunately for these long-suffering market participants, spring has gotten off to a frosty start in some parts of the Lower 48. Supportive weather—and forecasts calling for more of the same through the end of this month—bolstered gas prices this week. Below-average temperatures in many key US heating markets refocused traders’ attention on gas demand for space heating as they endeavored to assess the effect on season-ending storage inventories. Still, most market pundits expect US working gas stocks to finish the heating season at close to average levels, which could limit price gains in the near term. Indeed, benchmark US gas futures prices gave back some of their early-week gains today after the EIA reported only a modest storage withdrawal.
    • After racing higher on Tuesday and Wednesday, the prompt NYMEX Henry Hub Futures Contract slipped by $0.09 to settle at $4.24 per MMBtu today.
  • The EIA reported on Thursday that Lower-48 working gas inventories declined by 6 Bcf on a net basis during the week ending Friday, March 18, 2011—in line with consensus expectations. Although this net withdrawal was bullish compared to the 7-Bcf net injection reported a year earlier, it nevertheless compared bearishly to the five-year average pull of 17 Bcf. A withdrawal in the East consuming region outweighed injections in the Producing region and the West consuming region. At 1,612 Bcf, Lower-48 working gas stocks are 0.7% less than a year ago but are 2.2% above the five-year average level.
    • Mild US weather and robust domestic gas output facilitated the modest net withdrawal. In its “Natural Gas Weekly Update” for March 24, 2011, the EIA reported that average Lower-48 temperatures were roughly 3 degrees above normal during the storage report week (but were still colder than a year earlier). However, the return of colder weather appears to have given a late-season boost to gas consumption in more recent days. In the same report, the agency stated that resurgent gas demand for space heating pulled total US gas consumption higher by 6.1% during the week ending Wednesday, March 23 (notice this differs from the storage report week).
    • The EIA also reported that US gas production continues to set new records as shale gas output continues to grow. According to the agency’s weekly update, domestic gas output averaged more than 63.0 Bcf per day during the week ending March 23—5.9% higher than a year earlier—and registered a new single-day record of 63.3 Bcf on Sunday, March 20. The EIA indicated that strong output from the Marcellus and Haynesville shales contributed to the robust level of US production. Late last week the agency reported that the Haynesville Shale dislodged the Barnett Shale as the nation’s largest shale-gas producing play in February. The EIA bases its preliminary/weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • Although domestic gas output remains strong, a decreasing gas rig count is spurring the hopes of some market participants that US gas production growth will moderate in the months ahead and that output will switch into sequential decline later this year. A lower gas rig count may have contributed to the past week’s rise in benchmark US gas futures prices, which some analysts believe were inordinately low this winter given the rapid decline in the Lower-48 storage surplus that occurred during the period.
    • Adding to its recent string of declines, the Baker Hughes US gas rotary rig count fell by 7 to 875 as of Friday, March 18, 2011—nearly 7.0% below its year-earlier reading. The US oil/gas drilling split reported by the company continues to shift in favor of oil, and is rapidly approaching 50/50. The US horizontal rig count (including rigs seeking oil and those targeting gas) continues to climb.

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