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Weekly Oil & Gas Market Highlights: April 21, 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, 4/21/11 Noon (EDT) on Thursday, 4/14/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $111.71 (May-2011 Contract) $107.93 (May-2011 Contract)
WTI Cushing Spot $111.04 $107.94
Dated Brent Spot $123.72 $122.47
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 4/21/11 Noon (EDT) on Thursday, 4/14/11
Front-Month NYMEX Henry Hub Futures $4.40 (May-2011 Contract) $4.24 (May-2011 Contract)
Henry Hub Spot $4.33 $4.14

Data sources: Bloomberg; CME Group

Oil market highlights: Falling Crude Stocks Make for a Bullish Surprise

  • It was another eventful week in oil and gas markets with average U.S. gasoline pump prices closing in on $4 a gallon and continuing political unrest in the Middle East and North Africa (MENA). With a sharp dip in the beginning of the week and a jump up towards two-and-a-half-year highs at the end, benchmark oil prices continued their roller-coaster ride. Early in the week, continuing supply concerns from MENA were offset by worrying signs of a slowed global economic recovery: Standard & Poor’s (S&P’s) lowered the U.S. government's credit rating, asset bubbles dimmed prospects in emerging markets, and market participants pulled back on oil. By midweek, however, traders moved past S&P’s downgrade and oil was back up on strong consumption numbers from the U.S. and China, lower inventories, a weaker dollar, and rising equity markets in Asia and Europe. While the market is showing increased responsiveness to demand indicators, supply concerns continue to underpin prices as fighting disrupts oil exports from Libya and a volatile political environment of uncertainty threatens additional supply disruptions in the region.
    • After settling at $109.66 per barrel (bbl) last Friday, the front-month NYMEX Light, Sweet Crude Oil Futures Contract opened low and then climbed early this week—closing at $108.15 per bbl on Tuesday—continuing upward, settling at $111.45 per bbl on favorable domestic demand signs on Wednesday. On Thursday, the prompt “WTI” contract jumped above $112 per bbl to near the highest level since 2008 amid signs that U.S. demand remains robust despite rising fuel costs. Brent fell below $120 per bbl for the first time in two weeks, but was back up around $124 per bbl on Thursday, sustaining a strong premium to WTI.
    • The U.S. average retail price of regular gasoline increased more than a nickel from last week to $3.84 per gallon before the upcoming summer driving season. This is $0.98 per gallon higher than last year at this time and is the highest price in April since the EIA began tracking weekly data in 1990.
Geopolitical Risk Price Premium
  • Political turmoil and supply uncertainty in the Middle East and North Africa continue to impose a geopolitical risk price premium on the market. Saudi Arabia refused to further leverage its spare capacity to sustain high production and discount its barrels against Brent to provide some cushion in the system. To the chagrin of Washington and Beijing, Saudi’s oil minister announced this week that it cut back oil production by 800,000 barrels per day of sour crude in March due to poor demand. China's increased demand for diesel and Libya’s civil war have tightened light, sweet crude supply. As a result, additional OPEC supplies of heavy sour crude are having little effect on prices, propelling Brent crude futures to a 32-month high above $127 per bbl last week, trading about $3 below that peak on Thursday.
    • There is a looming threat of further supply disruptions as unrest, which has toppled leaders in Egypt and Tunisia and spun Libya into a civil war, spreads to Syria, Jordan, Iran, Oman, Algeria, Bahrain, and Yemen. Escalating violence in Nigeria, Africa’s biggest oil producer, also added to investors’ uncertainty of global oil supply.
$ 4 Gasoline Demand Destruction? Not yet!
  • Oil prices rebounded midweek after a fall in U.S. crude stocks took the market for a bullish surprise. Despite a 29% jump in oil prices since mid-February, higher fuel costs have not curbed demand. Oil was back above $111 Wednesday as gasoline inventories fell 1.6 million bbl last week, after a 7 million bbl reduction in barrels the previous week, as refineries ramp up production of gasoline ahead of the summer driving season. At 208 million bbl, U.S. gasoline inventories are 7.5% less than a year ago and 1.5% below the five-year average mark. U.S. distillate stocks declined by 2.5 million bbl, but are still 18% above their five-year average reading. Traders have been watching closely for signs that high gasoline prices will undermine demand, but strong consumption numbers from the U.S. and China suggest that the market bulls might have some room to run. Further upward market trajectory will also be fueled by Middle East unrest, a weaker dollar, and rising equity markets in Asia and Europe.
    • In its weekly inventory report, the Energy Department said U.S. oil supplies fell by 2.3 million bbl in the week ending April 15, surprising analysts expecting an increase of 1.6 million bbl. Total U.S. petroleum consumption remained essentially unchanged from the prior week at around 19.3 million bbl. On a four-week moving average basis, total domestic consumption registered 19.1 million bbl per day—about even with a year earlier.
    • A 6% weekly decrease in crude oil imports contributed to the crude stock draw as both domestic oil production and inputs to refineries remained roughly unchanged from the previous week. Total U.S. refinery capacity utilization increased by 1.1 % from the prior week to 82.5% as refiners ratcheted up operations. At 357 million bbl, total U.S. crude oil inventories are 0.3% higher than a year earlier and 4.2% above the five-year average level. Crude inventories at Cushing, Oklahoma remain at 41.1 million bbl—helping to keep WTI prices below those for Brent and other similar grades.

Natural Gas market highlights: Late Cold Snaps and Early Heat Waves Fire up Gas Prices

  • Natural-gas futures ended at their highest levels in 11 weeks Thursday after a second consecutive smaller-than-expected weekly build in U.S. inventories, cold weather lingered in the Northwest and upper Midwest and early season cooling demand increased in the South. Scheduled natural gas shipments to U.S. power plants rose to the highest level in almost 10 weeks. Colder-than-normal temperatures are expected in May through July across the northern tier of the U.S. and warmer-than-normal weather is expected from the Southwest through the Gulf Coast, according to the National Oceanic and Atmospheric Administration.
    • NYMEX Henry Hub Futures Contract settled at $4.412/MMBtu on Thursday, the highest ending price since Feb. 2
  • End-of-season gas inventories for the Lower-48 are still reasonably ample (at slightly above-average levels) despite last winter’s big drawdown thanks in part to the near-record-high inventory levels at the start of the 2010-11 withdrawal season. EIA's April 2011 Short-Term Energy Outlook projects that storage operators will inject enough gas into storage to push Lower-48 working gas inventories to 3,908 Bcf by the end of the 2011 injection season as a result of continuing strong production levels. This level of injection will place stocks at the end of the 2011 injection season 61 Bcf above last year's season-ending inventories.
    • The EIA reported Lower-48 working gas storage was 1,654 Bcf as of Friday, April 15, 2011, representing a net increase of 47 Bcf from the previous week, 165 Bcf less than last year at this time. Inventories were within the 5-year historical range, but fell short of estimates for a 51-bcf build.
  • Market participants expect U.S. storage to be quickly refilled by robust domestic production. There were 885 drilling rigs seeking natural gas in the U.S. last week, according to Baker Hughes U.S. gas rotary rig count, down by four from the previous week, suggesting that low gas prices triggered a slight pull back from producers.

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