Weekly Oil & Gas Market Highlights: January 26, 2012 Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Data sources: Bloomberg; CME Group

Oil & Gas highlights

• NYMEX WTI futures for March ended Wednesday, January 25 trading down $0.24 for the week at $98.46 per barrel after spending most of the week below the $100 per barrel mark.  WTI Crude Futures prices tumbled last Friday over weak oil fundamentals highlights in the Energy Information Administration’s (EIA) Thursday oil stocks report.  Oil consumption was down 7.2% year on year and gasoline demand was at an 11-year low, below the 8 MMbbl/d mark.  Current high prices hovering around $100 per barrel in a weak, but recovering U.S. economy only reinforces low demand and exerts downward pressure on prices.  Worldwide equity markets and the oil markets were holding their breath as Greece entered into debt discussions with private bondholders.  Greece needs a deal with bondholders to avoid default when its bonds come due on March 20.  Also, Greece must have a deal with current bond holders in place before it can receive 130 billion euros in new international financial assistance from the EU and IMF.  Private bondholders are being asked to accept a 65-70% reduction in value of their holdings and swap them for new 30-year Greek bonds with a 10-year grace period and a progressive coupon rate averaging ~4%.  The swap would cut Greeks’ debt of 350 billion euros by 100 billion reducing the country’s projected debt-to-GDP ratio from 160% in 2020 to 120%.  Negotiations over the exact coupon rate pushed the discussions into the weekend and thus maintained a bearish outlook over the market on Friday.
• On Monday WTI and Brent futures opened lower as negotiations over Greek debt failed to produce any results over the weekend and continued into this week.  The euro, which had been staging a recovery against the dollar fell 1.2887 to the dollar.  Euro short positions reached an all-time high of 160,030 contracts, up 3% from last week, even as euro long positions were up 7.5%.  Crude prices began surging and crossed the $100 mark as the EU announced the approval of an Iranian oil embargo that would take effect immediately on new contracts and for existing contracts begin on July 1 of this year.  The EU also put in place sanctions against Iran’s central bank (Bank Markazi), which immediately bans transfers of petrochemicals-related technology to Iran and petrochemicals exports from Iran to the EU beginning May 1.   The EU will review the effect of the new policy on member nations on May 1 to make a determination about progress and how to proceed.  Over the weekend, U.S. aircraft carrier Abraham Lincoln passed through the Strait of Hormuz for the first time since Iran conducted its military exercises around the first of the year.  A UK frigate and French warship also passed through the strait.  Market traders waited through the day to discover if the Iran sanctions would include states such as Greece, Italy and Portugal.  The EU imports some 600,000 bpd of oil from Iran with Mediterranean member nations, most dependent.  In downstream news, three U.S. East coast refineries announced they were closing and Hovensa LLC said it would close its St. Croix, Virgin Islands refinery, which supplies petrochemicals products to the U.S., this February.  Given the large amount of petroleum products stockpiles currently, the news did not have a significant upward impact on oil prices.
• Tuesday saw crude prices give back most of Monday’s gains as the market’s Iran fears began to calm with the realization that the July 1 deadline for Iranian oil sanctions gave the two sides time to negotiate and the despite the recent heated rhetoric, there had been no disruptions in the oil flow.  Other potential upside news failed to deliver much of a boost to a market still waiting for news out of the Greek debt negotiations.  South Sudan said it would shut down its oil production in order to apply negotiating pressure to Sudan over transit fees.  South Sudan currently produces 180,000 bpd of oil, down from the 490,000 bpd it produced prior to the civil war.  Since South Sudan is land-locked, it must transport the oil north to the Red Sea via pipeline through its Northern neighbor, but there has been no agreement about what the transit fees should be.  Sudanese oil is primarily being produced by Chinese, Indian, and Malaysian companies.  News that Europe’s troubled independent refining company Petroplus would shut down its five refineries did little to boost prices in the products market as the market expects European products demand to be 250,000 bpd below normal as a result of warmer temperatures.
• WTI futures started on a downward trend on Wednesday as there was still no resolution to the Greek debt negotiations and the IMF cut its world economic growth forecast for 2012 from 4% to 3.3%.  However, the market began to surge on EIA’s release of oil inventories data for the previous week.  Crude inventories rose by 3.6 million barrels last week to 334.8 MMbbl, about half of the American Petroleum Institute’s (API) estimation for a 7.3 MMbbl increase.  However, the market moved upward on the news that gasoline and distillate stocks fell.  Gasoline stocks declined by 400,000 barrels.  The data seemed to offer hope that the burgeoning gasoline stocks, which had been building on weak demand, might be turning a corner.  Refinery production of gasoline fell by 2.8% to 8.54 MMbbl/d.  Further upside came as Federal Reserve officials announced that the Fed did not intend to raise the federal funds rate at least until 2014 at which time 11 of 17 committee members expected rates to rise.  Keeping the rate low was seen as good for maintaining a growth environment in the economy.  The Fed also announced an inflation goal of 2%.  However, some analysts believed the interest rate effect would be modest if banks do not make loans to business and consumers, who have had a hard time qualifying under current conditions.  They also said it would consider additional bond purchases to boost growth.  The Federal Open Market Committee said that it would maintain a “highly accommodative” stance toward the money supply, signaling that it was ready to step in with additional monetary easing if necessary.  More easing would be bullish for commodities prices as investors move assets to commodities as a store of value.  Turning to the economic forecast, the Fed trimmed its economic growth forecast for 2012 to 2.2 – 2.7%, down from 2.5 – 2.9% in November.  For 2013, the forecast was lowered to 2.8 – 3.2% from 3.0 – 3.5%.  Finally, the Fed said it expected unemployment would not drop below 8.2% in 2012 and would only fall to 7.4% next year.  The Department of Labor announced earlier in the day that unemployment had fallen to 8.5% last week.
• On Thursday, futures surged up above the $100 per barrel mark as the U.S. Department of Commerce reported that orders for 3-year durable goods increased by 3%, which was above analyst expectations of 2%.  Last month orders for durable goods meant to last three years were up 4.3%.  The news along with the announcements by the Fed on Wednesday injected confidence in the market that the economic picture in the U.S. could be brightening.
  • The average retail gasoline price was down less than penny last week holding steady at $3.39 per gallon.  Prices were $0.28 higher than a year ago.  Gasoline stocks fell 400,000 barrels to 227.1 million barrels, down 2.9 million barrels year on year.
  • The average retail diesel price edged slightly downward by $0.006 to also holding steady at $3.85 a gallon, up $0.42 from a year ago.
  • Residential heating oil was down $0.014 from last week to $3.94 per gallon and $0.46 higher than a year ago.
  • Propane stocks dropped 2.4 MMbbls to 50.7 million as prices fell by a penny to $2.86 per gallon, which is $0.06 higher than a year ago.
• Tuesday night, President Obama delivered the State of the Union address during which he touched on several energy-related issues and embraced and “all-of-the-above” energy strategy. For the third time, the President proposed eliminating tax deductions for the petroleum industry worth some $300 billion.  Fifty-two billion of that amount would come from a proposed elimination of “last in, first out” inventory valuation methods widely used by other U.S. industries.  The President seeks another $41 billion in additional revenue by disallowing depletion reductions for oil and gas wells (equivalent to depreciation in other industries), repealing the domestic manufacturing deduction for oil and gas production as well as intangible drilling costs.  Previous attempts to remove these deductions have met with bipartisan resistance.  Recalling his 2010 State of the Union pledge in which President Obama called for the U.S. to get 80% of its energy from clean energy by 2035, the President said that he also wanted to “double down” on clean energy to spur innovation by allowing the development of enough clean energy on public lands to power 3 million homes.  The Obama administration defines natural gas as a clean energy.  He also called for energy efficiency improvements that would help manufacturers eliminate energy waste at their facilities, which he said would lower their energy bills by $100 billion over the next ten years.  Another factor that has given a boost to U.S. manufacturing is shale gas production, which has substantially lowered the energy costs to manufacturing companies who use natural gas as a feedstock for their industrial processes.  U.S. manufacturing output climbed by 0.9% last December, the largest gain since December of 2010.  The President views a revival of manufacturing as a key part of his goal to double U.S. exports over five years.  Another result of the shale gas revolution is that U.S. refineries have become net exporters of petroleum products such as jet fuel, heating oil, and gasoline.  According to EIA, the U.S. exported ~525,000 bpd of gasoline mostly to Mexico and Latin America.  Since November of 2010, the U.S. has been exporting the highest levels of finished motor gasoline since the country has been keeping records surpassing even the immediate peak levels at the end of World War II.  Petroleum product exports as a percentage of refinery production has been growing steadily with the shale oil boom from ~6% in 2005 to ~14% in 2011.  The U.S. trade deficit for the first 11 months of 2011 was $650 billion, a 12% increase from the prior year, with petroleum products accounting for 35% of the total increase while natural gas and liquefied petroleum gas imports declined over the year.  Over 20% ($415 billion) of total imports of $2,022 billion is imports of petroleum and petroleum products.  However, the Environmental Protection Agency has said it would impose new regulations on wastewater used in shale gas production in 2014 due to its oversight authority over wastewater provided to public treatment plants or released into surface water.  Some in the industry view the upcoming regulations as a back-door means to regulate the industry.  EIA states that shale gas accounted for 23% of U.S. natural gas production in 2010, which will rise to 50% in 2035.  The president also said his administration would open more than 75% of the U.S. offshore to oil and gas exploration and production.  However, in November, the administration offered a leasing plan that excluded offshore areas in the Atlantic off the coasts of Virginia and South Carolina where there had been bipartisan support.  There was no mention of the KeystoneXL pipeline or the permitting delays that have plagued Gulf of Mexico deepwater development since the lifting of the drilling moratorium.

Natural Gas highlights

• NYMEX February 2012 futures reported by EIA this week rose 25.7 cents per MMBtu to $2.729 per MMBtu on Wednesday.  The Henry Hub spot price closed up 0.12 cents to $2.61 per MMBtu.
• Domestic natural gas production remained flat during the week rising only 0.3%, but was up 8.2% year on year. Canadian LNG imports were down 4.4% over last week, a 31% year-on-year decline.  The natural gas rotary rig count fell by 11 rigs to 780 down 14% from last year and oil rigs rose 32 to 1,223 a 53% year on year increase.
• Working natural gas in storage fell 192 Bcf to 3,098 Bcf, which is 531 Bcf higher than a year ago and 547 Bcf above the 5-year average.
• Natural gas consumption was down 4.3% led again by power burn and residential/commercial demand.  Consumption was 9.3% below year ago levels.  Temperatures were 1.1 degrees warmer than the 30-year average.

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Learn more

Deloitte MarketPoint LLC and the Deloitte Center for Energy Solutions have developed an assessment of the potential economic impact of LNG exports from the United States based upon various assumptions. Made in America: The Economic Impact of LNG Exports from the United States summarizes the findings of alternative scenarios regarding U.S. LNG exports and offers related strategic insights.

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