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Weekly Oil & Gas Market Highlights: March 3, 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, 3/3/11 Noon (EST) on Thursday, 2/24/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $101.04 (Apr-2011 Contract) $99.43 (Apr-2011 Contract)
WTI Cushing Spot $100.87 $97.90
Dated Brent Spot $114.31 $114.22
Natural gas, USD per MMBtu Noon (EST) on Thursday, 3/3/11 Noon (EST) on Thursday, 2/24/11
Front-Month NYMEX Henry Hub Futures $3.78 (Apr-2011 Contract) $3.79 (Mar-2011 Contract)
Henry Hub Spot $3.80 $3.83

Data sources: Bloomberg; CME Group

Oil market highlights: Jumpy prices rise above $100

  • High price levels and volatility remain the name of the game in the global oil market. The ongoing civil revolt and resulting oil production disruption in Libya continue to command the attention of oil market participants and to drive oil price movements. However, the market’s focus is not only on the current situation in Libya, but also on the risk that output disruptions may spread to other producing countries in North Africa or the Middle East. In the minds of petroleum traders, that risk may have increased during the past seven days as civil disturbances flared up in countries such as Iran, Iraq, and Oman. Benchmark oil prices almost certainly will continue to show a significant risk premium as long as the market remains fearful that further oil supply curtailments could be in the offing.
    • After falling below $97.00 per bbl on Monday, the front-month NYMEX Light, Sweet Crude Oil Futures Contract climbed over the next two days to settle above $102.20 per bbl on Wednesday. However, prices eased slightly on Thursday following media reports that embattled Libyan President Qaddafi had accepted Venezuelan President Chavez’ proposal to mediate the conflict in Libya—even though the viability of the proposal (including its acceptability to rebel leaders) was unclear. The prompt Contract slipped by 0.3% to settle at $101.91 per bbl today. Brent continues to trade at a big premium to WTI, with prices for the North Sea grade at more than $114.00 per bbl. Benchmark US futures prices for gasoline and heating oil generally followed those for crude in recent days, and are above $3.00 per gallon. Gasoline prices were bolstered at midweek by a large reported draw in US inventories of the fuel.
  • The constantly changing status of the revolt in Libya and of protests in other countries in North Africa and the Middle East is keeping petroleum prices volatile. With incomplete (and sometimes conflicting) information available, market participants have reacted strongly to reports of any salient development.
    • Benchmark oil prices slipped early this week following a barrage of announcements from regional oil producers aimed at calming the market’s supply anxieties. On Monday, Saudi Arabian officials reiterated that the nation is ready to provide extra crude supplies, and stated that the country already has increased crude production by 0.5-0.6 million bbl per day (to roughly 9.0 million bbl per day). Kuwait also stated that it could raise production. In addition, reports from shipbrokers suggested that at least some Libyan oil exports were still being shipped. Furthermore, Libyan oil officials reported that the country’s oil fields and infrastructure remained safe, and urged foreign oil workers to return.
    • However, prices resumed a generally upward trajectory later in the week as fighting between pro-Qaddafi and rebel forces intensified—fanning fears that the supply disruption could worsen. Further unnerving markets, the International Energy Agency (IEA) reported on Wednesday that Libyan production shut ins have risen to 0.85-1.00 million bbl per day (out of 1.60 million bbl per day). The Agency’s accompanying statement that European refiners—who are the primary consumers of Libyan crude oil—appear to be adequately supplied at least through the end of March was not enough to undermine midweek price support. The IEA said that widespread seasonal refinery maintenance in Europe was minimizing the impact of the crude supply disruption on Continental refiners.
  • While oil traders remain fixated on the turmoil in Libya and the surrounding region, they still are keeping one eye on major economic indicators. One piece of US economic news that got the market’s attention this week was a report that domestic manufacturing activity increased at a strong pace in February. The Institute for Supply Management (ISM) reported on Tuesday that its factory index rose to a greater-than-expected 61.4 last month—one of the highest levels in several years. On Thursday, a better-than-expected US jobs report joined with a positive ISM gauge of the service sector to limit oil price declines.
  • On Wednesday, the US Energy Information Administration (EIA) issued a snapshot of domestic oil fundamentals that contained both bullish and bearish aspects. On the bullish side, total US commercial petroleum inventories slipped as total stocks of crude oil, gasoline, and distillates all posted weekly declines. On the bearish side, crude inventories at Cushing, Oklahoma—the delivery point for the benchmark NYMEX “WTI” futures contract—rose significantly. In addition, total domestic petroleum consumption fell by 3.9% from the prior week to 19.1 million bbl per day. On a four-week moving average basis, total US consumption registered 19.6 million bbl per day, or about 1.4% more than a year earlier.
    • For the week ending Friday, February 25, 2011, US commercial crude oil inventories slipped by 0.4 million bbl—diverging from consensus projections of a build of 0.7-1.0 million bbl. Higher crude oil inputs to refineries—as capacity utilization rose by 1.5% to 80.9%—and a slight decline in imports contributed to the draw. Stocks at Cushing grew by 1.2 million bbl to 38.6 million bbl. US crude inventories are 1.4% higher than a year earlier and 4.4% above the five-year average.
    • The most bullish facet of the EIA report, gasoline inventories fell by 3.6 million bbl—in contrast to consensus expectations of a small gain. A rise in gasoline demand of 0.7% on the week helped stocks to slip even as production edged higher and imports were flat. Gasoline inventories are 1.2% higher than a year earlier and 4.2% above the five-year average. Distillate stocks decreased by 0.8 million bbl—a bit less than expected—and remain nearly 5.0% higher than a year ago.

Natural Gas market highlights: Bulls remain four-lorn

  • US gas market bulls remain challenged to keep benchmark gas prices above $4.00 per MMBtu. After succeeding in driving prompt Henry Hub futures prices back above that level during the early stages of the past week, market bulls subsequently stumbled under a renewed assault by their bearish counterparts. Gas prices are under pressure from mounting market perceptions that US production—which appears to remain in year-over-year growth—likely will continue at a robust pace while demand eases seasonally in the months ahead. Although the market’s periodic reassessment of price levels relative to declining storage inventories has engendered occasional price rallies in recent weeks, such rallies have repeatedly proven to be short lived. Still, gas prices likely will continue to fluctuate along with weather forecasts as the final month of the notional heating season unfolds.
    • The prompt NYMEX Henry Hub Futures Contract fell slightly to settle at $3.78 per MMBtu today.
  • EIA data released today show that a below-average volume of gas was pulled from US storage facilities for a second consecutive week. According to the agency, Lower-48 working gas inventories declined by 85 Bcf on a net basis during the week ending Friday, February 25, 2011—in line with consensus expectations. This moderate draw was substantially less than both the year-earlier pull of 124 Bcf and the five-year average withdrawal of 131 Bcf. Consequently, the storage deficit relative to the year-earlier level narrowed considerably. At 1,745 Bcf, Lower-48 working gas stocks are just 0.5% less than a year ago and 0.9% below the five-year average mark.
    • Moderate temperatures helped to keep the pace of storage withdrawals in check. In its “Natural Gas Weekly Update” for March 3, 2011, the EIA reported that Lower-48 heating degree days were about 5.0% below normal during the storage report week. Gas demand appears to have rebounded a bit in more recent days. The agency stated that stronger core demand—resulting in part from cold weather in the Northeast—pushed total US gas consumption roughly 5.0% higher during the week ending Wednesday, March 2 (notice this differs from the storage report week). Total domestic gas supply was flat as lower imports from Canada and domestic LNG sendouts offset stronger US production. The EIA noted that estimated daily domestic gas output hit a whopping 63.1 Bcf on Monday, February 28. The EIA bases its weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • Recently released US gas production data for December 2010 did little to harm market perceptions of ample US gas supply. In its “Natural Gas Monthly” for February 2011, the EIA reported that total US dry gas output rose by 0.2 Bcf per day from the prior month to average nearly 61.0 Bcf per day in December—representing year-over-year growth of about 10.0%. For 2010 as a whole, US dry gas output averaged 59.1 Bcf per day—4.8% more than in 2009 and the highest level since 1973. Preliminary data suggest that domestic production has remained robust early in 2011, although extremely cold temperatures in the Rockies and the Midcontinent in early February led to widespread well freeze-offs that hindered output during that period. Even so, year-to-date US dry gas output through February 25 was 5.6% higher than a year earlier, according to the American Gas Association’s “Natural Gas Market Indicators” report for the same date.
    • The Baker Hughes US gas rotary rig count continues to hover near 900, with the count rising by 1 to 906 as of Friday, February 25, 2011. Although the current gas rig count is lower by roughly 80-90 than it was six months ago, it appears to have stabilized in recent weeks. Some analysts believe the pace of gas-directed drilling will need to fall significantly further in order to materially impact production. As reported by SNL Energy, analysts at Barclays Capital estimated in the firm’s “Natural Gas Weekly Kaleidoscope” for March 1 that the number of gas rigs needs to decline to the 800-850 range to flip US gas production into a downward trend. The analysts noted that output potentially still could rise even at that level of drilling, if producers complete significant numbers of wells drilled last year.
  • Aspiring gas market bulls also must contend with expectations of strong hydroelectric output in the Pacific Northwest—which could weigh on gas demand for power generation in the western US—in the months ahead. In its latest outlook, the Northwest River Forecast Center stated that it continues to anticipate normal or greater-than-normal water flows at key hydroelectric dams in the Northwest through September. In agreement with this projection, some private forecasters also expect the La Niña weather pattern to bring high levels of precipitation to the Northwest this spring.

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

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