Weekly Oil & Gas Market Highlights: March 8, 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 crude futures for April fell during the week to close Thursday at $106.58 a barrel as rumors of a Saudi Arabian pipeline explosion last week proved false, concerns about the global economy continued, and tensions with Iran received a temporary respite with weapons inspectors permitted to visit an Iranian military facility.
• The market’s rapid reaction, to rumors of the purported pipeline explosion in Saudi Arabia , is indicative of ongoing concerns over regional supplies and stability in the Middle East and North Africa.  Further downward pressure on prices came from developments in the ongoing European debt crisis, which sent the euro down versus the dollar.  European leaders signed a new austerity pact designed to maintain a strict government deficit limit, approved the second 130 billion euro bailout for Greece, and indicated that the transition from the temporary European Financial Stability Facility to the permanent European Stability Mechanism would be accelerated.  WTI futures closed at $106.70, down $2.14 during the day’s trading and down 2.8% for the week.
• Over the weekend, a two-vehicle collision in New Lenox, Illinois damaged line 14/64, a key juncture of Enbridge’s Midwest pipeline network, causing an oil leak and fire.   The company shutdown the 318,000 bbl/d pipeline that carries Canadian crude to Griffith, Indiana.  The company’s spokesperson said they planned to open line 14 on Wednesday and line 64 on Thursday of this week.  The capacity of line 14/64 is ~3% of total U.S. oil imports.
• On Monday, China announced a new GDP growth target of 7.5% down from the 8.0% growth it has targeted for the past 8 years.   The news sent crude prices lower as the country is the second largest oil-consuming nation in the world and a major source of demand for many of the world’s other commodities.  The reduction of the growth target combined with China’s recent downward revision of the reserve requirements for China’s banks indicates that the country is feeling the economic pinch of the global recession and is looking for ways to maintain growth by bolstering internal demand.  During New York trading, futures prices encountered resistance just above $107 a barrel as the market awaited news out of a meeting between President Obama and Israeli Prime Minister Benjamin Netanyahu.  President Obama is seeking ways to patch the growing rift between the United States and one of its closest allies.  The market is concerned about the possible consequences for Middle Eastern oil supplies if there is an Israeli attack on Iran’s nuclear facilities.
• Crude futures plummeted during Tuesday trading as new data for fourth quarter growth in Europe showed that the economy of the EU shrank by 0.3% at the end of 2011.  A report by the Institute of International Finance predicted that 1 trillion euros of damage could result from a disorderly Greek default.  Such as scenario might ensue if private holders of Greek debt, or a substantial portion of them reject the write-down of their assets in exchange for new Greek bonds.  If fewer than 67% of bondholders participate, such a scenario could become a reality.  Futures prices also fell as tensions with Iran seemed to ease with the announcement that Iran will allow U.N. weapons inspectors access to the Parchin military base.  Downside news continued as the Energy Information Agency (EIA) released its March Short-term Energy Outlook, in which the agency estimated a decline in U.S. 2012 petroleum demand of 0.3% (60,000 bbl/d) compared to an estimate of a modest 0.2% 2012 demand increase last month.  Further, the agency sees China’s oil demand growth slowing to only 4.5% in 2012 compared to its February forecast of 5.4% growth.  Global demand is expected to rise 1.2% this year, down from 1.5% last month.  U.S. demand will fall to an average of 18.77 million bbl/d, a 15-year low even as U.S. crude oil production increased by 120,000 bbl/d in 2011 and will rise by an additional 90,000 bbl/d in 2013.  Total U.S. 2011 production increases of 390,000 bbl/d were offset by a 230,000 bbl/d decline in production from Alaska and a 230,000 bbl/d decline in production from the Gulf of Mexico as it struggles to revive from the effects of the moratorium and “permitorium” that followed.  WTI futures closed down $2.02 at $104.70 at the close of New York trading.
• During Wednesday trading, futures prices traded within a narrow band on bearish signals from the American Petroleum Institute (API) that estimated a crude inventory build of 4.6 million barrels.  However, crude futures received a boost from news that Federal Reserve (Fed) officials are considering new so-called quantitative easing measures.  The new discussion is over “sterilized” quantitative easing that would attempt to limit the inflationary effect of additions to the money supply by using the newly minted dollars to purchase long-term Treasury bonds and mortgages, but then tie up the money by borrowing it back for short-term periods at low interest rates.  Since the beginning of the recession in 2008, the Fed has acquired $2.3 trillion in securities.  Through June the Fed will continuing Operation Twist, and sell short term bonds to buy long-term ones.The infusion of more dollars into the economy is supportive of higher crude prices, since crude is denominated in dollars.  However, given that wages are sticky, such measures in the long-term could lead to demand destruction.  The Fed uses the core Consumer Price Index, which does not include oil and gas prices, to measure inflation.  News from the Fed outweighed the EIA’s report that showed crude stockpiles increased by 800,000 barrels last week, well below the more bearish estimates from API.
• On Thursday, crude futures prices began to climb again on positive news out of Europe.  The German Economy Ministry announced that industrial output rose 1.6% in January after a 2.6% decline in December, which was the largest decline in almost 3 years.  Also supporting prices was news that ~60% of Greek bondholders have agreed to accept a 70% loss on the face value of their bonds in return for new Greek bonds.  Also, on the supply side, Barclay’s Capital reported estimates that oil shipments from Iran have declined by 400,000 bbl/d.   Crude prices closed at $106.58 per barrel on the NYMEX Thursday.
  • EIA reported NYMEX crude futures fell $3.07 to $106.70 on March 2 even as crude stocks rose by 800,000 barrels to 345.7 million.  Stocks are 3.2 million barrels lower than a year ago.
  • The average retail gasoline price was up $0.07 for the week to $3.793 a gallon.  Prices were up $0.27 over last year.  Gasoline stocks fell by 400,000 barrels to 229.5 million barrels, which is down 300,000 thousand barrels from the same time last year.
  • The average retail diesel price was up by $0.04 to $4.09 a gallon, up $0.043 from a year ago.
  • Distillate stocks were down 1.9 million barrels to 139.5 million barrels.  Down 15.7 million barrels from a year ago.
  • Residential heating oil was down $0.008 last week to $4.100 per gallon, $0.227 higher than a year ago.
  • Propane futures prices were unchanged over the week holding at $2.87 per gallon, which is $0.013 lower than a year ago.

Natural Gas highlights

• The EIA reported Henry Hub spot prices fell $0.20 last week to $2.24 per MMBtu as warmer temperatures settled across much of the country and consumption fell and average of 3.2% last week.  Temperatures for the week ending March 2, were 2.7 degrees warmer than the 30-year average and 3.0 degrees warmer than a year ago.
• Domestic Natural Gas production fell 0.7% last week to 63 Bcf/d up 7.5% year on year.  Imports of LNG from Canada also increased 1.9%.  The natural gas rotary rig count fell by 19 rigs to 691.  Oil-directed rigs were up 28 to 1,293.
• Working natural gas in storage fell 80 Bcf to 2,433 Bcf, which is 792 Bcf higher than last year.
• Natural Gas consumption was down 3.2% on average.  The Residential and Commercial sector led the decline with a 5.4% drop, down 8.72% from last year.  The power sector was down 0.7% and the industrial sector was down 2.0%.

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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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