Weekly Oil & Gas Market Highlights: December 8, 2011 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

• Crude oil prices declined over the past week, even as it crisscrossed the $100 per barrel mark several times, on anticipation of news from the European debt summit.  On Monday, the U.S. Department of Labor announced that unemployment dropped to 8.6% in November, the first time it has been below the psychologically important 9% threshold since March of 2009 and 1.2% below the same time last year.  Part of the decline was a result of 315,000 people that stopped looking for work as reflected in a decline in the participation rate from 64.2% to 64.0%.  Yet, even with these job seekers added back in, the new rate would still be below the 9% threshold at 8.9%.  NYMEX Oil futures surged to $101.56 on hopes that a nascent economic recovery might be in the works.  However, a rising dollar pushed crude futures down below $100 per barrel briefly as investors fled the Euro over concerns of a possible downgrade of Spain’s sovereign debt.  Eurozone expectations shed the optimism over coordinated Central Bank action to reduce borrowing costs for Europe earlier in the week as eyes turned to a planned Monday summit between German Chancellor Merkel and French President Sarkozy to discuss the future of the common currency.  Looking at the oil fundamentals, China is expected to begin building stocks over the coming months to provide the supplies needed to support its expansionary fiscal policy while supplies at Cushing are expected to begin tightening when the Seaway pipeline reversal is accomplished.  Over the weekend, Italian Premier Mario Monti announced his government approved a series of austerity measures designed to balance Italy’s government budget by 2013.  The measure includes a 2% increase in the VAT tax to 23% as well as increases in the retirement age up to 66 by 2018 and increases the number of years workers must pay their contributions to receive full pension benefits to 42 years for men and 41 years for women.  On Monday, crude prices opened higher on news of the Italian austerity measures supported by optimism for the Merkel-Sarkozy summit and concerns over the looming issue of Iran oil sanctions.  Merkel and Sarkozy announced plans for centralized oversight of member nation budgets and automatic sanctions against countries that violate deficit rules.  French President Sarkozy said the plan is to have treaty changes drafted by the end of March after which they would go through a lengthy ratification process.  Ratification might include direct voter referendums on the proposed changes.  WTI crude futures hit an intraday high of $102.44 per barrel on the news only to plummet as a report surfaced that Standard & Poor’s (S&P) put 15 of the 17 European nations on a negative credit watch as a result of the continuing economic and political crisis in the Eurozone.  The list included 6 triple-A rated countries: Austria, Finland, France, Germany, Luxembourg, and the Netherlands.  Tuesday trading saw prices fluctuate within a narrow price band as the market considered S&P’s warning and noted that any Iranian oil sanctions, which had provided some upside speculation, would by opposed by China.  Traders looked to the release of the Energy Information Administration’s (EIA) weekly oil inventory data and the outcome of an EU summit on Thursday and Friday to provide a clear market signal.   On Wednesday, futures opened lower amid German pessimism for a European debt deal at the planned summit.  EIA reported that crude stocks rose by 1.3 million barrels or 0.4% over the past week, which sent futures prices below $100 per barrel briefly.  Oil stocks are currently above the five year average by 4.5 million barrels and the growing build of U.S. gasoline stocks is also a concern.  Gasoline demand is at a 10 year low of 8.5 million barrels a day indicative of the overall sluggish economy.  On Thursday, the European Central Bank (ECB) announced an interest rate cut that had been expected to provide some upside to futures prices.  However, ECB President Mario Draghi was neutral on the issue of more bond purchases in an effort to maintain support from Bundesbank chief Jens Weidmann, a leading critic of the program.  Concerns about further bond purchases dampened market expectations and sent crude below $100 per barrel again declining 2.1% during the day to close near $98 per barrel.  European debt concerns overshadowed the Department of Labor’s announcement that new jobless benefits claims dropped by 23,000 to their lowest level in nine months.

  • Average retail gasoline price fell for the third week by $0.02 to $3.29 per gallon, which is $0.33 higher than one year ago.  Gasoline stocks rose 5.1 million barrels to 215 million barrels, which is the largest weekly build over the past 10 months and one million barrels higher than a year ago.
  • The national average retail diesel price fell $0.03 to $3.93, which is $0.73 higher than one year ago.
  • Residential heating oil also fell by was relatively unchanged at $3.89, but still $0.69 cents higher than a year ago.
  • The residential propane price inched up under a penny and stayed flat at $2.85 per gallon while propane inventories declined slightly to 59.7 million barrels.
• The EIA released its December Short Term Energy Outlook on Tuesday raising its liquid fuels projected production increases for both 2011 and 2012 to 200,000 barrels per day as a result of shale oil.  Currently, the U.S. produces over 400,000 barrels a day of oil shale which is around 8% of total U.S. oil production.  The National Petroleum Council’s recent report “Realizing the Potential of North America's Abundant Natural Gas and Oil Resources” estimated that under favorable regulatory conditions the U.S. could produce between 2 and 3 million barrels per day of shale oil plays such as Bakken and Eagle Ford with continuing technological improvements.  Additionally, IHS Global Insight recently released a new report titled “The Economic and Employment Contributions of Shale Gas in the United States” which looks at the impact of shale gas development on the economy.  The report estimates that shale gas production will grow to 43% of total U.S. gas production in 2015 and 60% in 2035.  Further, the study states that the shale gas industry supported 600,000 jobs in 2010, which is estimated to grow to just under 900,000 in 2015.  According to the report, shale gas contributed $76 billion to the U.S. economy in 2010 and will contribute $118 billion annually in 2015.  On a household basis, consumers are reaping savings of around $925 per year as a result of lower natural gas prices.

Natural Gas highlights

• On November 21, the Henry Hub spot price closed down 8 cents to $3.45 per MMBtu on Wednesday.  Gas consumption rose 18.4% during the week even as working natural gas in storage fell to 3,831 Bcf, a decline of 20 Bcf over the week.  However, the gas withdrawal was focused on the East Coast while other regions continued to add gas to storage.  Temperatures during the week were above the 30 year average and 6.6 degrees warmer than last year.

• The natural gas rotary rig count declined by 9 to 856active units. Natural gas production was down 1.4% largely as a result of winter production freeze-offs in the Western part of the country, which occur when natural gas flows are blocked as a result of water vapor freezing in the stream.
• NYMEX January 2012 futures were down 3.4 cents to $3.180 per MMBtu from $3.55 per MMBtu last Wednesday.

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Learn more

The euphoria that has surrounded shale gas in recent years has been tempered by questions about the profitability of recent investments and prospects for future successful development. Read Navigating a Fractured Future: Insights into the Future of the North American Natural Gas Market, which addresses many of the questions and summarizes the findings of multiple scenarios regarding the future of North American and global gas markets and offers related strategic insights.

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