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Weekly Oil & Gas Market Highlights: April 14, 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, 4/14/11 Noon (EDT) on Thursday, 4/7/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $107.93 (May-2011 Contract) $109.29 (May-2011 Contract)
WTI Cushing Spot $107.94 $109.27
Dated Brent Spot $122.47 $122.12
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 4/14/11 Noon (EDT) on Thursday, 4/7/11
Front-Month NYMEX Henry Hub Futures $4.24 (May-2011 Contract) $4.07 (May-2011 Contract)
Henry Hub Spot $4.14 $4.18

Data sources: Bloomberg; CME Group

Oil market highlights: Roller coaster ride

  • Oil markets took traders on a wild roller coaster ride over the past seven days—or perhaps it was the other way around. Either way, market participants may be feeling a bit queasy following the sizeable price swings of the past week. In short, prices seesawed up and down as traders shifted their focus back and forth between conflicting supply-side and demand-side factors. After soaring to their highest levels in more than 2.5 years on global supply worries late last week, benchmark oil prices plummeted early this week as market participants became concerned that world petroleum demand growth could be starting to slow. Ever tenacious, market bulls subsequently regrouped and oil prices regained some ground at midweek after a report showed a somewhat startling drop in US gasoline inventories—rekindling some of the market’s nervous speculation surrounding the adequacy of fuel supplies in the months ahead. Thursday proved to be a mixed bag as speculation that Saudi Arabia may be reducing oil output helped to push WTI prices higher, while some other components of the petroleum complex eased slightly. With no end to Libyan oil supply disruptions or Middle Eastern tensions yet in sight, market participants remain on edge—and hence price volatility likely will remain high in the short term.
    • After settling within striking distance of $113.00 per bbl last Friday, the front-month NYMEX Light, Sweet Crude Oil Futures Contract plunged early this week—closing at $106.25 per bbl on Tuesday—before recovering somewhat on Wednesday. On Thursday, the prompt “WTI” Contract rose by 0.9% to settle at $108.11 per bbl. At more than $122.00 per bbl, Brent prices remain at a strong premium to those for WTI.
    • Benchmark US futures prices for gasoline once again overtook those for heating oil following midweek news of a much larger-than-expected draw in domestic gasoline stocks—and as petroleum market participants began to focus more heavily on the upcoming summer driving season. Prompt-month gasoline futures prices of more than $3.20 per gallon are continuing to support the high gasoline pump prices that are drawing the ire of US motorists.
  • Oil prices sank on Monday and Tuesday as a wave of concern about the near-term prospects for global oil demand growth swept through the market. The International Monetary Fund’s (IMF) recent analysis of the global economy—and of the detrimental effects that sustained high oil prices could have on global economic growth this year—was the prime mover behind the torrent of concern. In its updated “World Economic Outlook”, released on Monday, the IMF stated that higher oil prices present a critical downside risk to global economic expansion. Indeed, the organization cited high petroleum prices and the somewhat tepid recovery of the US job market as key reasons for revising its forecast of US economic growth lower. The IMF now expects US GDP to expand by 2.8% in 2011, a downgrade of 0.2% from the agency’s January forecast. The organization also revised its projection of Japanese GDP growth lower by 0.2% to 1.4% for 2011. Oil traders went on a selling spree in response to the IMF’s less optimistic economic outlook for these two key petroleum-consuming nations. On the brighter side for oil market bulls, the IMF maintained its forecast of robust Chinese GDP growth of 9.6% in 2011, which likely helped to keep oil prices from falling even further.
    • On Tuesday, the International Energy Agency (IEA) added more fuel to the fire when it released its monthly “Oil Market Report” for April. Although the IEA left its forecast of world oil demand growth unchanged from March—consumption is still projected to rise by 1.4 million bbl per day (1.6%) to average 89.4 million bbl per day in 2011—the Agency implied that it may lower its global demand forecast in the near future. The IEA caught the attention of oil market participants by stating that preliminary data for January and February suggest that high petroleum prices already have started to weigh on the pace of oil consumption growth. While oil market pundits disagree as to whether or not it is too early to tell if demand destruction is occurring, the mere mention of the possibility was sufficient to undermine oil prices this week—temporarily, at least. On the more bullish side—and likely helping to keep a floor under oil prices—the IEA also indicated that lost Libyan oil output and the concomitant production responses of other OPEC members have combined to reduce the cartel’s effective spare capacity to less than 4.0 million bbl per day. The Agency noted that this spare-capacity margin is similar to those that drove other major oil price rallies in the past decade.
    • Renewed worries about the ultimate impact of Japan’s ongoing nuclear crisis on that country’s economy (and those of its main trading partners), and reports that Colonel Qaddafi had agreed to a cease-fire proposal crafted by the African Union—which was later rejected by Libyan rebel leaders—also contributed to early week oil price pressures. Media reports suggested that Goldman Sachs’ withdrawal of its recommendation that investors buy a basket of several commodities that included crude oil may have played a role as well.
  • Oil prices rebounded at midweek after the US Energy Information Administration (EIA) provided a bullish snapshot of domestic petroleum fundamentals. While gasoline inventories have headlined the EIA petroleum status reports in recent weeks, they absolutely stole the show this week. US gasoline stocks stunned market participants and analysts alike by posting their largest single-week swoon in more than a dozen years. Not even another weekly rise in US inventories of crude oil—with which the nation remains well supplied—was sufficient to prevent traders from sending crude prices higher on the mammoth gasoline draw. Adding to the perceived bullishness of the report, total US petroleum consumption edged up slightly from the prior week to 19.3 million bbl per day owing primarily to stronger demand for both gasoline and distillates. On a four-week moving average basis, total domestic consumption registered 19.1 million bbl per day—essentially even with a year earlier.
    • For the week ending Friday, April 8, 2011, US commercial crude oil inventories rose by 1.6 million bbl—bettering the consensus forecast of a 1.0-million bbl build. Stocks grew as crude inputs to refineries fell by 2.5%. Indeed, total US refinery capacity utilization declined by 3.0% from the prior week to 81.4% as refiners ratcheted back operations. At 359.3 million bbl, total US crude oil inventories are 1.5% higher than a year earlier and 5.0% above the five-year average level. Crude inventories at Cushing, Oklahoma remain at 41.9 million bbl—keeping WTI prices below those for Brent and other similar grades. Total domestic gasoline stocks plunged by a whopping 7.0 million bbl—seven times as much as expected—as a 3.7% increase in consumption joined with a 17.5% decline in imports to outstrip an uptick in domestic gasoline production. At 209.7 million bbl, US gasoline inventories are 5.3% less than a year ago and 1.8% below the five-year average mark. US distillate stocks declined by 2.7 million bbl, but are still nearly 20.0% above their five-year average reading.
  • Oil prices strengthened further on Thursday as the market continued to react to Wednesday’s EIA data, and as media reports suggested that Saudi Arabia may be reducing production of the light crude oil blends it developed as a replacement for shut-in Libyan supplies (due to a lack of buyers). Prices also rose as the US dollar weakened against the Euro following a report from the US Labor Department that initial unemployment claims increased by more than anticipated last week.

Natural Gas market highlights: Spring weather brings comparative calm

  • As the spring shoulder season takes hold, the US natural gas market remains calm in comparison to the tumultuous oil markets. Benchmark US gas futures prices continue to inhabit the low-$4.00 per MMBtu neighborhood, with normal factors such as weather forecasts and storage inventory data driving daily price fluctuations. Overall price movements were limited during the past week as market participants appeared to be caught between near-term expectations of weak (shoulder-season) fundamentals and longer-term expectations that gas demand will rise seasonally this summer—just as an active hurricane season gets underway. Today’s report of a smaller-than-expected storage injection pushed the market’s focus back toward the latter and served as a reminder that the 2011 injection season is beginning with inventories at a near-average level—the cold winter of 2010-11 having all but obliterated the once-sizeable storage surplus. Hence, gas traders sent prices higher on Thursday.
    • The front-month NYMEX Henry Hub Futures Contract rose by $0.07 per MMBtu to close at $4.21 per MMBtu today.
  • For the week ending Friday, April 8, 2011, the EIA reported today that Lower-48 working gas inventories increased by 28 Bcf on a net basis—falling short of consensus expectations of a build of 32-34 Bcf. While this gain equaled the five-year average net injection, it paled in comparison to the unusually large year-earlier build of 79 Bcf. Market participants appeared to start covering short positions almost as soon as the EIA released the weekly storage report. Inventories rose the most in the Producing region, with the balance of the build occurring in the East consuming region. At 1,607 Bcf, Lower-48 working gas stocks are 7.9% less than a year ago but remain 0.6% above their five-year average level.
    • The arrival of more moderate weather facilitated the transition of overall storage activity from net withdrawal to net injection. In its “Natural Gas Weekly Update” for April 14, 2011, the EIA reported that average Lower-48 temperatures were roughly 9.0 degrees warmer than the prior week—and 1.6 degrees warmer than normal—during the storage report week. The agency also indicated that temperatures and gas demand for space heating continued to moderate in more recent days, as a decline in core gas demand of 21.0% led total US gas consumption lower during the week ending Wednesday, April 13 (notice this differs from the storage report week). On the supply side, the EIA stated that total US gas production eased slightly from the previous week’s record level, but still averaged nearly 64.0 Bcf per day. The EIA bases its preliminary/weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • Notwithstanding the record levels of US gas output that preliminary data have suggested in recent weeks, the EIA still expects domestic production growth to decelerate this year. In its “Short-Term Energy Outlook” for April (released on Tuesday) the agency projects that US marketed gas output will average 63.3 Bcf per day in 2011—2.4% more than in 2010. While substantial, this expected pace of growth is significantly less than the 4.5% year-over-year gain realized in 2010. The EIA sees domestic gas output beginning to decline later in 2011 as the pace of gas-directed drilling falls in response to low gas prices. However, the agency expects US production to resume sequential growth in 2012 as gas prices and total gas consumption rise on robust growth in gas demand for power generation.
    • The Baker Hughes US gas rotary rig count edged down by 2 to 889 as of Friday, April 8, 2011. The US oil/gas drilling split moved further toward oil, with gas rigs comprising 49.9% of US drilling. This is the first time that gas-directed rigs have accounted for less than 50.0% of the total US rig count since 1995.

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