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Weekly Oil & Gas Market Highlights: March 31, 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, 3/31/11 Noon (EDT) on Thursday, 3/24/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $105.95 (May-2011 Contract) $106.02 (May-2011 Contract)
WTI Cushing Spot $105.85 $105.51
Dated Brent Spot $117.22 $115.39
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 3/31/11 Noon (EDT) on Thursday, 3/24/11
Front-Month NYMEX Henry Hub Futures $4.28 (May-2011 Contract) $4.24 (Apr-2011 Contract)
Henry Hub Spot $4.25 $4.18

Data sources: Bloomberg; CME Group

Oil market highlights: Looking at Libya

  • After staying within their recent trading ranges for most of the past seven-day period, oil prices moved decidedly higher today. Without game-changing news coming out of the Middle East or North Africa (collectively referred to as MENA), oil prices moved sideways as much as any other direction for much of the past week. Market participants returned some of their focus to more mundane indicators as they waited for clues to the market’s next big move. With traders caught between fears of potential further disruptions in MENA oil supplies on one hand and signs that the global oil market remains adequately supplied on the other, petroleum prices vacillated in recent days. However, prices surged higher on Thursday after rebel forces reportedly lost ground in Libya—spurring concerns that Libyan exports will remain curtailed for an extended period—and as the US dollar weakened.
    • The front-month NYMEX Light, Sweet Crude Oil Futures Contract fluctuated within the $103.50-106.00 per bbl range for much of the past seven days. After slipping to a settlement price of $104.27 per bbl on Wednesday, the prompt “WTI” Contract reversed course and jumped by 2.4% to close at $106.72 per bbl on Thursday. At more than $117.00 per bbl, Brent crude oil prices remain approximately $10.00-11.00 per bbl above those for WTI.
    • Benchmark US gasoline futures settled at more than $3.10 per gallon on Thursday, while benchmark US heating oil futures closed slightly below that mark. Front-month gasoline rose above prompt heating oil early this week, and continued higher after a midweek report showed that US inventories of the motor fuel declined by more than expected.
  • MENA tensions continue to support oil prices, with some analysts estimating that the associated geopolitical risk is boosting benchmark crude oil prices by $10.00-15.00 per bbl. Advances by Libyan rebels against forces loyal to Colonel Qaddafi early this week worked against oil price gains as market participants speculated that the conflict—and hence curtailments of Libyan oil production and exports—might end sooner than previously expected. However, such speculation was quashed later in the week and oil prices rose as loyalist forces reportedly regained some ground against the insurgents—including taking back the oil town of Ras Lanuf. In the Middle East, political tensions remain high in several countries including Syria, Yemen, and Bahrain—keeping the oil market on edge about the potential for civil unrest to spread into Saudi Arabia and to cut that key nation’s oil production.
    • Early this week, Libyan rebels touted the possibility of exporting oil from fields under their control in the eastern part of the country. Media reports cited both US and UN officials as indicating that any oil put up for sale by the rebels would not be subject to sanctions as long as the rebels do not involve companies (such as Libya’s National Oil Corporation) or other institutions controlled by Qaddafi’s government in the process. On Monday, Reuters reported that the rebels were discussing a plan with Qatar under which the Middle Eastern nation would market oil on behalf of the insurgents. However, some market participants discounted the possibility of rebel-held Libyan oil actually making its way into the global market anytime soon, owing to the numerous logistical challenges and operational risks that buyers would face in purchasing and securing delivery of the oil.
    • Saudi Arabia appears to be continuing its efforts to compensate for lost Libyan supplies of light, sweet crude oil. On Wednesday, the Wall Street Journal reported that Saudi Arabia recently sold three shipments of light, sweet crude to European refiners, and that the country is producing a new “super light” crude blend intended to mirror the qualities of Libyan oil more closely. On Tuesday, media reports cited a Baker Hughes official as indicating that Saudi Arabia will raise the number of active drilling rigs in the country from 92 to 118 by the end of 2011.
  • Oil prices also may have garnered support from a weaker US dollar on Thursday, which likely boosted the appeal of dollar-denominated petroleum commodities to holders of other currencies. The US dollar fell against the Euro after the EU reported that Euro-zone inflation rose at a 2.6% annual rate in March—more than in February and above consensus expectations. The inflation report drove speculation that the European Central Bank will raise interest rates in the near future, which sent the Euro skyward.
    • Positive US economic signs also likely contributed to oil’s gains today by bolstering the market’s outlook for domestic oil consumption. The US Labor Department reported on Thursday that initial unemployment claims declined by 6,000 to 388,000 for the week ending March 26, 2011. Earlier this week, data from ADP Employer Services suggested that US companies added approximately 200,000 employees in March, and an official with the St. Louis Federal Reserve indicated that the Fed may be able to end its quantitative easing program a bit sooner than originally planned.
  • The US Energy Information Administration (EIA) provided a somewhat bearish snapshot of domestic petroleum fundamentals at midweek. The report showed that the nation remains very well supplied with crude oil—inventories of which continue to climb higher—while domestic petroleum consumption is moderate. Gasoline stocks provided one of the few highlights for market bulls, as the fuel’s inventories declined by more than anticipated for yet another week. Total US petroleum consumption fell by 3.7% from the prior week to 18.6 million bbl per day—its lowest reading since last November and about 2.2% less than a year earlier. On a four-week moving average basis, total consumption was 19.2 million bbl per day—essentially flat to its year-ago reading.
    • For the week ending Friday, March 25, 2011, US commercial crude oil inventories grew by 2.9 million bbl—beating consensus expectations of a gain of 1.5-2.0 million bbl. An increase of 1.6% in US crude oil imports (to an average of 9.1 million bbl per day) contributed to the stock build. Stocks rose in nearly every region of the US. Notably, crude inventories at Cushing, Oklahoma grew by 1.7 million bbl to 41.9 million bbl —the highest level in EIA data going back to 2004. Swelling inventories at the Cushing hub—which is the delivery point for the NYMEX “WTI” Contract—are continuing to keep pressure on WTI prices relative to those for Brent. At 355.7 million bbl, total US crude stocks are slightly higher than a year ago and are roughly 5.0% above the five-year average.
    • US gasoline stocks fell by 2.7 million bbl—surpassing estimates of a 2.0-million bbl draw—even as gasoline consumption slipped by 2.3%. At 217.0 million bbl, inventories of the motor fuel are 3.5% less than a year earlier and are slightly below their five-year average level. Domestic distillate stocks rose by 0.7 million bbl. At 153.3 million bbl, distillate inventories are 6.0% higher than a year ago and remain well above their five-year average mark.

Natural Gas market highlights: Weathering the season

  • Today marks the end of the notional heating season in the Lower 48; however, residents of the Northeast and some other regions of the country may be wondering if someone forgot to tell Mother Nature. Chilly weather in parts of the US supported benchmark natural gas futures prices in recent days as traders weighed the impact of incremental gas demand for space heating on season-ending storage inventories. Supportive weather outlooks continued to underpin benchmark gas prices on Thursday, and ultimately helped NYMEX Henry Hub prices to finish the day higher—despite today’s EIA report showing the first net storage injection of 2011. Some meteorologists now foresee Lower-48 demand for both heating and cooling exceeding normal levels the days ahead, as cold weather persists in key heating markets while above-normal temperatures descend upon portions of the southern US. Weather expectations joined with speculation that the EIA may report a net storage withdrawal next week to limit the bearish price impact of today’s storage data. Media reports suggested that end-of-quarter short covering also may have played a role in today’s price gain.
    • The April 2011 NYMEX Henry Hub Futures Contract expired at $4.24 per MMBtu on Tuesday. After rising by $0.09 per MMBtu during its first day in the prompt position on Wednesday, the May 2011 Contract edged slightly higher to settle at $4.39 per MMBtu on Thursday.
  • The EIA reported that Lower-48 working gas inventories increased by 12 Bcf on a net basis during the week ending Friday, March 25, 2011—at the bearish end of a wide range of market expectations that spanned from moderate withdrawal to modest build. This net injection was identical to the 12-Bcf build reported a year earlier and compared bearishly to the five-year average net withdrawal of 22 Bcf for the week. A build of 25 Bcf in the Producing Region accounted for all of the net injection, and was partially offset by a 7-Bcf withdrawal in the East Region and a 6-Bcf pull in the West. Market participants initially sent NYMEX Henry Hub prices sharply lower in response to the storage report, but prices subsequently rebounded on other factors. At 1,624 Bcf, Lower-48 working gas stocks are 0.7% less than a year earlier but are 4.4% above the five-year average level.
    • Mild weather across much of the Lower 48 and robust gas supply contributed to the net storage injection. In its “Natural Gas Weekly Update” for March 31, 2011, the EIA reported that average Lower-48 temperatures were about 3 degrees above normal during the storage report week (although temperatures varied widely among regions). However, the agency indicated that cooler temperatures helped to drive US gas demand higher in more recent days. The EIA stated that domestic gas consumption rose by 23.2% during the week ending Wednesday, March 30 (notice this differs from the storage report week) as demand increased in virtually every sector. The agency also reported that total US gas supply grew by 2.0% from the prior week as both domestic gas production and imports climbed. The EIA noted that US gas output averaged 63.8 Bcf per day during the week—0.9% more than a week earlier—and set more daily production records in the process. The EIA bases its preliminary/weekly gas supply and demand estimates on data from Bentek Energy Services, LLC.
  • On Tuesday, the EIA released its first official estimate of monthly US gas production for January 2011. In its “Natural Gas Monthly” for March 2011, the agency reported that US marketed gas output averaged approximately 63.5 Bcf per day in January 2011—6.4% more than a year earlier. This level of output was especially impressive given the anomalous well freeze-offs that hindered production during the month. Indeed, in today’s “Natural Gas Weekly Update”, the EIA attributed January’s slight (0.7-0.8%) decline in output from December 2010 to these weather-driven production curtailments.
    • The Baker Hughes US gas rotary rig count ended its recent run of declines and rose by 5 to 880 during the week ending Friday, March 25, 2011.

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