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Weekly Oil & Gas Market Highlights: August 16, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) August 16, 2012 August 9, 2012 % Change
Oil – WTI
(USD per barrel)
$95.60 $93.36 2.40%
Oil – Brent
(USD per barrel)
$116.90 $113.28 3.20%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$2.72 $2.95 -7.50%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude futures rose 2.4% this week, as a result of mounting tensions in the Middle East, positive U.S. economic data, and a fall in crude stocks contributed to the price rise. Bears took note of weak economic data from China and Japan and lower global oil demand projections by the International Energy Agency (IEA).

Closing price
Note: Intra-day prices (every 6 hours)
Data source: Bloomberg

  1. Crude futures fell more than 1% on Friday in Asian trading as China announced that its July oil imports fell to their lowest level in almost 10 months, although they were up 12.5% year-on-year. China’s trade surplus also contracted from $31.7 billion in June to $25.1 billion in July as a result of the continued global economic slowdown. Further, the IEA lowered its 2013 crude demand forecast by nearly 0.4 MMbbl/d to 90.5 MMbbl/d, primarily due to lower demand from the U.S. As a result, WTI (U.S. benchmark) fell more than Brent, widening the Brent-WTI spread to almost $20 per barrel, a level not seen since April. However, the Brent premium is expected to come down as North Sea fields currently under maintenance come back online and the Seaway pipeline plus rail shipments begin to reduce the bottleneck at Cushing. In New York trading, futures began to rise on concerns that Iran could attempt to disrupt oil supplies if the Assad regime falls in its neighboring Syria. Further boosting prices was the belief that the Fed will engage in further easing. Prices closed down 0.5% for the day at $92.87 per barrel, erasing more than half of the loss in the Asian trading.
  2. Crude futures rose in early trading on Monday as market participants viewed China’s disappointing Friday economic data and low inflation as a sign that the country may engage in further easing, which will boost its oil demand and purchases. However, oil prices fell by more than 1% as Japan announced that its economic growth slowed to 0.3% in the second quarter after rising 1.3% in the first quarter of the year. The geopolitical risk premium in the oil price increased during the day as tensions mounted in the Middle East, following the news that Israel will test its new nationwide texting services for warning citizens about an imminent missile attack. Additionally, a U.S. guided missile destroyer collided with a Japanese oil tanker near the Strait of Hormuz, through which a third of all water-borne crude travels. News of the collision drove up WTI and Brent crude futures prices, offsetting the fall in the earlier sessions. However, Brent rose more than WTI as the European market is more exposed to Middle Eastern crude movements than the U.S. The Brent-WTI spread approached $21 per barrel during the day.
  3. On Tuesday, crude futures rose 0.8% as Germany announced its second quarter growth was 0.3%, exceeding analyst expectations of just 0.2%, and France’s GDP remained flat, beating forecasts of a slight contraction. Giving a further boost to prices, the U.S. Department of Commerce announced that retail sales improved 0.8% in July, the first increase in four months. Retail sales had fallen 0.7% in June.
  4. WTI prices fell in early trading on Wednesday as the American Petroleum Institute’s (API) weekly report showed an increase of 2.78 MMbbl in oil stocks. API also highlighted that U.S. crude imports increased last week by over 5% to an estimated 9.4 MMbbl/d. However, crude prices reversed course when the Energy Information Administration (EIA) announced that crude stocks dropped 3.7 MMbbl to 366.2 MMbbl last week. The EIA receives its data by Congressional mandate, whereas API relies on voluntary data. Gasoline stocks also fell 2.37 MMbbl to 203.7 MMbbl. Distillates were up by 677,000 barrels to 124.2 MMbbl, contrary to analyst expectations of a decline. Boosting prices further was news that U.S. industrial production was up 0.6% in July, following a mere 0.1% increase in June.
  5. On Thursday, oil futures rose as Israel’s ambassador to the U.S. stated that Israel would approve a military strike on Iran in order to significantly impair the latter’s ability to develop nuclear weapons. However, Israeli President Shimon Peres stated that it was unlikely such a strike would come before the November elections in the U.S. Oil prices rose above $95 per barrel for the first time since May as the Department of Commerce announced that U.S. building permits increased to 812,000 annualized in July, a level not seen since August 2008. The data also showed that annualized housing starts fell 1.1% to 746,000 from 754,000 in June. Crude prices have increased 2.4% during the week and are up ~8.7% in August till date.

Natural Gas Prices

Natural gas futures tumbled 7.5% this week due to moderating temperatures in the U.S., leading to lower cooling demand. Record-high working natural gas storage levels also added to the fall in prices despite the potential for the hurricane season to threaten Gulf of Mexico natural gas supplies.

Closing price
Note: Intra-day prices (every 6 hours)
Data source: Bloomberg

  1. U.S. natural gas futures fell throughout the day on Friday as temperatures were expected to moderate over the next few days, particularly in the north and east parts of the U.S., which had been experiencing a heat wave. The EIA announced that current natural gas in storage was 15.7% higher than the same period last year and 12.5% higher than the five-year average. On the supply side, horizontal rigs, which are commonly used to extract oil and gas from shale formations, were up by 6 to 1,161, even as gas-directed rigs fell by 3 to 495. Traders have noted that there seems to be momentum on the downward side of prices. However, at the Friday closing price of $2.77 per MMBtu (down ~4% for the week), technical indicators suggest that prices will need to fall below the 200-day moving average for further downside.
  2. Futures traded largely sideways on Monday before ending the day down 4.1 cents (1.5%) to close at $2.729 per MMBtu. Although futures are down approximately 15% in August, traders note that support exists around $2.70 per MMBtu and prices would have to break through that support for a more bearish outlook to develop. Bulls are eyeing storm activity in the Gulf of Mexico as the hurricane season (June 1 – November 30) progresses. The National Oceanic and Atmospheric Administration (NOAA) recently increased its estimates of the season’s storm activity. It expects 12-17 named storms to develop during this season, including the six that have already occurred, and 5-8 hurricanes to develop from the storms. NOAA’s original forecast called for a “near-normal” season of 9-15 named storms. Thus far, there have been four tropical storms and two hurricanes, but no major hurricanes. No storms currently threaten Gulf of Mexico oil and gas supplies.
  3. U.S. natural gas futures rose 10.5 cents on Tuesday (~4%) to close at $2.834 per MMBtu. Nuclear power outages for this week are 3,000 MW above last year’s outages, which is expected to add an additional ~1% to natural gas demand. Many traders are skeptical about a further upside in prices, even with the hurricane season, because peak summer demand is beginning to fade, while natural gas inventories and production remain near record highs. Further, NYMEX eastern coal is trading at ~$0.60 discount to Henry Hub in MMBtu terms, which will encourage coal use instead of natural gas (given the differences in transportation costs, the choice between natural gas and coal is an even trade in some areas).
  4. Natural gas futures fell on Wednesday on continued expectations of cooler temperatures across most parts of the country. The National Weather Service’s 6-10 day forecast called for below-normal temperatures along the East Coast, the Mid-Continent, and the West Coast. New England and the non-coastal West expect above-average temperatures.
  5. On Thursday, natural gas futures rose ~1% as traders predicted another below-average storage build for the week. However, Henry Hub futures slipped as EIA’s data did not match expectations. Futures hit an intraday low of $2.685, below critical support at $2.70 per MMBtu.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to the limited storage capacity (current natural gas inventories are 12.5% higher than the five-year average). March 2013 natural gas futures are still 24% higher than spot prices, compared to just 2% for oil.

Data source: Factset

Weekly U.S. Crude Oil and Natural Gas Data

Crude Oil
Indicators This Period* Prior Period* % Change
Refinery Inputs (MMBPD) 15.71 15.61 0.67%
Gasoline Demand (MMBPD) 9.31 8.84 5.31%
Distillate Demand (MMBPD) 3.57 3.79 -5.83%
Production (MMBPD) 6.18 6.22 -0.60%
Imports (MMBPD) 8.72 8.63 1.04%
Stocks (million barrels) 366.2 369.9 -1.00%
Rotary Rig Count 1,432 1,429 0.21%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,850 (May 12) 1,944 (Apr 12) -4.71%
Gross Withdrawals (Bcf)** 2,527 (May 12) 2,450 (Apr 12) 3.27%
Canadian Imports (Bcf)** 240.34 (May 12) 246.91 (Apr 12) 2.09%
LNG Imports (Bcf)** 16.21 (May 12) 7.55 (Apr 12) 114.65%
Working Storage (Bcf) 3,261 3,241 0.62%
Rotary Rig Count 495 498 -0.60%
Horizontal Rig Count 1,161 1,155 0.52%

Notes:
*The EIA did not release a natural gas report this week due to the U.S. Independence Day holiday. Thus, this period data is for the week ending June 27 and prior period data is for the week ending June 20.
**The EIA does not provide weekly natural gas consumption, withdrawals, and imports numbers. Thus, the latest available monthly numbers are reported above.
Data source: U.S. Energy Information Administration (EIA)

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Learn more

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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