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Weekly Oil & Gas Market Highlights: October 4, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) October 4, 2012 September 27, 2012 % Change
Oil – WTI
(USD per barrel)
$91.71 $91.85 -0.2%
Oil – Brent
(USD per barrel)
$112.58 $112.01 0.5%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.41 $3.30 3.3%

Data sources: Bloomberg; CME Group

Crude Oil Prices

Crude oil futures closed marginally lower this week, rebounding from the $3.75 per barrel sell-off on Wednesday prompted by disappointing economic data from China and weak gasoline demand in the U.S. The rebound in prices was due to supply concerns spurred by a border skirmish between Syria and Turkey, European Central Bank (ECB) reiterating its support for the Eurozone, and an unexpected fall in U.S. crude oil inventories.

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

  1. During Asian and European trading last Friday, WTI crude oil futures were supported by continued strengthening of the euro versus the dollar following Thursday’s news of Spain’s austerity budget. Also supporting the upside in futures were continued tensions in the Middle East as the Israeli Prime Minister and Iranian President rattled sabers during speeches at the United Nations in New York. Prime Minister Netanyahu stated that the production of nuclear fuel by Iran would trigger an Israeli strike while President Ahmadinejad stated that Iran would view any attack on Iran as a joint U.S.-Israeli strike. Iran has threatened to close the Strait of Hormuz in retaliation. Price began to fall, however, as the market reacted to news of an agreement between the leaders of Sudan and South Sudan to allow oil to resume flowing from South Sudan to the coast. South Sudanese officials said the agreement would return 350,000 bbl/d to the global oil market. Giving a further boost to oil prices was the surge in the price of reformulated gasoline contracts in response to low gasoline stockpiles in the East Coast. Across the U.S., gasoline stockpiles are at their lowest levels in the past four years. Gasoline futures rose 6.3% during day trading, and have increased 42.44 cents in the past four trading days. NYMEX WTI futures closed at $92.19, up $0.34 from Thursday’s closing, but down from early trading in Asia where prices briefly crossed the $92.50 threshold.
  2. On Monday, crude futures fell during Asian trading as China’s Purchasing Manager’s Index (PMI) fell to 53.7 in September from 56.3 in August, the lowest level in two years. Traders are concerned about an economic slowdown in China, a country that has accounted for half of the growth in global crude demand over the past few years. However, some market participants believe that with the Chinese economy showing signs of a slowdown, the government will engage in additional economic stimulus to boost GDP growth.  In the U.S., the world’s largest oil market, the Institute for Supply Management reported that the U.S. PMI rose to 51.5 in September from 49.6 in August, the first expansion in U.S. manufacturing activity in three months. Futures prices briefly crossed $93.00 per barrel following the release of the data. In global supply news, J.P. Morgan announced that the South Sudanese government’s official estimates of near-term crude production are overstated. The company stated that South Sudan will likely only be able to bring ~50,000 bbl/d to market by the end of 2012 and just under 200,000 bbl/d by the end of 2013. Oil futures rose 0.3% and closed at $92.48 per barrel.
  3. On Tuesday, market participants focused on macroeconomic data that would be released later in the week to provide direction to the market, such as Thursday’s meeting between the Bank of England and the European Central Bank (ECB) to discuss interest rates and Wednesday’s Energy Information Administration (EIA) weekly crude stocks report, which is a major mover of the crude market. In anticipation of EIA’s report, crude futures slid during New York trading on concerns that this week’s oil data would show a build in oil stocks, which is bearish for the market. On Friday, the Department of Labor will release its employment data, which will give a further indication about the state of the U.S. economy. In Iranian oil sanctions news, the UK, France, and Germany are pushing to tighten European Union (EU) sanctions on Iran during an upcoming meeting of EU foreign ministers on October 13. The Pembroke refinery in Wales, which produces 120,000 bbl/d of gasoline, will begin an eight-week maintenance turnaround later this month, which is expected to further tighten East Coast gasoline supplies.
  4. On Wednesday, futures trended lower and trading volumes were light ahead of EIA’s weekly release of oil stocks data. During the day, it was reported that OPEC’s output had dropped slightly over the past month, falling by ~150,000 bbl/d to 31.7 MMbbl/d.
    Prices began falling further as data from the China Federation of Logistics and Purchasing showed that China’s service sector performance fell in September. New orders fell to 51.8 in September from 52.7 in August. The data also showed that the Chinese economy only grew at 7.6% year-on-year, the slowest pace in three years. EIA released its weekly oil stocks data, which showed a 500,000 barrel drop in U.S. crude inventories and a 3.7 MMbbl decline in distillates. Although the inventory data was bullish for crude, the data also showed that U.S. crude production was up 12.5% from last year at 6.5 MMbbl/d and gasoline demand was down 3.5% from last year at a 10-year low. Futures fell over 4% during the day, closing down $3.75 per barrel at $88.14.
  5. On Thursday, crude futures climbed during the day as the euro strengthened, rising nearly 1% versus the dollar to above $1.30. Crude futures rose as ECB President Mario Draghi reaffirmed the bank’s commitment to the euro and stated that the ECB is ready to purchase government bonds to support member nations. Tensions in the Middle East briefly erupted in military violence between Syria and Turkey as Syria shelled a Turkish border town believed to be harboring Syrian rebels. In response, Turkish military units fired shells at Syrian military targets. The exchange of artillery fire has raised concerns about the potential disruption of the ~300,000 bbl/d Kirkuk–Ceyhan pipeline from Iraq to the Turkish coast, which is located near the Syrian border. Later in the day, the Department of Labor announced that new jobless claims increased by 4,000 to 367,000. The four-week moving average figure stood unchanged at 375,000. Oil futures pushed above $90 per barrel after recovering from Wednesday’s lows to close at $91.71 per barrel.

Natural Gas Prices

U.S. natural gas futures briefly crossed $3.50 per MMBtu early this week as investors bet on an early start to the heating season. However, prices retreated from 2012 highs and closed just above $3.40 per MMBtu after the EIA reported a weekly inventory build-up of 77 Bcf and the National Oceanic and Atmospheric Administration (NOAA) predicted relatively warm temperatures for the coming winter.

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

  1. Last Friday, natural gas futures were marginally lower in the first half of the day as traders noted the bearish fundamentals reported in last week’s EIA natural gas report, which showed the highest build in gas inventories for the year, 80 bcf. Natural gas prices began climbing later in the day as the National Weather Service issued its 6-10 day forecast predicting normal temperatures across much of the country but warmer-than-average temperatures on the East Coast and in the Southwest. Traders see this as an extension of the summer “cooling season”, which some believe is bullish for demand. Looking ahead to the winter “heating season”, some analysts see the prediction of cooler weather for the next month as a bullish indicator for heating demand. However, other traders note that the current mild autumn, following a warmer-than-normal summer, may portend another mild winter. Nuclear power outages were 16,500 MW, up from 11,700 MW a year ago. Baker Hughes data showed the natural-gas directed rig count fell by 19 to 435, the lowest level in 13 years.
  2. On Monday, natural gas futures rose 4.8% and closed at $3.48 per MMBtu. The front-month contract has grown ~23% over the past five sessions, the fastest increase in the natural gas price in three years. However, the largest part of that increase occurred when the October contract expired last week and the November contract took the front-month position, adding $0.20 per MMBtu.
    Many market participants believe that the market is currently overbought. On the demand side, utility companies are switching from natural gas back to coal as gas prices have risen and coal prices have fallen. On the supply side, producers may resume activity at wells that have been drilled but have stopped flowing due to poor economics.
  3. On Tuesday, natural gas futures rose during the day on speculation about early heating demand. NOAA’s Climate Prediction Center predicted cooler-than-average temperatures across most parts of the country over the next week. Electricity prices at PJM West rose over 40% to ~$50 per MWh, on expectations of early heating demand.
  4. On Wednesday, U.S. natural gas futures closed lower for the first time in the past seven sessions. Futures were down 13.6 cents, closing at $3.39 per MMBtu. A revised forecast from NOAA showed increased warming over the next two weeks. Additionally, NOAA reduced its estimate of the colder-than-average temperatures that it had forecast across most of the eastern U.S. in the extended two-week forecast by reducing the size of the area that would be affected and upwardly revising the temperature estimate. With a mild forecast for the beginning of heating season, demand is expected to be soft and gas inventories are likely to increase.
  5. On Thursday, natural gas futures pared most of its early morning gains after the EIA published its weekly natural gas inventory report. EIA data showed that working natural gas in storage increased by 77 Bcf last week to 3,653 Bcf. The figure was higher than analysts’ expectations, but lower than the 101 Bcf injection during the same week last year. The injection was on par with the five-year average of 78 Bcf. Many traders believe the market may be overbought and that gas futures could dip lower as storage continues to build. Current storage levels are 86% of the total estimated capacity, up from 84% last week. Natural gas futures rose 0.3% and closed at $3.41 per MMBtu.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to cooler weather forecasts and limited storage capacity (current natural gas inventories are ~9% higher than the five-year average). June 2013 natural gas futures are 12.5% higher than current prices, despite the recent price rally, 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) 14.85 14.62 1.52%
Gasoline Demand (MMBPD) 8.63 8.77 -1.56%
Distillate Demand (MMBPD) 4.09 3.70 10.48%
Production (MMBPD) 6.52 6.51 0.17%
Imports (MMBPD) 8.11 7.60 6.73%
Stocks (million barrels) 364.7 365.2 -0.14%
Rotary Rig Count 1,410 1,402 0.57%
Natural Gas*
Indicators This Period Prior Period % Change
Consumption (Bcf)* 2,045 (Jul 12) 1,847 (Jun 12) 10.73%
Gross Withdrawals (Bcf)* 2,457 (Jul 12) 2,424 (Jun 12) 1.44%
Canadian Imports (Bcf)* 265.45 (Jul 12) 250.04 (Jun 12) 5.95%
LNG Imports (Bcf)* 15.36 (Jul 12) 8.26 (Jun 12) 86.02%
Working Storage (Bcf) 3,653 3,576 2.15%
Rotary Rig Count 435 454 -4.19%
Horizontal Rig Count 1,142 1,149 -0.61%

Notes:
*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)

Comments and questions welcomed. Please contact DeloitteCenterforEnergySolutions@deloitte.com

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