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Weekly Oil & Gas Market Highlights: September 13, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) September 13, 2012 September 6, 2012 % Change
Oil – WTI
(USD per barrel)
$98.31 $95.53 2.9%
Oil – Brent
(USD per barrel)
$116.90 $113.49 3.0%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.04 $2.78 9.4%

Data sources: Bloomberg; CME Group

Crude Oil Prices

Crude oil futures rose to a four-month high on news of the U.S. Fed’s $40 billion monthly bond-buying plan and the approval of a Eurozone bailout fund by a German court. The recent attacks on U.S. embassies have intensified the tensions in the Middle East, but the impact on prices was less than $1 per barrel as the geopolitical risk premium is already factored in.

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

  1. Crude oil futures for October delivery climbed last Friday on anticipation of positive employment news from the Department of Labor (DOL). However, the DOL data showed that the U.S. economy added only 96,000 jobs in August, well below analyst expectations, while the unemployment rate dropped from 8.3% to 8.1%. Crude prices plunged on the news, falling below $94.50 per barrel on fears of demand slowdown. However, futures quickly rebounded to over $96.50 per barrel as bulls believe expectations that given the weak unemployment data the Federal Reserve will engage in a further round of quantitative easing due to continued weakness in the economy. Current oil prices continued to incorporate a geopolitical risk premium of $10 – $20 per barrel due to tensions in the Middle East, even before tensions escalated further this week.
  2. Crude oil futures struggled to find direction on Monday since Friday’s unemployment data could be seen as both bullish (due to expected easing from the Fed) and bearish (due to demand destruction). Trading volumes were light as many market participants were reluctant to take positions ahead of Thursday’s Fed meeting and a decision by Germany’s constitutional court on the Eurozone’s fiscal treaty. In Asia, China reported that its oil imports fell to 18.4 million tons for August, a near two-year low, and ~16% down from July. U.S. crude demand also faltered with the Energy Information Administration (EIA) reporting that U.S. petroleum demand fell ~1% last week.
  3. Crude futures fell slightly in Asian trading on Tuesday, tracking Asian equities. Trading volumes were down slightly in anticipation of the German court’s decision expected on Wednesday and the Fed’s announcement on Thursday. Some analysts are concerned that the Fed announcement could be a case of “buy the rumor, sell the fact,” where prices would drop even if stimulus is announced because traders may have already priced in such a decision. Crude futures, however, rose throughout the rest of the day in London and New York trading, as Moody’s announced that it is considering downgrading the U.S. debt rating, which sent the euro rising over the dollar. In its Short-Term Energy Outlook (STEO), the EIA announced that liquids demand is expected to fall 1.5% in 2012, with a modest 0.5% increase forecast for 2013.
  4. Crude oil futures rose on Wednesday as the German constitutional court ruled in favor of the country’s continued participation in a permanent Eurozone bailout fund. In the Middle East, tensions flared as militants attacked the U.S. embassy in Egypt and the U.S. consulate in Benghazi, Libya, killing the U.S. ambassador to Libya. U.S. officials are investigating whether the attacks were a coordinated action by members of Al Qaeda, timed with the anniversary of the September 11 attack on the U.S. in 2001. Also adding a note of tension, a rift emerged in U.S.-Israeli relations as Israeli Prime Minister Benjamin Netanyahu stated that the Obama administration had failed to establish “red-lines” in Iran’s continuing nuclear program, which is believed to be a cover for a nuclear bomb. In a telephone conversation, President Obama and Netanyahu discussed their upcoming speeches at the United Nations, but the President declined a meeting with Netanyahu due to scheduling conflicts. The oil market was largely unchanged as a result of the continued Middle East tensions, largely because geopolitical risk is already priced in. Oil prices fell after EIA announced that U.S. crude stockpiles rose by 2.0 MMbbl, where analysts had been expecting a decline of a similar size. Stockpiles of middle distillates rose by 1.5 MMbbl, while gasoline stocks fell by 1.2 MMbbl.
  5. WTI crude futures rose sharply on Thursday as the Fed announced that it would engage in open-ended, home mortgage debt purchases of $40 billion per month and that it would keep interest rates near zero through 2015. The news sent crude futures up over $98.50 per barrel before plunging to ~$96.75 and rebounding above $98 later. Two previous rounds of quantitative easing have had mixed results in stimulating the economy and reducing unemployment. However, the stock and commodities prices have benefitted from each round of easing with stock prices twice what they were during the market lows of 2009. In the Middle East, protestors stormed the U.S. embassy in Sana’a, Yemen, breaching the perimeter and burning two cars. One demonstrator was killed and five wounded. The Yemen embassy in Washington released a statement that order had been restored at the embassy and Yemen’s President Abdurabuh Mansur Hadi promised to pursue the perpetrators. Yemen has been fighting an ongoing battle with Al Qaeda and other extremists in the country for years.

Natural Gas Prices

U.S. Henry Hub natural gas futures rose nearly 10%, driven by aggressive technical buying, after prices soared above the 200-day moving average of $2.65 per MMBtu early this week. Looking at the fundamentals, the steep price increase is inexplicable, considering cooler temperature forecasts, production ramp-up in the U.S. Gulf Coast, higher-than-expected build-up in inventories, and lower demand expectations.

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

  1. U.S. natural gas futures slid more than 3% on Friday. Electronic trading had to be halted for about a half-hour during the day due to a technical problem. Shut-in gas due to Hurricane Isaac began to come back online, with only 847 million cubic feet (Mcf) or 19.5% of Gulf gas production still offline. Traders are hoping that nuclear outages may provide additional support to gas prices during the shoulder season. Nuclear outages were 6,900 MV (7%) on Friday, down from 8,500 MW a year ago. The October natural gas futures contract closed at $2.682 per MMBtu on Friday, down 9.4 cents (~3.5%).
  2. On Monday, gas futures rose by nearly 5% as traders believed that natural gas was oversold on Friday. Gulf of Mexico gas production continued to come online, with only 275 Mcf (6%) of production still offline. Nuclear power outages were 9,300 MW (9%) on Monday, down from 9,900 MW a year ago. Many traders remain skeptical of further upside due to record-high inventories for this time of year and gas production near an all-time high. Bulls point to the falling gas-directed rig count, which is currently at 13-year lows. However, the horizontal rig count, used to extract gas and oil from shale, is nearing previous highs. The horizontal rig count and dry gas production show over 90% correlation, as volumes of dry associated gas are produced and brought to market.
  3. Natural gas futures continued a rapid rise on Tuesday, driven by aggressive technical buying and expectations of another light weekly storage build. Trading volumes were over 650,000 contracts, one of the heaviest trading days this year. Traders shrugged off a temperature forecast for mostly average-to-below-normal temperatures across the eastern portion of the country. However, most analysts expect the price to remain below $3 per MMBtu because a loss of power utility demand would likely swell in-ground storage to near capacity as dry gas production continues to grow. Prices increased over 11.5% since the beginning of the week and closed just below $3 per MMBtu. In its September STEO, EIA forecast that gas production in 2012 would climb to a new high of 69.8 bcf/d. The agency also lowered its natural gas demand estimate to an increase of just 0.2 Bcf/d (0.2%) in 2013.
  4. Natural gas futures continued to climb on Wednesday, but faltered in early trading. Traders are bidding up gas futures on expectations that the EIA will announce a lighter-than-usual storage build this week. Since the beginning of the week, futures contracts were up ~14.5%. Traders seem largely unconcerned about tropical storm Nadine, which seems set to track northward rather than toward the U.S.. During the day, the EIA revised upward its estimate for U.S. peak working gas storage by more than 3%. EIA said that demonstrated capacity was up 136 Bcf to 4,239 Tcf.
  5. On Thursday, gas futures encountered resistance at $3.05 per MMBtu and began to fall due to predictions of a mild winter in much of the U.S. Shut-in gas production in the GoM returned to normal levels. Nuclear power outages were 9,100 MW (9%), up from 8,500 MW last year. The EIA reported that working gas in storage rose 27 Bcf to 3,429 Bcf last week, 342 Bcf above year-ago levels.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to limited storage capacity (current natural gas inventories are ~10% higher than the five-year average). Despite the ~10% surge in natural gas prices this week, April 2013 natural gas futures are still 16% higher than spot prices, compared to 2.5% 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) 14.32 14.61 -1.98%
Gasoline Demand (MMBPD) 8.70 9.18 -5.28%
Distillate Demand (MMBPD) 3.27 3.22 1.52%
Production (MMBPD) 5.53 5.49 0.66%
Imports (MMBPD) 8.57 8.04 6.53%
Stocks (million barrels) 359.1 357.1 0.56%
Rotary Rig Count 1,409 1,419 -0.70%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,847 (Jun 12) 1,852 (May 12) -0.27%
Gross Withdrawals (Bcf)** 2,424 (Jun 12) 2,532 (May 12) -4.27%
Canadian Imports (Bcf)** 250.04 (Jun 12) 240.37 (May 12) 4.02%
LNG Imports (Bcf)** 8.26 (Jun 12) 16.21 (May 12) -49.04%
Working Storage (Bcf) 3,429 3,402 0.79%
Rotary Rig Count 452 473 -4.44%
Horizontal Rig Count 1,135 1,149 -1.22%

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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November 13, 2012
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