Weekly Oil & Gas Market Highlights: October 27, 2011 Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Data sources: Bloomberg; CME Group

Oil & Gas Highlights

• NYMEX futures surged through the week with markets responding favorably to positive news about the Greek debt deal and U.S. GDP figures.  The market began a rally last week following the Energy Information Administration’s (EIA) announced drawdown in oil stocks to the lowest levels in two years.  The rally was further supported in the early part of the week by the December – January contract approaching backwardation.  The Brent – WTI gap briefly narrowed to $16.78 per barrel on Tuesday.  Some analysts predict the spread could narrow to $5 - $10 per barrel by the second half of 2012 if additional pipeline and rail capacity is added to bring supplies to the Gulf Coast.  Futures prices cooled on Wednesday following EIA’s announcement that oil stocks rose 4.7 MMbbl last week and amidst uncertainty over European debt talks.  However, prices rebounded robustly on Thursday following the EU debt agreement that would cut the face value of Greece’s debt in half, which is expected to reduce Greece’s 2020 debt to 120% of GDP.  The agreement would be enforced by a ‘troika’ that would visit Greece every quarter to monitor the measures taken by Greece.  The rally was further extended by news from the U.S. Department of Commerce showing that GDP grew by 2.5% annually in the third quarter up from 1.3% last quarter.  U.S. GDP surpassed the pre-recession peak for the first time.  However, current dollar personal income increased only 0.9% in the third quarter compared to 4.6% in the prior period, the largest decline in two years.

  • U.S. crude oil inventories were up 1.4% to 337.6 MMbbl and down 7.8% year on year.
  • Distillate stocks dropped 2.9% to 145.4 MMbbl, down 13.6% from last year’s levels.
  • The price of regular gasoline fell 1.4 cents to $3.46 per gallon up 65 cents from last year and the national average diesel fuel price rose to $3.83 per gallon, 76 cents higher than last year.
  • Residential heating oil increased $0.03 per gallon to $3.80, $0.80 above last year’s level.
  • Propane prices held steady at $2.80  per gallon as propane inventories climbed a modest 0.2 million barrels to 59.1 MMbbl.
• Keystone XL pipeline:  The State Department announced on Tuesday that it may miss its year-end deadline for a decision on the 700,000 bbl/d Keystone XL pipeline.  The $7 billion pipeline is needed to relieve the supply build-up of crude at Cushing and allow Canadian supplies to reach Gulf Coast refineries.  The Obama administration has been under pressure from environmental groups over the pipeline.  On Wednesday, Senator Bernie Sanders (I-VT) and 13 Senate Democrats sent a letter to the Department of State seeking to delay the decision until an internal investigation can be conducted into conflict of interest allegations over a contractor’s environmental impact statement on the pipeline.  On Monday, Nebraska’s governor Heineman called for a special session of the legislature to consider legislation giving the state the power to approve or deny the pipeline’s path, but any such legislation is expected to meet with a legal challenge.  Market analysts are anticipating the Keystone XL pipeline will be online by the second half of 2013.  In 2004, then President Bush assigned to the Department of State responsibility for decisions on pipelines that cross international borders.
• Brazil oil production:  By 2035, Brazil’s anticipated oil production of 4.8 MMbbl/d will account for 14% of total world production and 40% of non-OPEC supply growth over the period.  Brazil currently produces over 2.6 MMbbl/d and became a net exporter of oil in 2008.  The Oil and Gas Journal estimates Brazil’s reserves at 12.9 billion barrels excluding pre-salt reservoirs.  According to Petrobras, pre-salt resource estimates vary from 1.8 – 6.5 billion commercially recoverable barrels.  Petrobras outlined a 2011-15 investment program of $224.7 billion in order to meet its production targets.  It will divest foreign assets and reduce downstream investments to focus on upstream development.  Since the pre-salt reserves are more than 150 miles off-shore, Petrobras has plans to purchase 45 floating production storage and offloading vehicles, or just under half of the world’s estimated fleet of 100 such vehicles.  Brazil was the 10th largest trading partner of the U.S. in 2010 according to Foreign Trade Statistics of the U.S. Census Bureau.

Natural Gas Highlights

• The Henry Hub spot price rose to $3.65 per MMBtu on October 26 and the December NYMEX futures contract rose modestly by 0.4 cents to $3.590 per MMBtu.  Prices were driven by a modest 0.6 decrease in gas supplies and expectations of cooler weather across the country over the next week as a cold front is expected to bring snow in the Northeast and colder temperatures across the South.  Temperatures in the Rockies are 5-20 degree below average.  Consumption was up 3.0% over last week even as power burn declined 9.0% as a result of mild temperatures.  Consumption increases were driven by double digit increases in residential and commercial demand.  Working natural gas in storage rose following a 92 Bcf injection to 3,716 Bcf, which was 28 Bcf below last year’s level. The natural gas rotary rig count dropped to 927 active units, down 9 from last week.  Canadian imports of natural gas dropped 6% averaging 5.4 billion cubic feet per day.  LNG imports averaged 767 MMcf/day.
  • North America’s future as a gas exportor future received a boost with news that British-based BG Group PLC entered into an agreement with Cheniere energy to purchase an estimated $8.2 billion of LNG over 20 years.  Cheniere has been seeking LNG contracts before beginning construction of its Cameron Parish facility, which should begin production in 2015.  The deal will allow BG to purchase gas at the lower U.S. price and sell it in Europe or Asia.  BG is also currently seeking an LNG export permit for its Lake Charles facility.
  • Canada’s National Energy Board granted an export license to the Kitimat LNG Operating General Partnership to export up to 468 Bcf of natural gas a year for 20 years.  The terminal is jointly owned by Apache (operator), EOG Canada, and Encana.  Construction will start in 2012, with operations planned to begin in 2015.  The target market is the Asia where the prevailing natural gas price is currently three times the U.S. price.  The export license is the first ever considered since deregulation of the natural gas market in 1985.

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Learn More!

The euphoria that has surrounded shale gas in recent years has been tempered by questions about the profitability of recent investments and prospects for future successful development. Read Navigating a Fractured Future: Insights into the Future of the North American Natural Gas Market, which addresses many of the questions and summarizes the findings of multiple scenarios regarding the future of North American and global gas markets and offers related strategic insights.

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November 22, 2011
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December 15, 2011
Deloitte Oil & Gas Conference – Houston, TX
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