Weekly Oil & Gas Market Highlights: September 15, 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

• Crude prices seesawed this week with mixed supply and demand signals and poor economic news. Crude futures jumped early in the week, breaking through the $90 per barrel resistance level as crude inventories took their biggest drop since December. Storms shut in 61% of output in the Gulf of Mexico and stockpiles fell by 6.7 million barrels, more than twice what analysts had expected, according the Energy Information Administration (EIA). Putting downward pressure on crude futures: gasoline supplies increased the most since June, demand dropped by 3.8% and retail sales slowed. As the driving season comes to an end, gasoline consumption dropped 1.2% to 8.85 million barrels a day in the week ended Sept. 9, the lowest level since May. Some market participants fear this is evidence of demand destruction in the world’s biggest oil consuming country. The U.S. is not alone; investors continue to watch European debt woes, worried that the contagion will spread. The European Central Bank calmed some of these fears on Thursday, announcing it will lend euro-area banks dollars to help mitigate the region’s credit crisis.
  • The U.S. average retail price of regular gasoline decreased this week, losing over a penny to fall to $3.66 per gallon. The average price is $0.94 per gallon higher than last year at this time. The national average diesel price totaled $3.86 per gallon after decreasing less than a penny. The diesel price is $0.92 per gallon higher than last year at this time, according to the EIA.
  • The oil rig count fell this week to 1,057 after increasing for 19 consecutive weeks, according to Baker Hughes Incorporated.
• The prospect of Libyan oil coming back online has analysts forecasting when production will return to prewar levels. These two factors will affect global oil prices and will be largely determined by political and security issues. Stability is needed to repair and secure vulnerable oil infrastructure. Rebel led Transitional National Council (TNC) recently gained control over the government and the vast majority of Libyan cities after 6 months of civil war. The war took about 1.6 million barrels of light, sweet crude offline and created a tightness of high quality oil in the market that drove up prices, especially in Europe, which depends on Libyan exports. This contributed to Brent crude price premium to West Texas Intermediate, which hit a record $27 a barrel last Wednesday. Since then, and as the return of Libyan oil to the market becomes more likely, Brent’s price premium to West Texas has fallen considerably. Many challenges remain to Libya’s oil industry, including damage to oil infrastructure, small pockets of resistance to the TNC and facilities booby trapped with explosive devices. The return of Libya's oil exports will also necessitate filling domestic demand estimated to average 290,000 barrels per day (bpd) and expected to increase due to reconstruction needs, according to the EIA.
  • The European Union and United Nations had lifted sanctions on Libya, however; U.S. sanctions remain in place.
  • Libyan oil production capacity could reach 350,000 bpd to 400,000 bpd by the end of this year and 1.1 million bpd by the last quarter of 2012, according to the International Energy Agency (IEA).
• The Organization of the Petroleum Exporting Countries (OPEC) and the IEA both cut their forecasts for global oil demand growth in 2011 and 2012 on continuing global economic woes. The IEA cut its forecast of global oil demand growth this year by 160,000 bpd to 1.04 million bpd and trimmed its 2012 demand growth estimate by 190,000 bpd to 1.42 million bpd. OPEC lowered its global oil demand forecast by 150,000 bpd for 2011 and by 40,000 bpd for 2012. It also lowered its estimate for crude produced by OPEC nations by about 100,000 bpd in 2011. Extra global oil supply helped increase oil inventories in the industrialized economies by 10.8 million barrels in July or the equivalent of 58.4 days of forward demand. But these oil stocks were built more slowly than usual for the time of year, and overall oil stock levels slipped below the five-year average for the first time since the economic recession of 2008.
  • Despite lowered forecasts by OPEC and the IEA, Goldman Sachs Group Inc. affirmed its forecast that oil in London will rally to $130 a barrel next year.
• While U.S. ethanol production continues to grow, the rate of increase has slowed due to market saturation and lower domestic gasoline consumption. Most ethanol is blended with gasoline in volumes containing up to 10% ethanol (E10). U.S. gasoline consumption was 161,000 bpd or 1.8% lower through May 2011 compared to the same period in 2010. In late 2010 the legal limit for ethanol blends sold for use in vehicles designed to run on gasoline was increased to 15% (E15) in vehicles manufactured after 2000. However, marketing barriers have limited the sale of E15, according to the EIA. Similarly, sales of 85% ethanol, 15% gasoline (E85) is limited to flex-fueled vehicles and the limited number of E85 stations. In April 2011, the year-over-year growth rate of ethanol production hit 4.7%, the lowest of any month since May 2001, according to the EIA.
  • Consumption of fuel ethanol grew more slowly 23,000 bpd or 2.8% than production during the first five months of 2011. April consumption was 10,000 bpd or 1.2% lower compared with April 2010, the first time a month registered a year-over-year decrease since July 2002.
  • During the first five months of 2011, U.S. fuel ethanol production increased 59,000 bpd or 6.9% compared with the same period in 2010. This represents a slower rate of growth compared with 2010 when production during the first five months was 194,000 bpd or 29.7% higher than the same period in 2009, and 154,000 bpd or 21.6% higher for the whole year.

Natural Gas Highlights

• Mild autumn weather and robust domestic production have contributed to a supply build, outstripping demand. As the hurricane season draws to a close and temperatures cooled across the country, consumption registered a modest decline of 1.9% over last week. The shale boom has contributed to a significant increase domestic dry gas production, which is 7.5% above this time last year. The week’s production gain was further augmented by a 4.0% increase in Canadian imports averaging 5.2 billion cubic feet (Bcf) per day. However, Canadian imports remain 16.8% below year-ago volumes. While short-term supply and demand fundamentals are bearish, market participants weighed in future winter heating demand, lifting natural gas prices back up over the $4 mark this week. At the New York Mercantile Exchange, the October 2011 natural gas contract advanced 9.9 cents per MMBtu to close at $4.03 per MMBtu over the week.
  • Temperatures during the week ending Thursday, September 8, cooled off considerably, averaging 71.1 degrees, 3.7 degrees cooler than last week.
  • Total working gas was 52 Bcf below the 5-year historical range at 3,112 Bcf as of Friday, September 9, 2011, according to EIA estimates. This represents a net increase of 87 Bcf from the previous week. Stocks were 140 Bcf less than last year at this time and 52 Bcf below the 5-year average of 3,164 Bcf, according to the EIA.
  • The natural gas rotary rig count fell by 3 to 892 active units, falling for the third consecutive week, according to Baker Hughes Incorporate.

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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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December 15, 2011
Deloitte Oil & Gas Conference – Houston, TX
For more information on the 2011 Deloitte Oil & Gas Conference please contact OilandGasConference@deloitte.com

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