Weekly Oil & Gas Market Highlights: November 3, 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 had a rocky ride over the past week after an initial surge late last week as a result of the Euro debt deal and the U.S. Department of Commerce’s announcement that GDP grew by 2.5% in the third quarter.  However, futures prices fell on Monday’s Asia open due to the rising U.S. dollar as traders sought to lock in recent gains.  Japan’s Finance Ministry intervened to weaken the Yen against the dollar over fears that currency traders may push the yen value higher and the Euro also fell against the dollar.  U.S. trading was light on Monday with only 300,000 contracts traded instead of an average of 660,000 as a result of the bankruptcy of MF Global, a top commodities futures trader with $6 billion in exposure to Europe’s sovereign debt crisis.  Trading was halted completely for MF Global clients, who had to liquidate positions and move them to other brokerage firms during the day to resume trades.  On Tuesday, the markets were rocked by news that Greek Prime Minister Papandreou threw the European debt deal into doubt with calls for a referendum on the proposal as a result of intense political opposition.  By Thursday, it seemed that the government of Papandreou either might collapse or an agreement would be reached to form a caretaker government, which in either made a referendum unlikely.  Eurogroup head Jean-Claude Juncker said that Europe is preparing for the possibility that Greece may leave the euro zone all together, while Papandreou made conflicting statements on the matter.  The announcement of a referendum triggered the largest two-day drop in the MSCI index in three years.  The new European Central Bank President Mario Draghli said that European growth would slow to a mild recession by year end and that European inflation was at 2%.  As a result of the Greek announcement there was some speculation the Fed might announce further easing after its meeting in the middle of the week.  However, such speculation was ended after the Fed announced no change in its policy in a 9-1 vote.  The Fed also lowered its growth forecast to 2.5 – 2.9% for next year, down from 3.3 – 3.7% and expects that unemployment would not fall below 8.5 – 8.7% until 2012.  The U.S. Department of Labor announced unemployment rose 397,000, which was less than had been expected.  The Energy Information Administration announced on Thursday that crude stocks rose by 1.8 million barrels last week, which was above analyst expectations.  However the rise in crude stocks came amidst a 3.6 million decline in distillate stocks.

  • Gasoline stocks rose 1.4 million barrels as the average retail gasoline price fell to $3.45, still $0.65 higher than last year.
  • The national average retail diesel price climbed $0.07 to $3.89 as distillate inventories declined 3.6 million barrels.
  • Home heating oil rose $0.05 cents to $3.85 per gallon 86 cents above last year’s price and the residential propane price rose 2.5 cents to $2.82 per gallon while propane stocks rose 1.2 million barrels.
• President Obama announced on Tuesday that he will make the ultimate decision on the $7 billion 1,700 miles Keystone XL pipeline rather than the State Department.  The President said he would weigh the economic benefits against the potential environmental consequences.  The same day, the Nebraska State Senate met to draft “Bill 1”, which would give authority to the state to change the pipeline’s planned route.  However, there is skepticism that law makers can frame legislation that would only apply to Keystone not the other pipelines crossing the state and still not be seen as an unconstitutional restriction of inter-state commerce.  The state speaker’s office said the draft bill should be sent to committee on November 7.  Gulf Coast refiners have contracts with Venezuela and Mexico that will expire in 2012 and 2013 that they will replace with contracts on Keystone XL deliveries.  If the Keystone pipeline becomes seriously delayed, those supplies may ship by rail or tanker from the West Coast instead.

Natural Gas Highlights

• The Henry Hub spot price declined to $3.39 per MMBtu on November 2 and the December NYMEX futures contract declined 2.6 cents to $3.749 per MMBtu.  Although cooler temperatures across the country gave a boost to prices toward the end of last week, stocks continued to rise with working natural gas in storage increasing 78 Bcf.  Current stocks of 3,794 Bcf are 201 Bcf above the five year average.  Average temperatures were 3.7 degrees cooler than last year driving up consumption by 12.6% from last week.  Most of the demand came from the residential and commercial sectors with power burn down slightly from last week.  The natural gas rotary rig count increased to 934 active units, up 7 from last week.  Domestic production was up a 0.2 percent from last week with Canadian imports of rising 1.6% over last week and 2.3% Year on year.

• David Hayes, Deputy Secretary of the Interior, told the Department of Energy’s shale gas panel that Interior will issue disclosure rules for hydraulic fracking on federal lands in the next couple of months.  The guidelines will be finalized twelve months after their release.  Onshore drilling rule 9 has not been revised since 1982.  The new revision will deal with water management and disposal of flowback water.  Hayes said they may also consider requiring drillers to certify they are in compliance with state and local water management standards.  Around 14% of all natural gas was produced on federal land last year and fracking is used in 90% of gas wells drilled there.  The United States Environmental Protection Agency (EPA) said they are developing rules for flowback and produced water from oil and gas well before it can be sent to public water treatment plants.  EPA is already going through the rulemaking process to limit air emissions from new gas well and send state new guidelines on the use of diesel fuel in fracking.  In a preliminary report in August, the DOE panel called for a national database of information about shale gas wells.  The final report is due out in November.

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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.

Save these dates!

November 22, 2011
Shale Gas: Leveraging This Boom to the U.S. Economy – Dbrief Register Now!

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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