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Weekly Oil & Gas Market Highlights: November 8, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) November 8, 2012 November 1, 2012 % Change
Oil – WTI
(USD per barrel)
$85.09 $87.09 -2.3%
Oil – Brent
(USD per barrel)
$107.25 $108.17 -0.9%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.61 $3.70 -2.5%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude oil futures ended the week down driven by the effects of Hurricane Sandy on the East coast that shuttered refineries, concerns about the “fiscal cliff” of tax increases and automatic budget cuts faced by the U.S. in 2013, and a bearish build in crude stocks reported by the Energy Information Administration. 

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

  1. Last Friday, oil futures trended lower as prices tracked the euro down against the dollar over concerns about the upcoming vote of the Greek Parliament to address the debt crisis. During New York trading, the Department of Commerce announced that U.S. non-farm payrolls were up by 171,000 in October well above analyst expectations. However, the market largely ignored the news as it focused instead on the effects of Hurricane Sandy. The aftermath of the “super storm” has negatively affected crude demand. Two refineries in the region remain closed, jet fuel use is down and fewer people are driving during the crisis. Many filling stations are still without power and thus unable to dispense gasoline. In New York City, 75% of stations could not dispense gasoline. In positive news for regional fuel supplies, the Colonial Pipeline that delivers gasoline and diesel from the Gulf Coast to the East Coast resumed deliveries to the Linden, NJ distribution hub.
  2. On Monday, many traders were reluctant to take positions a day ahead of the U.S. elections and as a result volumes were lighter than average. In bearish news, the Purchasing Manager’s Index (PMI) for the European Union dropped from 46.1 in September to 45.4 in October. This is the 15th month of manufacturing contraction in the region. On the East Coast, gasoline shortages continued as a result of power outages even though the region was being stocked with new supplies of gasoline and diesel. To help alleviate shortages, the federal government waived the Jones Act that prohibits foreign ships from transporting goods between two U.S. ports. The Governor of New York also waived a tax on tankers docking at New York Harbor. Prices began rising as the Associated Press reported that fighting broke out between Saudi border guards and Al Qaeda forces trying to cross into Yemen raising concerns about Middle East tensions. Also adding to the geopolitical concerns, International Atomic Energy Agency (IAEA) Director-General Yukiya Amano stated that Iran is not providing "necessary cooperation" to the agency to assess the true intent of Iran's nuclear program. WTI futures closed up 79 cents (~1%) at $85.65 per barrel on the NYMEX.
  3. On Tuesday, crude futures were relatively flat in Asian trading ahead of the results of the U.S. Presidential election. Traders were also awaiting news out of China’s 18th Party Congress on Thursday, a meeting in which new leaders are chosen for the country. Crude oil futures began to rise in London trading on concerns about continued tensions in the Middle East and the security situation in Yemen. In New York, crude futures received a large election day boost surging ~3.5% well above the S&P’s 0.8% rise. Gasoline futures were also up 3% during the day. Some investors believed the Energy Information Administration’s (EIA) weekly oil stocks report to be released the next day would be bullish for crude prices.
  4. WTI crude oil futures plummeted in New York trading on Wednesday as President Barack Obama won re-election with 303 electoral votes to Romney’s 206. Some traders fretted about a “fiscal cliff” the U.S. may face if last year’s budget compromise legislation and expiration of existing tax cuts are allowed to take effect in January. This sent crude sliding nearly $4.00 per barrel (>4.5%). The market also was concerned about Greek Parliamentary approval of a range of austerity measures proposed by Greek Prime Minister Samaras in order for the country to qualify for a further 31 billion euro ($40 billion) in bailout funds. The austerity measures would increase the retirement age to 67 and eliminate payments that pensioners receive on Christmas and holidays. The Greek government has until November 12 to approve a series of measures required by the Troika in order to qualify for additional aid. Further fueling the price decline, EIA’s weekly oil stocks report showed bearish data for crude. U.S. oil stocks rose by 1.77 MMbbl to 374.8 MMbbl last week while gasoline inventories were up by 2.88 MMbbl to 202.4 MMbbl. Distillate stocks were also up by 131,000 bbl at 118.1 MMbbl. U.S. crude oil production also increased by 8,000 barrels to 6.68 MMbbl, the highest level of U.S. production in nearly 20 years.
  5. On Thursday, crude futures rose during London trading as the Greek Parliament approved a package of austerity measures by just 3 votes (153/300). Mario Draghi, President of the European Central Bank (ECB), stated the economic outlook for Europe is getting worse, but that the ECB stands ready to provide more funds to the ailing economy. In New York trading, futures prices rose 1.5% as the Department of Labor announced that new applications for jobless benefits fell by 8,000 to 355,000 last week beating analyst expectations. Other traders were more skeptical of the upside, calling it a dead-cat bounce since demand is uncertain given the economic conditions in Europe and with the United States economy facing a “fiscal cliff”. The Congressional Budget Office stated that the U.S. economy could contract by 0.5% in 2013 if nothing is done to stop the expiration of the Bush-era tax reduction and automatic government spending cuts. Crude futures closed up 0.8% at $85.09 per barrel.

Natural Gas Prices

Henry Hub natural gas futures end the week down at $3.61 per MMBtu on Thursday. The decline in futures prices was driven by forecasts for above-average temperatures in key power demand regions in the northeast and Texas, burgeoning natural gas in storage currently at a record 3,929 Bcf, and EIA forecasts of a 0.5 Bcf/d decline in natural gas consumption in 2013 driven by a preference for coal over gas for power burn at current prices.

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

  1. Last Friday, Henry Hub natural gas futures tumbled as natural gas in storage was at a record high of 3,908 Bcf. Further pressuring prices, the National Weather Service released its one-week forecast showing that most of the country is expected to have above average temperatures during the period while its two-week forecast shows cool temperatures in the East, but above-average temperatures in the mid-Atlantic and northeast. Giving some indications of potential upside, natural gas production has begun to lag as indicated in EIA’s weekly natural gas report released the day before. Natural gas production in the lower 48 states was down 0.2% in August to 72.55 Bcf/d.
  2. On Monday natural gas futures swung up and down during the day falling to $3.506 per MMBtu and then rising as high as $3.588 per MMBtu before ending the session unchanged at $3.554 per MMBtu. The upside in price was supported by news that the return of power service was boosting gas demand. Bears found comfort in the two-week weather forecast that showed the key power demand regions of the northeast and Texas would experience mild temperatures, which is expected to keep demand down in a well-supplied market.
  3. On Tuesday, natural gas futures closed up 6.3 cents at $3.617 per MMBtu. A cold snap and news of another storm heading to the northeast on Wednesday helped support the rise in price. Power outages caused by Sandy were partly offset by colder temperatures in the region, which increased demand in areas where power was not disrupted. The EIA released its monthly Short-term Energy Outlook, which showed a revised prediction of natural gas consumption for 2012 of 69.7 Bcf/d, which is up nearly 5% from 2011. However, the EIA forecasts a slight decline in natural gas consumption in 2013 of 0.5 Bcf/d due to expectations that rising natural gas prices will negatively affect demand for power burn.
  4. Natural gas futures fell during Wednesday trading as both the one-week and two-week forecasts from the National Weather Service showed above-average temperatures. In the 6 – 10 day forecast, above-average temperatures are forecast to cover much of the northeast, mid-Atlantic, southeast and some portions of the West. In the 8 – 14 day forecast, warmer than average temperatures continue in the northeast and mid-Atlantic, but also include much of the central U.S. Also pressuring prices, traders were expecting EIA’s weekly storage data to show another build of natural gas stocks on top of last week’s record high of 3,908 Bcf.
  5. On Thursday, natural gas futures fell in early trading on continued expectations for build in natural gas supplies of around 27 Bcf. When EIA announced the natural gas data later in the morning, it showed that natural gas in storage reached another record high of 3,929 Bcf. However, the build was only 21 Bcf, below analyst expectations indicating either an increase in demand or slowing production, which sent prices rising. The inventory figure is 3.0% above 2011 levels and 6.8% higher than the five-year average. Nuclear power plant outages are 26,900 MW (27%), which is 8,700 MW higher than a year ago and 4,200 higher than the five-year average. Henry Hub natural gas futures closed at $3.61 per MMBtu.

Futures Curve

The U.S. Henry Hub natural gas futures curve is “out of contango” following the recent price rally due to cooler winter weather forecasts. Current natural gas inventories are ~7% higher than the five-year average. July 2013 natural gas futures are 6% higher than current prices, compared to ~4% 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) 14.67 14.85 -1.21%
Gasoline Demand (MMBPD) 8.31 8.84 -6.00%
Distillate Demand (MMBPD) 3.59 3.54 1.41%
Production (MMBPD) 6.68 6.67 0.15%
Imports (MMBPD) 8.01 7.92 1.14%
Stocks (million barrels) 374.8 373.1 0.46%
Rotary Rig Count 1,373 1,408 -2.49%
Natural Gas*
Indicators This Period Prior Period % Change
Working Storage (Bcf) 3,929 3,908 0.54%
Rotary Rig Count 424 416 1.92%
Horizontal Rig Count 1,105 1,105 0.00%
Consumption (Bcf)* 1,982 (Aug 12) 2,045 (Jul 12) -3.08%
Gross Withdrawals (Bcf)* 2,374 (Aug 12) 2,457 (Jul 12) -3.38%
Canadian Imports (Bcf)* 262 (Aug 12) 265.45 (Jul 12) -1.13%
LNG Imports (Bcf)* 19.1 (Aug 12) 15.36 (Jul 12) 24.84%

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)

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