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Weekly Oil & Gas Market Highlights: November 15, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) November 15, 2012 November 8, 2012 % Change
Oil – WTI
(USD per barrel)
$85.45 $85.09 0.4%
Oil – Brent
(USD per barrel)
$110.98 $107.25 3.5%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.70 $3.61 2.6%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude oil futures rose marginally and closed above $85 per barrel despite weak economic numbers from the U.S., Japan, and Germany and international agencies highlighting the downside risk to 2013 global oil demand. Escalating tensions in the Middle East are providing support to prices and widening Brent-WTI spread, which has increased to $25 per barrel. 

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

  1. Last Friday, crude futures rose during Asian trading on positive economic news out of China. The growth of China’s Consumer Price Index slowed to 1.7% in October from 1.9% in September, indicating reduced inflation. Slower inflation in the country increases the possibility of further economic easing, which is bullish for crude. Crude prices fell later during the day, as the German Federal Ministry of Finance stated in its monthly economic outlook that it expects the German economy to be “noticeably weaker” during the winter half-year as companies withhold investments due to the continued fiscal crisis in the Eurozone. The ministry noted a 3.3% decline in factory orders from August to September. Putting further downside pressure on the price, OPEC released its Monthly Oil Market Report, which highlighted “notable downside risk” as a result of ambiguity in the world economy that could reduce world oil demand growth by 20% in 2013, according to the organization. During New York trading, prices began rising as estimates of U.S. consumer confidence from November rose to 84.9, above analysts’ expectations. The figure would be the highest level since 2007 before the recession if the trend continues throughout the month. Futures closed up $0.98 cents (1.2%) at $86.07 per barrel.
  2. On Monday, crude futures teeter-tottered in Asian trading as data from the Chinese General Administration of Customs showed that China’s crude imports for October increased to 5.6 MMbbl/d, which is up ~14% from last year and up nearly 18% from September. China accounts for over half the anticipated growth in world crude demand in 2013. However, news that Japanese GDP fell 0.9% in the third quarter served to keep weak underlying global economic conditions in focus. Traders viewed positively news that Greece approved a 2012 budget, which includes austerity measures needed for the nation to receive the next tranche of funds from the European Central Bank (ECB). However, the funds may not be made available for several weeks. The market viewed as bearish Monday’s release of the World Energy Outlook report from the International Energy Agency (IEA), which projected that the United States is set to overtake Saudi Arabia as the world’s largest oil producer by 2020 due to growing production from unconventional oil and gas resources. The report also showed that by 2035, the U.S. will import less than 2 MMbbl/d and that additional production from Iraq will account for 45% of the increase in additional oil and gas supplies over the same period. With supplies rising and demand uncertain, analysts saw the report as bearish for futures.
  3. On Tuesday, prices trended downward amid thin trading volumes. The IEA released its monthly Oil Market Report, which left expectations of 2013 demand growth unchanged at 800,000 bbl/d. However the report warned that demand growth expectations could be revised downward if global economic conditions worsen. Economic uncertainty is weighing heavily on oil prices as China’s growth is slowing, Europe’s debt crisis continues to lack resolution, and the U.S. now faces a potential “fiscal cliff” that could send the country back into recession. Putting a floor under prices, however, are mounting tensions in the Middle East as Syria exchanged rocket fire with Turkey and NATO pledged to support Turkey should tensions escalate.
  4. On Wednesday, trading volumes continued to be light in overnight trading. The market lacked clear direction as there are ample supplies and demand continues to lag. However, Middle East concerns and continued easing by the major central banks are helping to keep prices elevated. Futures rose rapidly as Israel received mortar fire from the Gaza Strip that it answered with an airstrike on three locations and a mortar from Syria, which it countered with tank fire on a weapons storage facility. The airstrikes in reportedly Gaza killed the leader of Hamas’ military arm. Israel also called up its reservists in advance of a possible infantry assault, should tensions escalate further. Economic news out of the U.S. helped keep a lid on further advances in prices during the day. The Department of Commerce announced that U.S. retail sales fell 0.3%. While the Producer Price Index fell 0.2, the first decline in nearly half a year, after rising 1.1% last month. The dollar also declined versus the euro on pessimism about a U.S. budget deal.
  5. On Thursday, crude prices rose, as tensions continued to rise in the Middle East between Israel and Gaza. Israel countered mortar fire from Gaza with airstrikes throughout the day. Israeli Defense Minister Ehud Barak stated that the Israeli military was ready to launch a ground assault in Gaza if needed. However, oil began retreating during the day as the Department of Labor announced that the number of people seeking new jobless claims increased by 78,000 to 439,000, well above analyst expectations of 375,000. Many states indicated that the increase was due to the effects of Hurricane Sandy. Futures fell further as the  U.S. Energy Information Administration (EIA) released its weekly oil stocks report showing that crude stockpiles increased by 1.09 MMbbl to 375.9 MMbbl and U.S. oil production was up for the 10th week in a row to 6.71 MMbbl.
    During the day, the January contract was more active than the December one, which expired at the end of the day on Thursday. Futures closed at $85.45 per barrel, down 1%.

Natural Gas Prices

Henry Hub natural gas futures rose 2.6% and made a new one-year high last week. The rise in futures was driven by colder temperatures in key power demand regions in the northeast and Texas and IEA’s positive long-term growth outlook. However, according to traders, the future upside in natural gas prices is limited due to record-high inventory levels and the growing cost competitiveness of coal.

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

  1. Last Friday, natural gas futures fell from an intra-day high near $3.57 to below $3.50 for a short period before closing at $3.50 per MMBtu, down 10.5 cents. Prices came under pressure due to revised forecasts from the National Weather Service that show above-average temperatures in the northeast, mid-Atlantic, and part of the central U.S. in the 6–10-day forecast. The 8–14-day forecast predicts above-average temperatures in those regions will persist. Baker Hughes released its weekly rig data on Friday, which showed that the gas-directed rig count fell by 11 to 413 rigs. Around 400,000 homes and businesses remain without power in the U.S. due to the effects of Hurricane Sandy.
  2. On Monday, NYMEX Henry Hub gas futures rose nearly 2% as the National Weather Service revised its weather forecasts, which showed colder temperatures in the northeast. Traders expect that this week’s natural gas inventory report from EIA to show the first withdrawal of the season. Traders also found support in the IEA’s World Energy Outlook report, which projected that natural gas demand would rise 19% over 2010 levels by 2017 and 50% by 2035. The report predicts that natural gas will overtake oil as the largest fuel source by 2030.
  3. During Tuesday’s trading, natural gas futures rose 16.9 cents (~5%) the year’s new high of $3.74 per MMBtu as a cold snap covered much of the country from Texas to the northeast. The colder temperatures are expected to lead to the first posted drawdown in natural gas stocks this season. Nuclear power plant outages at 9,500 MW increased natural gas demand by ~1.5 Bcf/d on Tuesday.
  4. Natural gas futures closed up 2.1 cents on Wednesday at $3.76 per MMBtu, a new one-year high. This rise in prices was driven by forecasts from private companies that colder temperatures will drive heating demand, particularly in the northeast. However, the National Weather Service forecasts show below-average temperatures only in portions of the southeastern U.S. with most of the rest of the country experiencing above-average temperatures.
  5. Natural gas futures fell on Friday even as EIA reported the first drop in natural gas in storage for the season. EIA’s weekly natural gas report showed a net withdrawal of 18 Bcf last week leaving storage at 3,911 Bcf, which is 71 Bcf above last year and 209 Bcf above the 5-year average. However, prices fell following the announcement as some traders were concerned that the drawdown came at the low-end of analyst expectations. With the National Weather Service showing above-average temperatures for much of the country and the energy equivalent price of natural gas being well above coal, there is concern about current storage levels coming off a record high.

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 ~5% higher than the five-year average. July 2013 natural gas futures are 5% 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) 14.61 14.67 -0.41%
Gasoline Demand (MMBPD) 8.91 8.31 7.22%
Distillate Demand (MMBPD) 4.11 3.59 14.48%
Production (MMBPD) 6.71 6.68 0.45%
Imports (MMBPD) 7.87 8.01 -1.75%
Stocks (million barrels) 375.9 374.8 0.29%
Rotary Rig Count 1,389 1,373 1.17%
Natural Gas*
Indicators This Period Prior Period % Change
Working Storage (Bcf) 3,911 3,929 -0.46%
Rotary Rig Count 413 424 -2.59%
Horizontal Rig Count 1,104 1,105 -0.09%
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)

Comments and questions welcomed. Please contact DeloitteCenterforEnergySolutions@deloitte.com

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