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Weekly Oil & Gas Market Highlights: March 20, 2014

Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators

Front Month Futures March 20,
2014
March 13,
2014
% Change
Oil – WTI
(USD per barrel)
$99.43 $98.20 1.3%
Oil – Western Canadian Select*
(USD per barrel)
$80.43 $76.30 5.4%
Oil – Brent
(USD per barrel)
$106.45 $107.39 -0.9%
Natural Gas – U.S. Henry Hub
(USD per MMBtu)
$4.37 $4.38 -0.3%

Data sources: Bloomberg; CME Group
* Western Canadian Select (WCS) is a blend of Canadian heavy conventional and bitumen crude oils blended with sweet synthetic and condensate oils traded in Hardisty, Canada.

Crude oil prices

WTI crude futures rose 1.3% this week boosted by positive economic news from the U.S. and falling crude inventories at Cushing. However, continuing tensions over the Ukraine crisis and possible Western economic sanctions against Russia remained a concern.

Daily closing price
Note: Intra-day prices (every 6 hours); April month futures expired on March 20, 2014
Data source: Bloomberg

  1. Last Friday, crude futures rose as the International Energy Agency increased its 2014 global oil demand forecast by 100,000 barrels to 1.4 MMbbl/d based on expectations of improved global economic conditions. Market participants also closely monitored a meeting between U.S. Secretary of State, John Kerry, and Russian Foreign Minister, Sergey Lavrov, over rising tensions in Ukraine. The U.S. increased pressure on Moscow ahead of a scheduled Sunday vote in Crimea over whether to break from Ukraine and become part of Russia. Investors were concerned the vote would prompt the European Union (EU) to impose sanctions on Russia, a key oil producer, which could result in lower global crude supplies. WTI crude futures closed up $0.69 at $98.89 per barrel.
  2. On Monday, crude futures fell as market participants noted U.S. and EU sanctions against Russia were unlikely to affect global energy supplies. Over the weekend, 97% of voters in Crimea voted to secede from Ukraine and become part of Russia. The referendum was declared illegal by the U.S. and the EU, both of which enacted sanctions against specific Russian and Ukrainian officials on Monday. The sanctions prohibit Americans from conducting business with seven Russian officials and four Ukrainians while the EU imposed asset freezes and travel bans on 13 Russian officials and eight Ukrainian officials from the Crimean region. Investors noted energy markets could be affected if the two sides do not find a way to prevent the situation from escalating further. WTI crude futures closed down $0.81 cents at $98.08 per barrel.
  3. On Tuesday, oil prices softened during Asian trading as concerns over the crisis in Ukraine began to recede. Investors noted that sanctions were limited to specific individuals and were unlikely to affect energy supplies. Russian President Vladimir Putin also helped ease the situation by signaling Russia was not about to occupy the eastern part of Ukraine. Crude futures rose during New York trading as the Department of Commerce reported building permit requests increased 7.7% to an annualized 1.02 million in February, reflecting a surge in applications for apartment-building construction. Increased construction activity was viewed as positive for demand. News that the Seaway pipeline expansion would be completed ahead of schedule in late May or early June also boosted crude futures later in the afternoon. A new pipeline linking Cushing and the Gulf Coast is being built alongside the existing pipeline to increase capacity from 400,000 barrels to 850,000 barrels a day. The expanded line is expected to help alleviate a bottleneck at the key pricing hub. Supplies at Cushing have fallen for the past six weeks largely due to the opening of the southern leg of the Keystone XL pipeline in late January, which has increased deliveries to the Gulf Coast. WTI crude futures closed up $1.62 at $99.70 per barrel.
  4. On Wednesday, futures rose above $100 per barrel as weekly data from the Energy Information Administration (EIA) showed supplies at Cushing falling 989,000 barrels — the seventh week of declines at Cushing — to 29.8 million barrels, the lowest level since January 2012. Total crude stockpiles in the U.S. rose by 5.85 million barrels to 375.9 million barrels while U.S. domestic crude production rose 33,000 bbl/d to 8.22 MMbbl/d, the highest level since 1988. Strong petroleum products demand also helped boost futures as gasoline stockpiles fell 1.5 MMbbl and stocks of distillates fell by 3.1 MMbbl. Distillate stocks are at the lowest level since 2008. Following a meeting of the Federal Open Market Committee, the Federal Reserve announced the third $10 billion reduction in its bond-buying program, reducing its monthly purchases from an initial $85 billion to $55 billion. The Fed also announced it would look at a range of data, including the unemployment rate, to determine when to raise interest rates. Under Chairman Ben Bernanke, the Fed had pledged to keep interest rates unchanged until unemployment fell below 6.5 percent. This was the first Fed meeting led by newly appointed Chair Janet Yellen. WTI crude for April delivery rose $0.67 to settle at $100.37 per barrel. The Brent/WTI premium narrowed to $6.68 per barrel.
  5. On Thursday, crude futures rose initially during Asian trading as investors monitored the EU’s response to the crisis in Ukraine. However, futures changed course as EU leaders discussed increasing the sanctions against Russia amid concerns that the country could retaliate by disrupting negotiations with Iran over its nuclear program. According to German Chancellor, Angela Merkel, phase-two sanctions include extending the list of Russian and Ukrainian individuals subjected to asset freezes and travel restrictions, while phase-three sanctions would include economic sanctions. Merkel also declared the G8, of which Russia is a member, “defunct” until Moscow changes its behavior toward Ukraine. Oil market participants are concerned over an escalation of the conflict, which could restrict energy supplies from Russia. Prices continued the fall later in the day as the dollar strengthened against the euro on speculation that the Fed might raise the interest rates by mid next year. WTI crude futures for April delivery fell $0.94 to expire at $99.43 per barrel.

Natural gas prices

Henry Hub natural gas futures ended this week marginally lower due to moderating winter weather in the U.S. and a lower-than-expected withdrawal in weekly inventories. However, decade-low natural gas inventories at 953 Bcf limited the downside.

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

  1. Last Friday, natural gas futures rose as investors believed the futures had been oversold following the prior day’s 10.7 cent loss. Short-covering was supported by weather forecasts from the National Weather Service (NWS), which showed below-average temperatures across most of the northern part of the country in the 6–10 day forecast. With current storage levels at 1,001 Bcf – down 958 Bcf from the same time last year, some analysts forecast are skeptical that natural gas production can rebuild inventories ahead of this year’s winter heating season. Henry Hub natural gas futures closed up 4.2 cents at $4.425 per MMBtu.
  2. On Monday, natural gas futures were supported by revised weather forecasts from the NWS showing continued cold weather across much of the country in the 8–14 day. Market participants projected continued above-average to average draws on natural gas inventories, which are expected to push storage levels well below 1,000 Bcf before the beginning of the injection season. Despite concerns about the ability of producers to rebuild inventory levels before the winter heating season, the EIA projected in its March Short Term Energy Outlook a historic storage build of 2,500 Bcf during the injection season, which would raise storage levels to 3,459 Bcf. Henry Hub natural gas futures closed up 11.1 cents at $4.536 per MMBtu.
  3. On Tuesday, natural gas futures fell on profit-taking following Monday’s rise. Near-term weather forecasts from the NWS showing below-average temperatures across the eastern part of the country limited the downside. However, the 8-14 day forecast showed temperatures moderating, which supported the selling activity. Henry Hub natural gas futures closed down 8 cents at $4.456 per MMBtu.
  4. Wednesday trading saw natural gas futures rise on expectations that this week’s natural gas report from the EIA would show supplies tightening further. Analysts believed this week’s draw would compare bullishly to the five-year average draw of 30 Bcf. Henry Hub natural gas futures closed up 2.8 cents at $4.484 per MMBtu.
  5. On Thursday, natural gas futures fell as EIA’s weekly natural gas data showed inventories falling 48 Bcf, which was below analyst expectations. Although the decline was above the five-year average, it was below last year’s draw of 74 Bcf. Despite the data, bulls noted current storage levels at 953 Bcf are the lowest for this time of year since 2004. Henry Hub natural gas futures closed for the day at $4.369 per MMBtu, down 11.5 cents.

Futures curve

The forward curve for WTI crude continues to be in backwardation, with December 2014 WTI futures 7% lower than near-month (April) futures due to rising North American crude supplies. The EIA expects U.S. crude production to average 8.42 MMbbl/d in 2014 — the highest since 1987 — boosted by increased drilling in tight oil plays. Natural gas futures are out of backwardation as the colder-than-normal U.S. winter comes to an end. Near-term (April) prices are 4% lower than the December 2014 futures.

Data source: Factset

Weekly U.S. crude oil and natural gas data

Crude oil
Indicators This Period Prior Period % Change
Refinery Inputs (MMBPD) 14.95 14.99 -0.27%
Gasoline Demand (MMBPD) 8.51 8.95 -4.92%
Distillate Demand (MMBPD) 4.16 3.70 12.43%
Production (MMBPD) 8.22 8.18 0.49%
Imports (MMBPD) 7.31 7.31 NC
Stocks (million barrels) 375.9 370.0 1.59%
Rotary Rig Count 1,461 1,443 1.25%
Natural gas
Indicators This Period Prior Period % Change
Working Storage (Bcf) 953 1,001 -4.80%
Rotary Rig Count 344 345 -0.29%
Horizontal Rig Count 1,212 1,202 0.83%
Consumption (Bcf)* 2,912 (Dec 13) 2,305 (Nov 13) 26.32%
Gross Withdrawals (Bcf)* 2,627 (Dec 13) 2,559 (Nov 13) 2.64%
Canadian Imports (Bcf)* 270.1 (Dec 13) 215.9 (Nov 13) 25.11%
LNG Imports (Bcf)* 2.73 (Dec 13) 2.69 (Nov 13) 1.34%

Notes:
NC: No Change
* The EIA does not provide weekly natural gas consumption, withdrawal and import 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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About the Deloitte Center for Energy Solutions
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Through the Center, Deloitte’s Energy & Resources Group leads the debate on critical topics on the minds of executives–from the impact of legislative and regulatory policy, to operational efficiency, to sustainable and profitable growth. We provide comprehensive solutions through a global network of specialists and thought leaders.

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