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Weekly Oil & Gas Market Highlights: December 6, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) December 6, 2012 November 29, 2012 % Change
Oil – WTI
(USD per barrel)
$86.26 $88.07 -2.1%
Oil – Brent
(USD per barrel)
$107.03 $110.76 -3.4%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.67 $3.65 0.5%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude futures fell 2% this week as economic growth concerns outweighed Middle East tensions. Traders are concerned about the growth in oil demand, amid the fall in U.S. consumer spending and manufacturing activity, sharp build-up in U.S. gasoline and distillate inventories, and downward revisions of Europe’s GDP forecast by the ECB. 

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

  1. On Friday, November 30, crude futures fell during Asian trading as the yen declined versus the dollar on speculations of aggressive easing by the Bank of Japan if the opposition Liberal Democrat Party wins the December 16 elections. Shinzo Abe, the head of the Liberal Democrat Party, has called for unlimited monetary easing in order to reach 2% annual inflation and end a 10-year period of deflation in the country. In London trading, futures began to rise as the German Parliament approved the Greek bailout by a wide majority (473:100). Some economists fear that a Greek bankruptcy could trigger the break-up of the Eurozone. Futures dipped briefly after U.S. consumer spending for October fell 0.2%, the first decline since May. However, the drop was attributed to the effects of Hurricane Sandy and was therefore largely viewed as a temporary blip rather than an indicator of overall fourth-quarter performance. Futures rose through the rest of the day on optimism that the U.S. government would reach a deal to avoid the so-called “fiscal cliff.” WTI futures closed up 84 cents (1%) at $88.91 per barrel. Brent closed at $111.10 per barrel, up 34 cents.
  2. Crude futures rose in Asian trading on Monday as China released its Purchasing Managers Index (PMI) data for November, which rose to 50.5 (expansion) from 49.5 (contraction) in October. The PMI number was at a seven-month high for the second-largest oil-consuming nation. In London trading, oil futures rose as Greece announced a 10 billion euro ($13 billion) buy-back of bonds to cut its debt load. The 10-year yield on Greek bonds fell below 15% for the first time since March on the news. The market also responded positively to German Chancellor Angela Merkel’s statement that Germany would not oppose a write-down of Greek debt. European finance ministers plan to make a decision on the release of an additional tranche of bailout funds to Greece on December 13. However, futures shed most of their earlier gains as the Institute of U.S. Supply Management’s PMI data for the U.S. showed a contraction in the country’s manufacturing rate, from 51.7 in October to 49.5 in November. The figure indicates the lowest level of activity since July 2009, giving rise to concerns about potential weakness in U.S. oil demand.
  3. On Tuesday, futures fell in Asia as traders responded to the low PMI figures for the U.S. Also weighing on the price were concerns over a U.S. deal to avert the fiscal cliff. JP Morgan said that oil-demand growth could fall by 580,000 bbl/d, if the U.S. economy contracts as much as predicted by going over the fiscal cliff. During London trading, geopolitical tensions in the Middle East kept a floor under prices as the UN announced that it was withdrawing all non-essential personnel from Syria.
    Futures fell in light trading volumes on the NYMEX as many traders decided to remain on the sidelines until the budget negotiations in Washington become clearer. Traders are concerned about the potential for a large price swing either up or down once the parameters of a deal are known, or if it is revealed that there will not be a deal. WTI futures closed down 0.7%, at $88.50 per barrel.
  4. On Wednesday, futures began to rise as market participants anticipated the release of the Energy Information Administration’s (EIA) oil stocks data later in the day. The American Petroleum Institute reported a 2.2 MMbbl/d drop in oil stocks the prior week, which supported expectations of a drop in stocks reported by the EIA over the same time period. Crude futures fell later in the day as the EIA’s weekly oil stocks report sent mixed signals—while U.S. crude stockpiles fell 2.4 MMbbl to 371.8 MMbbl, gasoline inventories rose by nearly 8 MMbbl, the highest one-week increase in over a decade. Distillate stocks were also up by 3 MMbbl. The gasoline and distillate figures taken together were a negative indicator for fuel demand growth, which declined to 18.3 MMbbl/d (~3.5%).
  5. On Thursday, futures rose in the first half due to the possible deployment and use of chemical weapons by Syria’s beleaguered regime. The U.S. and Russia, both signatories to the 1993 Chemical Weapons Convention, have warned Syria against using chemical weapons in the conflict.
    However, futures fell sharply after European Central Bank (ECB) President Mario Draghi stated that the European economy will end 2012 with a 0.5% decline in GDP, which is higher than last month’s predicted 0.4% drop. For 2013, the ECB projects a 0.3% fall in GDP, revised downward from an increase of 0.5% last month. However, the bank expects the EU economy to improve in 2014 with a 1% expansion. During New York trading, futures fell over demand destruction concerns in the U.S. and Europe, reflected in this week’s EIA data and the downward revisions in the ECB’s GDP figures. Further, traders remained concerned about Washington’s ability to work out a deal to avert the so-called fiscal cliff of across-the-board tax increases and spending cuts. In the last few hours of trading, futures marginally recovered after the Department of Labor’s new jobless claims data showed a 25,000 decline in applications to 370,000 for the prior week. WTI futures ended the day at $86.26 per barrel, a fall of 1.8%.

Natural Gas Prices

Natural gas futures ended the week marginally up at $3.67 per MMBtu, despite above-average temperature forecasts. Futures benefitted from a higher-than-expected drawdown in inventories and U.S. DOE’s LNG exports study showing a net economic benefit for the country.

Closing price; December futures expired on November 28.
Note: Intra-day prices (every 6 hours)
Data source: Bloomberg

  1. Natural gas futures fell last Friday as warmer-than-anticipated weather forecasts were expected to slow natural gas demand. AccuWeather.com predicted that temperatures in the Northeast and Midwest would be well above average in the 6–10 day forecast. The news came on the heels of Thursday’s natural gas report from the EIA, which showed an unexpected build in gas inventories over the prior week and rising gas production. Baker Hughes reported on Friday that gas-directed rigs dropped to 424, down 4 rigs from the previous week, but still hovering just above the lowest levels in over a decade.
  2. On Monday, natural gas futures were modestly higher, closing up 3 cents at $3.591 per MMBtu. Prices were supported by optimism that the week’s EIA data would show a large drawdown in working gas in storage. However, the upswing was dampened by weather forecasts that continued to show above-average temperatures across much of the country, including the Northeast. Long-range forecasts for the winter season expect temperatures to remain near the 30-year average.
  3. Natural gas futures were down 5.2 cents on Tuesday, closing at $3.539 as warmer-than-average weather forecasts continued to weigh on the market. The MDA Weather Services forecast indicates above-average temperatures in the Northeast and Midwest. Nuclear power generation has also picked up as plants come back online following fall maintenance, which is putting pressure on prices. Nuclear power plant outages had been supporting natural gas demand during November since gas-fired power is typically used as replacement generation for nuclear power.
  4. Natural gas futures rose 16.1 cents on Wednesday as the U.S. Department of Energy (DOE) released a long-awaited study of the economic impacts of LNG exports for the U.S. economy. The report, conducted by NERA Economic Consulting on behalf of the DOE, reviewed the impact of LNG exports under 63 different scenarios and concluded that in every case, the result was a net positive for the economy. Further, the report showed that higher levels of LNG exports directly correspond to higher economic benefits. The report was viewed as a positive sign for natural gas prices. The news of the report largely overshadowed data in the EIA’s Annual Energy Outlook, which showed that U.S. natural gas production would grow faster through 2040 than previously forecast. Annual 2035 production was increased from 27.99 Tcf in last year’s report to 31.41 Tcf in the current report. By 2040, natural gas is expected to account for 30% of total U.S. power generation and annual natural production will increase to 33.21 Tcf.
  5. On Thursday, futures briefly rallied as the EIA released data showing a 73 Bcf draw in gas inventories, above analyst expectations and the five-year average draw. The drawdown brought natural gas inventories below year-ago levels for the first time since November 2011. However, futures started falling, driven by warmer weather forecasts and profit-booking by traders. Henry Hub natural gas futures closed at $3.666 per MMBtu, down 0.9%.

Futures Curve

August 2013 futures of both WTI and Henry Hub natural gas are only 4% higher than current prices, reflecting average cost of carry, limited upside in demand, and adequate supply.

Data source: Factset

Weekly U.S. Crude Oil and Natural Gas Data

Crude Oil
Indicators This Period Prior Period % Change
Refinery Inputs (MMBPD) 15.43 15.17 1.68%
Gasoline Demand (MMBPD) 8.35 8.43 -0.87%
Distillate Demand (MMBPD) 3.54 3.84 -7.64%
Production (MMBPD) 6.82 6.82 -0.01%
Imports (MMBPD) 8.23 8.12 3.15%
Stocks (million barrels) 371.8 374.1 -0.61%
Rotary Rig Count 1,386 1,388 -0.14%
Natural Gas
Indicators This Period Prior Period % Change
Working Storage (Bcf) 3,804 3,877 -1.88%
Rotary Rig Count 424 428 -0.93%
Horizontal Rig Count 1,110 1,114 -0.36%
Consumption (Bcf)* 1,790 (Sep 12) 1,982 (Aug 12) -9.68%
Gross Withdrawals (Bcf)* 2,423 (Sep 12) 2,376 (Aug 12) 1.97%
Canadian Imports (Bcf)* 240.40 (Sep 12) 262.17 (Aug 12) -8.31%
LNG Imports (Bcf)* 11.50 (Sep 12) 19.10 (Aug 12) -39.79%

Notes:
*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)

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