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Weekly Oil & Gas Market Highlights: August 9, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) August 9, 2012 August 2, 2012 % Change
Oil – WTI
(USD per barrel)
$93.36 $87.13 7.2%
Oil – Brent
(USD per barrel)
$113.28 $105.90 7.0%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$2.95 $2.92 0.9%

Data sources: Bloomberg; CME Group

Crude Oil Prices

WTI crude futures gained 7% this week on positive U.S. employment data and a higher-than-expected fall in crude inventories. Continuing tensions in the Middle East and a temporary shortage in the Buzzard field in the North Sea added upward pressure on crude prices.

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

  1. Crude futures rose in Asian trading last Friday as investors sought to lock in trades before the U.S. Bureau of Labor Statistics (BLS) released weekly unemployment data. Crude supplies are tight in Europe as a result of maintenance work in the North Sea, which is causing a temporary shortage in the Buzzard field, the largest of the more than 70 oil fields that make up Forties crude. The field produces ~200,000 bpd of the lowest priced crude of the four North Sea grades (Brent, Forties, Oseberg, and Ekofisk). As a result, Buzzard plays a major role in deciding the price of dated Brent crude, which is used as the benchmark for pricing two-thirds of the crude in the world. Tensions among Iran, the West, Israel, and Saudi Arabia continue to simmer, adding upward pressure on crude prices.
  2. Following BLS’s announcement that jobs grew nearly twice analyst expectations, crude futures shot up ~5%. The U.S. economy added 163,000 jobs last month even as unemployment ticked up from 8.2% to 8.3%. In addition, futures strengthened further on a fall in the dollar, which was down ~1% against a basket of currencies. The Institute for Supply Management also announced that U.S. manufacturing activity edged up to 52.6 in July from 52.1 in June assisted by low natural gas prices that are providing a cost advantage to U.S. manufacturing in energy-intensive industries and petrochemicals. NYMEX WTI futures closed at $91.40 per barrel, while Brent closed at $108.98 per barrel, up ~3%.
  3. Crude oil futures fell in Asian trading on Monday as markets profited from Friday’s rise, but trading was thin as trader’s awaited indications of further interest rate easing from the Federal Reserve Chairman, Ben Bernanke’s scheduled testimony. The market also eyed an easing of supply tensions as Sudan and South Sudan signed an agreement to end their long-standing dispute, which had taken ~300,000 bpd off the market. Futures spiked >$0.50 per barrel as rumors surfaced that Syrian President Bashar al-Assad had been killed. The rumor was supposedly sparked off by a tweet by the Russian Interior Minister; however, the Interior Ministry of Russia later denied the claim. Overall trading volumes were light due to few economic indicators and the start of the summer vacation season. Although total volumes have averaged ~600,000 contracts per day during 2012, it fell to ~350,000 contracts on Monday, a level it touched just after the collapse of MF Global earlier in the year, which had prevented many market participants from placing trades for several hours.
  4. Futures extended their gains in Asian trading on Tuesday. A bomb exploded near Midyat, in the Turkish province of Mardin, near the Syrian border, on the main export pipeline (~360,000 bpd) from the Kirkuk oilfields in Iraq to Ceyhan, Turkey, resulting in a large conflagration. Brent futures rose $0.76 on the news to $110.31 per barrel. In the U.S., a fire at Chevron’s Richmond refinery, which supplies around 10% (~250,000 bpd) of PADD V’s petroleum products, shut down the facility. As long as PADD V gasoline prices are competitive, it should be a relatively easy to replace the missing supply. Analysts were also keeping an eye on tropical storm Ernesto, which could become a hurricane as it moved west toward Mexico’s oil-producing Campeche Bay region. The U.S. imports ~10% of its oil from Mexico. Therefore, PADD III refineries must make up the difference with relatively higher priced foreign crudes, which puts upward pressure on the gasoline price.
  5. Crude futures fell in Asian trading on Wednesday as traders profited from the recent run-up in the oil price and market participants awaited oil stocks data from the Energy Information Administration (EIA) later in the day. In bearish news, industrial output in Germany fell ~1% over the past month, higher than the decline forecast by economists. Thus far, Germany, the largest economy within the European Union (EU), has been the bright spot in the European economy. Its ~0.5% growth in the 1Q12 kept the EU as a whole from posting a GDP contraction. Some traders are beginning to feel that oil futures are in the overbought territory and anticipate some contraction unless geopolitical risk or supply factors become more amplified. The U.S. Department of Labor (DOL) reported nonfarm business productivity increased over 1.5% on an annualized basis in 2Q12. Prices received a further boost as EIA data showed that crude inventories fell by 3.7 MMbbl, well above analyst expectations of a 500,000 bbl decline. The data also showed that distillates fell by 700,000 bbls and gasoline inventories were down 1.8 MMbbls. WTI futures rose ~7.5% over the past three trading sessions.
  6. Oil futures increased marginally in Asian trading on Thursday as China’s National Bureau of Statistics’ consumer price index increased ~1.8% from a year ago, the lowest since February 2010. China pledged to make any adjustments necessary to keep the economy expanding. However, OPEC released its Monthly Oil Market Report, which showed that Iraqi crude output crossed the 3 MMbbl/d mark for the first time since 2003, leading to a fall in crude prices during the second half of Thursday. OPEC also made a 100,000 bpd downward revision of the amount of crude supply required to meet world demand (~29.5 MMbbl/d) over the next year as a result of the ongoing recession in the OECD. The IMF forecast that the global economy will grow only 3.5% in 2012, down from 3.9% in 2011 and 5.3% in 2010. Further, the dollar appreciated versus the euro on pessimism over the European economy. As a result, WTI futures fell $0.72 per barrel to the day’s low of $93.07 per barrel. However, oil prices regained as U.S. DOL data showed a decline of 6,000 jobless claims last week, with new claims falling to 361,000. The Department of Commerce (DOC) reported the U.S. trade deficit, largely made up of energy imports fell to $42.9 billion in June from $48 billion in May, the lowest in 18 months. DOC data indicated that the cost of imported oil fell nearly $8 to $100.13 per barrel, the steepest decline in almost four years. In a Deloitte DBriefs on Tuesday, August 7, Deloitte’s Oil and Gas practice showed that U.S. petroleum imports have declined from 60% of U.S. supply in 2005 to 45% in 2011, while exports of refined petroleum products have increased from ~1.2 MMbbl/d to ~2.9 MMbbl/d, driven largely by exports of distillate fuel oil, petroleum coke, and finished motor gasoline. As a result, U.S. net imports of petroleum have fallen to 8.4 MMbbl/d in 2011 from 12.5 MMbbl/d in 2005. The DOC also announced that the U.S. economy as a whole grew at a mere 1.5% annualized rate in 2Q12. NYMEX WTI crude futures closed flat in Thursday’s trading at $93.36 per barrel.

Natural Gas Prices

Henry Hub natural gas futures moved around 30 cents last week and closed marginally up at $2.95 per MMBtu. Lower demand expectations and a cooler weather outlook erased the gains from positive inventory data. The EIA reported a 24 Bcf increase in stockpiles, ~ 6 Bcf lower than analysts’ expectations.

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

  1. On Friday, U.S. Henry Hub natural gas futures fell for the fourth straight day even after an 8% selloff on Thursday. The front-month (September) natural gas futures ended the session down 4.3 cents (1.5%) at $2.877 per MMBtu. Gas prices have rebounded some 65% since spring, but once crossing the $3 per MMBtu, natural gas becomes less cost competitive than coal for use by power utilities. Currently, in MMBtu terms, coal is ~$0.50 less expensive than gas, with variations in the quality and energy density of various types of coal. Baker Hughes data for the week ending August 3 shows that gas-directed rigs have dropped below 500 for the first time since 1999. However, horizontal rigs used to drill for tight oil and liquids-rich shale gas rose to 1,155, which is ~3% below the all-time high of 1,193 in May.
  2. Natural gas futures opened ~$0.07 lower on Monday, but climbed throughout the second half of the day. The front-month futures contract has fallen >10% over the past four sessions as a result of milder weather and dissipating concerns about tropical storm Ernesto. Bulls point to a weekly natural gas storage build that is below average for this time of the year, while bears point to record-high levels of storage (~78% of capacity) that are not usually reached until mid-September. There are concerns that the excess storage could lead to a steep fall in the natural gas prices later this summer. The National Weather Service said on Wednesday that the West and Northeast U.S. would have higher than normal temperatures, but the rest of the country would have average or below-average temperatures. Nuclear outages on Monday were at 6,300 MW (6%), up from 5,600 MW on Friday. Natural gas futures ended at $2.908 per MMBtu on Monday, up 3.1 cents.
  3. Natural gas futures ended up a second day as traders placed orders ahead of EIA’s weekly inventory data. Technical traders noted that the market had been oversold in the past few days and was due for some expected upside. The EIA’s August-month Short-Term Energy Outlook (STEO) made a downward revision of 0.26 Bcf/d in 2012 marketed natural gas production, over last month’s Outlook. The EIA now expects 2012 production to grow by 2.52 Bcf/d to 68.72 Bcf/d. The EIA also revised its estimate for end-October storage to 3,954 Bcf from 4,002 Bcf in the prior month’s estimate. In Louisiana, a football-field-sized sinkhole opened up as result of a local natural gas salt dome storage cavern. The owner of the salt dome invoked force majeure on any new injections into the cavern, an action which is expected to increase the amount of gas on the market by 4-5 Bcf. Those seeking to store their gas have been asked to reduce their injections to 40% of the contracted rate.
  4. On Wednesday, natural gas futures continued their recent decline on expectations of a moderation in the recent high temperatures, which will curb demand for power burn. However, natural gas production remained up 4.3% year-on-year, with ever-increasing volumes being flared since there is no infrastructure yet to bring such stranded gas to market.
  5. Natural gas futures trended downward in early trade on Thursday with most traders expecting a ~30 Bcf rise in working natural gas in storage (WNGS) in the U.S. However, the EIA announced that WNGS increased only 24 Bcf to 3,241 Bcf last Friday, which led to a spike in Henry Hub futures to $3.08 per MMBtu. The U.S. National Hurricane Center said that there was a low pressure system developing off the Cape Verde Islands, which had a 70% chance of developing into a tropical storm. Concerns about tropical storm Ernesto are yet to materialize into any threat to supplies. According to EIA data, federal offshore in PADD 3 accounts for ~7% of U.S. natural gas production and almost 25% of crude oil production. Even as Henry Hub futures rise, Marcellus natural gas prices are largely becoming decoupled from them due to pipeline constraints. Tennessee Zone 4 Marcellus fell to $1.40 per MMBtu last Friday before it rebounded to $2.17 per MMBtu on Wednesday. The Algonquin Citygate (Boston) pricing point closed last week at $4.24 per MMBtu, according to the EIA.
  6. Futures pared the day's gain and ended with a modest gain of 0.4% due to profit taking. Traders remained skeptical about the upside in prices, noting that peak summer demand will fall in the next few weeks and that storage and production are still at historic highs.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to the limited storage capacity (current natural gas inventories are 14% higher than the five-year average). Despite the recent price rally in natural gas prices, March 2013 natural gas futures are 20% higher than spot prices, compared to less than 2% 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) 15.61 15.57 0.23%
Gasoline Demand (MMBPD) 8.84 8.82 0.22%
Distillate Demand (MMBPD) 3.79 3.75 1.17%
Production (MMBPD) 6.22 6.32 -1.61%
Imports (MMBPD) 8.63 8.41 2.63%
Stocks (million barrels) 369.9 373.6 -0.99%
Rotary Rig Count 1,429 1,416 0.92%
Natural Gas*
Indicators This Period* Prior Period* % Change
Consumption (Bcf)** 1,850 (May 12) 1,944 (Apr 12) -4.71%
Gross Withdrawals (Bcf)** 2,527 (May 12) 2,450 (Apr 12) 3.27%
Canadian Imports (Bcf)** 240.34 (May 12) 246.91 (Apr 12) 2.09%
LNG Imports (Bcf)** 16.21 (May 12) 7.55 (Apr 12) 114.65%
Working Storage (Bcf) 3,241 3,217 0.75%
Rotary Rig Count 498 505 -1.39%
Horizontal Rig Count 1,155 1,151 0.35%

Notes:
*The EIA did not release a natural gas report this week due to the U.S. Independence Day holiday. Thus, this period data is for the week ending June 27 and prior period data is for the week ending June 20.
**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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Learn more

Deloitte MarketPoint LLC and the Deloitte Center for Energy Solutions have developed an assessment of the potential economic impact of LNG exports from the United States based upon various assumptions. Made in America: The Economic Impact of LNG Exports from the United States summarizes the findings of alternative scenarios regarding U.S. LNG exports and offers related strategic insights.

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