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Weekly Oil & Gas Market Highlights: October 25, 2012

Deloitte Center for Energy Solutions publication

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Key Oil & Gas Price Indicators

Front Month Futures (August) October 25, 2012 October 18, 2012 % Change
Oil – WTI
(USD per barrel)
$86.05 $92.10 -6.6%
Oil – Brent
(USD per barrel)
$107.42 $112.42 -4.4%
Natural Gas – NYMEX Henry Hub
(USD per MMBtu)
$3.43 $3.59 -4.3%

Data sources: Bloomberg; CME Group

Crude Oil Prices

Crude oil futures (WTI) fell more than $6 per barrel this week as weak economic data weighed on demand growth. Traders are bearish on crude oil seeing weak third quarter earnings of major industrials, demand contraction in Europe, and higher-than-expected build-up in U.S. oil stocks. 

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

  1. Last Friday, crude futures traded largely sideways in Asian trading. Prices the prior Thursday rose rapidly as a result of the temporary closure of the ~590,000 bpd Keystone pipeline due to an “anomaly” discovered in the line between Illinois and Missouri. There was no report of a leak in the line. Crude prices began moving upward during London trading on reports of an explosion at a pipeline through Turkey that carries natural gas. Although the pipeline was not a carrier of oil, the market reacted to the news as indicative of possible oil supply disruptions as tensions continue between Syria and Turkey. A small leak from a 250,000 bbl/d crude distillation unit at a refinery in Whiting, Indiana led to a shutdown of the unit for repair. WTI crude futures moved higher following the news. However, crude futures fell 2.2% along with the broader market as an EU summit ended on Friday without any progress. Mariano Rajoy, the Prime Minister of Spain, stated that his country was not prepared to seek a bailout. The news sent the dollar rising versus the euro, which is bearish for crude. Current oil market fundamentals look increasingly bearish as crude stocks are at their highest level since the U.S. Department of Energy began keeping records in 1982.
  2. On Monday, crude futures fell in early Asian trading following the release of data from Japan’s Ministry of Finance that showed its exports to China had fallen by more than 14% in October amid Chinese protests over Japan’s claim to the Senkaku Islands, Northeast of Taiwan. Futures prices began ticking upward slightly amid concerns over the assassination of Lebanon’s most senior military intelligence official. The attack raised concerns that Syria’s Civil War was spreading to neighboring countries. Futures price fell for most of the remainder of the trading day as North Sea production was expected to return to the market over the next two to three weeks following longer-than-expected maintenance at one of the Forties fields. The reopening of the Keystone pipeline on Monday, also helped dampen prices. The November contract expired on the close of Monday trading at $88.73 down $1.32 (1.5%). The December contract moved to the front-month position and fell $1.79 (2%) during the day to close at $88.65 per barrel.
  3. Crude oil futures trading was muted in Asia on Tuesday as investors largely stood on the sidelines ahead of a meeting on Wednesday of the U.S. Federal Reserve’s (the Fed) Open Market Committee (FOMC).  Some traders believe that the Fed may reduce its recently announced $40 billion per month stimulus given recent positive U.S. employment news and housing starts. However, other traders believe that the current earnings season is showing weakness in the economy, which is bearish for crude. In New York trading, oil prices continued to fall as major industrial corporations released weak earnings result for the third quarter. The poor third quarter performance combined with burgeoning oil supplies and lackluster petroleum demand put a damper on futures prices. Futures ended the day down 2.3% at $86.67 per barrel, the lowest price since July of this year.
  4. Crude oil futures rose during early trading in Asia as HSBC released its preliminary Purchasing Manager’s Index (PMI) data for China, which showed that the contraction in the PMI slowed over the past month from 47.9 in September to 49.1 in October. Under the PMI rubric, any number below 50 indicates contraction. During London trading, futures prices fell as the euro-zone’s composite PMI fell from 46.1 in September to 45.8 in October, which is the lowest level since 2009. German business confidence also declined from the prior month. The news sent the dollar higher versus the euro, which is bearish for oil futures. Oil futures fell nearly $1 per barrel (1.1%) during New York trading as the U.S. Energy Information Administration released weekly oil stocks data, which showed a very bearish 5.9 MMbbl build in crude inventories, more than double analysts' expectations. Crude stocks are currently 375 MMbbl, which is the highest level for this week since government records of oil inventories began in 1982. Gasoline stocks also rose by 1.4 million barrels, above analysts’ expectations. However, stocks of distillates, which are currently finding a profitable export market in Latin America, dropped by 600,000 barrels. Futures pared their loses and began to rise again as the FOMC announced that it would continue its recent easing policies including Operation Twist, unending $40 billion per month monetary expansion, and low interest rates through 2015. Continued easing by the Fed is expected to be bullish for crude prices.
  5. On Thursday, oil futures began to climb in early trading as it was reported that Japan’s central bank will consider increasing its asset-purchase program by 12.5% or 10 trillion yen (~$125 billion) to 90 trillion yen at its next meeting on October 30. In London trading, futures were supported by economic optimism stemming from preliminary British GDP data from the UK Office for National Statistics. The UK office estimated that British GDP rose by ~1% in third quarter after three consecutive quarters of decline. If the estimates are correct, the U.K. will have effectively come out of recession. Further boosting prices, the U.S. Department of Commerce released data showing that U.S. durable goods demand rose just under 10% month on month, above analysts’ expectations. At the same time, the Department of Labor released its weekly unemployment data, which showed a 23,000 decline in the number of new applications for unemployment assistance. The number of new applications fell from 392,000 to 369,000 claims. Futures fell later in the day as initial estimates indicate that the Department of Commerce will announce Friday that U.S. GDP grew at 1.9% in the third quarter rising from 1.3% in the second quarter. A rise would be bullish for crude, however, if the estimate holds it would be the first two simultaneous quarters of below 2% growth in the U.S. since 2009.
    WTI crude futures closed on Thursday at $86.05 per barrel, an increase of 0.4%.

Natural Gas Prices

Natural gas futures fell 4.3% this week due to conflicting weather forecasts for early November, ongoing build-up in inventories, and weak demand. Analysts are concerned that prices near $3.50 per MMBtu will reverse the coal-to-gas switching in the power sector, limiting the upside in prices.

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

  1. Last Friday, U.S. Henry Hub natural gas futures ended higher on expectations of colder temperatures in the two-week ahead forecast. In the near-term, temperatures are expected to be above normal. However, the warm weather has already been factored in to the price. Some traders expect upside to be limited as current storage levels are at historic highs for this time of year, while production continues to grow as a result of associated gas production. Baker Hughes released its weekly rig count on Friday showing that gas directed rigs rose by 5 to 427, following a 13-year low the previous week. In the past five weeks, gas-directed rigs have risen three times whereas it has been declining week on week for most of the year. At current prices, some gas projects previously abandoned may now be coming back on line.
  2. Natural gas futures fell 4.6% on Monday as forecasts calling for colder weather were slightly revised to indicate more mild cooling. The National Weather Service (NWS) forecast below average temperatures in the week-ahead forecast, but the two-week forecast shows less dramatic cooling. Prices have risen under 10% this month with half of that rise in the past three sessions of trading. Many analysts expected the market was overdue for a correction. Traders are expecting that the onset of cooler weather will help stimulate demand for natural gas use. However, according to data in the most recent EIA weekly gas report (released last Thurdays October 18) natural gas usage fell 4% week on week when temperatures were cooler than expected. Most of the decline in use came from the residential and commercial sectors where demand was down by 9.5%, but natural gas for power generation was also off by 2.7%. Industrial natural gas use showed a marginal gain.
  3. On Tuesday, natural gas futures ended the day higher as traders bought in to Monday’s decline on speculation that the contract had been over sold. Traders are speculating that colder winter temperatures will lift heating demand. Nuclear power plant outtages were 6,700 MW higher than the prior year. Futures prices rebounded to an intraday high of ~$3.55 per MMBtu before settling at $3.53 up 8.3 cents on the day.
  4. Natural gas futures ended lower on Wednesday on speculation of a bearish inventory build in the EIA data this week and milder temperatures in the two-week forecast. The NWS’s one-week outlook shows below-average temperatures for the Eastern U.S. However, the key heating region of the Northeast will experience above average temperatures limiting the upside. Weather Service International states that the three month forecast (November – January) calls for cooler weather in the northwest of the U.S. However, the rest of the country is expected to be above-average during the same period. November natural gas futures closed down 8.5 cents at $3.45 per MMBtu on Wednesday.
  5. Natural gas futures fell on Thursday as traders sold contracts following a neutral build in natural gas in storage reported by EIA. EIA’s data showed that natural gas inventories rose by 67 Bcf in line with analyst expectations to 3,843 Bcf, a record high for this time of year, and just 9 Bcf below last year’s all time high of 3,852 reached in November of 2011.
    EIA data showed that total demand for the week was down by 2.9% with residential and commercial demand down 4.8% and natural gas for power burn down 2.8%. Demand was down even though temperatures were 1.3 degrees cooler than the same period last year. Temperatures were up 1.1 degrees above the 30-year average. Natural gas production was up 0.3% week on week. Futures closed at $3.43 per MMBtu.

Futures Curve

U.S. Henry Hub natural gas is in “contango” due to cooler weather forecasts and limited storage capacity (current natural gas inventories are ~7% higher than the five-year average). June 2013 natural gas futures are 14% higher than current prices, compared to just 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) 14.80 14.82 -0.11%
Gasoline Demand (MMBPD) 8.49 8.73 -2.70%
Distillate Demand (MMBPD) 3.53 3.88 -9.10%
Production (MMBPD) 6.61 6.61 0.06%
Imports (MMBPD) 8.82 8.35 5.70%
Stocks (million barrels) 375.1 369.2 1.60%
Rotary Rig Count 1,410 1,411 -0.07%
Natural Gas*
Indicators This Period Prior Period % Change
Consumption (Bcf)* 2,045 (Jul 12) 1,847 (Jun 12) 10.73%
Gross Withdrawals (Bcf)* 2,457 (Jul 12) 2,424 (Jun 12) 1.44%
Canadian Imports (Bcf)* 265.45 (Jul 12) 250.04 (Jun 12) 5.95%
LNG Imports (Bcf)* 15.36 (Jul 12) 8.26 (Jun 12) 86.02%
Working Storage (Bcf) 3,843 3,776 1.77%
Rotary Rig Count 427 422 1.18%
Horizontal Rig Count 1,114 1,112 0.18%

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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