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Bullish economic reports throughout the week, combined with a supply drop strengthened crude prices, while natural gas rocketed past the $4-level on frigid weather forecasts and positive stockpiles data.  

Crude Oil:

Crude prices increased last week on encouraging U.S. economic reports that fuelled hopes for robust demand in the worlds biggest oil consumer.

In particular, the Institute of Supply Management (ISM) manufacturing index data for the month of Nov showed that the sector expanded at the fastest rate in 2013, with 15 of the 18 industries reporting growth. A similar measure of activity in the Euro-zone also reflected growth, buoying energy demand prospects.

Oil traders often refer to manufacturing statistics as yardsticks to gauge the future fuel demand growth.

Later in the week, revised GDP numbers for Q3 came out, as did new jobless claims – both reports were impressively good for the U.S. economy. To complete a week of upbeat reports, the Bureau of Labor Statistics (BLS) came out with its monthly nonfarm payroll report on Friday, and results were better than expected.

Sentiments were further brightened by the Energy Information Administration (EIA) report that showed a big fall in inventories, the first in eleven weeks.

As per the EIA’s weekly ‘Petroleum Status Report,’ crude inventories dropped by a larger-than-expected 5.59 million barrels for the week ending Nov 29 to 385.83 million barrels. An uptick in refinery utilization rates led to the stockpile drawdown with the U.S. What’s more, storage at the Cushing terminal in Oklahoma, the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange, was also down marginally, following seven straight weekly gains.

As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was firmly in the black and settled at $97.65 per barrel, gaining 5.5% for the week. 

Natural Gas:

Investors continue to focus on temperature patterns to understand the fuel’s economic dynamics. As it is, natural gas fundamentals look uninspiring with supplies remaining ample in the face of underwhelming demand. In fact, it is expected to take many years for the commodity’s demand to match supply in the face of newer projects.

Despite these issues, natural gas rallied to a six-month high last week on the back of a larger-than-expected decrease in natural gas supplies and forecasts of freezing cold weather conditions.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states fell by 162 billion cubic feet (Bcf) for the week ended Nov 29, higher than the guided range (of 139–143 Bcf drawdown). Moreover, the decrease was considerably higher than both last year’s withdrawal of 62 Bcf and the 5-year (2008–2012) average reduction of 41 Bcf for the reported week.

Chilly weather forecasts – in the key U.S. consuming regions over the next few days – are likely to further spur the commodity’s demand for heating.

Influenced by these factors, natural gas spot prices ended Friday at $4.11 per million Btu (MMBtu), up 6.2% over the week.

Energy Week That Was:

The week’s energy coverage was dominated by the following news:

Shell to Abandon GTL Venture

U.S.-listed shares of Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Analyst Report) gained almost 3% on Friday after it pulled out of a program to construct a gas-to-liquids (GTL) plant in Louisiana. The company, which announced the decision on Thursday, is planning to stop all activities related to the development.

The Gulf Coast GTL project was expected to have a capacity of roughly 140,000 barrels of liquid fuel per day from natural gas feedstock. Moreover, the availability of gas is abundant in the locality. Despite these factors, the company felt that the North American project was not a feasible opportunity in the long run. Shell believes that the expected development expenses as well as uncertainty related to future oil and gas prices pose a potential threat when considerations of profit are taken into account. 

Management reveals that the recent decision reflects the company’s plan to allocate capital to more profitable projects worldwide, with a view to increase shareholder value. 

Petrobras' New Pricing Hurts Shares

U.S.-listed shares of the Brazilian state-run energy giant, Petroleo Brasileiro SA, or Petrobras (PBR - Analyst Report) slipped almost 11% since opening on Monday on news of its new pricing policy. The company had announced plans to increase gasoline price by 4% and diesel price by 8% effective Nov 30 onward.

Petrobras announced of the price hike as a measure to lower its leverage, bringing it down to the permissible limit according to the Business and Management Plan 2013–2017 and better align Brazilian oil prices with international prices. Once implemented, the company should see improved margins.

However, the news backfired as shares dropped substantially. The hike, permitted for the first time by the government since Mar 2013, fell below expectations. It is unlikely that this price hike will bridge the gap to reach the break-even point in the company’s downstream operations.

The government’s continued intervention in deciding the fuel prices had negative effects on the company’s financials. Moreover, any further hike seems unlikely until the Brazilian Presidential elections in October next year and inflation runs high. The transparency behind the policy is another questionable matter and reflects investor sentiment.

QEP to Spin Off Midstream Business

Domestic energy explorer QEP Resources Inc. (QEP - Analyst Report) plans to separate its midstream business, QEP Field Services Company, paying heed to the spin-off suggested by activist hedge fund and the company’s largest shareholder – Jana Partners LLC. The natural gas gathering and processing business will be separated along with QEP Resources’ stake in the master-limited partnership (MLP), QEP Midstream Partners LP (QEPM).

The spin-off is in response to the pressure imposed by Jana Partners LLC. Jana Partners holds a 7.6% stake in QEP Resources and demanded this spin-off citing poor performance by the company and suggesting the need for restructuring. Jana was also unsatisfied with the way QEPM was created and asked for a more complete separation of the MLP.

Hess to Sell Indonesian Assets

Integrated energy company Hess Corp. (HES - Analyst Report) announced two separate agreements with a joint venture between state-owned Indonesian oil and natural gas company, PT Pertamina and Thai oil and gas company, PTT Exploration and Production Company Limited.

Per the deals, Hess would sell its interests in both the Pangkah and Natuna A assets located off the coast of Indonesia for a total after-tax consideration of $1.3 billion. Together, the two assets produced an average of 15,000 barrels of oil equivalent per day net to Hess in the first three quarters of 2013.

Hess plans to use the proceeds from the asset sales on buying back shares under its existing $4 billion share repurchase program. The agreements are expected to close before the end of the first quarter of 2014.   

MarathonPetroleum Unveils $4B Budget

Independent oil refiner and marketer, Marathon Petroleum Corp. (MPC - Analyst Report) said it plans to invest roughly $4.0 billion during the 2014–2016 timeframe. This planned investment reflects a $2.4 billion hike from what Marathon Petroleum had invested during the previous three years for the segments.

Out of $4.0 billion, the company is expecting to spend around $640.0 million for midstream properties, $2.4 billion for Pipeline Transportation, while the remaining $925.0 million will be allocated for expanding the Speedway retail segment.

Other Headline News on Energy:

Statoil Grants Options Worth $16B

Norwegian energy giant Statoil ASA (STO - Analyst Report) reported that it has exercised 11 options worth $16 billion. The suppliers offer a range of services, including maintenance and modification (M&M) as well as isolation, scaffolding and surface protection (ISS) suppliers.

The M&M work will be carried out on 22 facilities offshore and onshore, by five companies, which have gained extensions from Aug 1, 2014 to Jul 31, 2016. The companies awarded M&M contracts are – Aibel AS, Aker Solutions MMO AS, Reinersten AS, Fabricom AS and Apply Sorco AS.

FMC Tech to Supply ROVs to Tidewater

Oil drilling equipment maker FMC Technologies Inc. (FTI - Analyst Report) has contracted with offshore vessel owner, Tidewater, to deliver six work-class Remotely Operated Vessel (ROV) systems for the subsea operations business of the latter. The deal will fetch $30 million in revenues for FMC Tech.

Cobalt Confirms Lontra Discovery

Oil and gas explorer Cobalt International Energy Inc. confirmed that it has successfully tested its previously announced Lontra #1 pre-salt discovery well in Block 20, offshore Angola. The company noted that the discovery well encountered both a high liquids content gas interval and an oil interval. Cobalt is partnered by British major BP plc and Sonangol Pesquisa e Producao, S.A., with 30% working interest each, in the block.

Performance Chart of Some Major Companies:

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.

Ticker

Last Week’s Performance

6 month performance

XOM

+2.32%

+4.97%

CVX

-0.12%

-0.33%

COP

-2.79%

+13.78%

OXY

-1.76%

+0.39%

SLB

+0.05%

+20.26%

RIG

-1.21%

-1.33%

VLO

+1.88%

+19.53%

TSO

-1.59%

-0.67%

 

This Week’s Outlook:

Apart from the usual suspects – the U.S. government data on oil and natural gas – market participants will be closely tracking Thursday’s monthly retail sales data for Nov that will shed further light on the economy’s wellness and the need for the bond buying policy. Energy traders will also be focusing on a slew of economic data from China.

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