MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURS. JUNE 25, 1998 (2)
OIL & GAS
OPEC, Bowing To Glut, Seals New Oil Cut
VIENNA, Austria - OPEC producers crippled by low oil prices announced sharper than expected output cuts of almost 5 percent to drain a disastrous glut of crude.
The petroleum group agreed Wednesday to choke supply by 1.355 million barrels per day (bpd), more than doubling an earlier set of reductions agreed to in March.
The sacrifices approved at a conference of the 11-member Organization of Petroleum Exporting Countries will be for one year from July 1.
"We took strong action because all oil producers were facing disastrous economic consequences," Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah told reporters.
"It will be enough to stop the rot," said Mehdi Varzi, who watches OPEC for Dresdner Kleinwort Benson. "Even if there is not 100 percent compliance it is a substantial cut."
Saudi Oil Minister Ali al-Naimi, who oversees the daily oil flow from the world's largest producer and exporter, said he was extremely happy with the agreement.
"We believe members will adhere to this diligently. It is in their own interests," OPEC Secretary General Rilwanu Lukman said after the meeting had closed.
In a bullish signal, the cuts would lower output by cartel kingpin Saud Arabia almost to the eight million bpd it held for much of the 1990s.
The pact faced a late glitch when the cartel's second- largest producer Iran haggled over the size of its own cut. After a couple of hours of discussion, Iran said it would cut by 305,000 bpd, 25,000 bpd less than it had agreed to earlier in the day.
Insiders suspected the agreement was made possible at least in part by talks Tuesday in Riyadh between Saudi's King Fahd and Iranian Foreign Minister Kamal Kharrazi, the latest in a series of friendly contacts between the rival Gulf oil powers.
The producers' predicament has been created by weak Asian demand growth and rising Iraqi exports, fueling a glut that took prices to 10-year lows and tore holes in producer revenues.
Oil company shares have suffered and exploration in remote areas has slowwed.
"The situation is seriously affecting our domestic economies, compelling us to reevaluate our development plans and trim budgets," said OPEC President and United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri.
The combined cuts including those pledged in previous reductions agreed to in March come to 2.6 million bpd, marking a 4.7 percent cut from the group's May output, or a cut of almost 10 percent from February output.
Non-OPEC producers had pledged a total of more than 500,000 bpd of cuts including reductions promised in both March and June, an OPEC communique said.
U.N.-monitored oil exports from OPEC member Iraq, still subject to U.N. sanctions for its 1990 invasion of Kuwait, are excluded from the accord.
The main contributors to cuts were Saudi Arabia with a combined 725,000 bpd and Venezuela, with a total 525,000 bpd.
Delegates said both had agreed to raise by 200,000 bpd the reductions pledged in talks with non-member Mexico in Amsterdam earlier this month.
The cuts failed to bring traders immediate joy, with North Sea Brent crude finishing 31 cents lower at $13.61 a barrel.
But some analysts said that if producers could stand by their word they would win higher prices further down the road.
"The market needs some time to digest the news but these are significant cuts which will reduce stocks and allow prices to rise," Gary Ross of Petroleum Industry Research Associates said.
Roger Diwan of Washington's Petroleum Finance Company estimated that even with some over-production the cuts would drain world oil stocks by some 900,000 bpd in the second half of the year after a 1.3 million bpd build in the first half.
OPEC Oil Cuts Put Spotlight On Compliance
VIENNA, June 25 - Bold oil production cuts failed to release OPEC from a market bearhug on Thursday but analysts saw prices eventually rising provided a global glut starts to drain.
Dominant OPEC power Saudi Arabia signalled it was confident a pact on Wednesday to lop another five percent off output would drain brimming storage tanks and draw market recognition.
''You can see the confidence in my face,'' Saudi Oil Minister Ali al-Naimi told reporters at the summer conference of the Organisation of the Petroleum Exporting Countries.
''It's the adherence story again,'' said a Kuwaiti delegate, referring to the notoriously leaky cartel's effort to shore up damaged credibility with sceptical traders.
An early sign of compliance came with word from Nigeria that it would review its July crude sales and cancel some contracts as a result of the pact.
''The goal is simple -- to have a higher price. We are optimistic that we will duplicate last year's price,'' when Brent average $19.30 a barrel, a Gulf delegate said.
But North Sea Brent crude was 15 cents lower at $13.46 a barrel on Thursday, almost $6 below the 1997 average.
''Compliance is difficult to enforce and the market will watch closely for signs of cheating,'' said Leslie Nicholas at GNI brokers in London.
The 11-country group's agreement is to choke supply by a larger than expected 1.355 million barrels per day (bpd) for a year from July 1, doubling earlier reductions agreed in March in its first major cuts in a decade.
The combined cuts, including those pledged in previous reductions agreed in March, come to 2.6 million bpd marking a cut of almost 10 percent from February's benchmark output.
Non-OPEC producers had pledged a total of over 500,000 bpd of cuts including reductions promised in both March and June.
OPEC's predicament has stemmed from weak Asian demand growth and rising Iraqi exports, causing a glut that took prices to 10-year lows and cut producer revenues. Oil company shares have been hit and some exploration has slowed.
The price slide chopped a third off OPEC's revenues in the first half of the year, Leo Drollas of the Centre for Global Energy Studies estimates.
Earlier this month Drollas said Saudi Arabia was likely to see a shortfall of $14 billion in 1998 from the $50 billion it earned last year if the price slump continued.
Delegates said the impact of the cut since March will not be felt immediately by the market.
''But in the end, the market will notice that less oil is available on the spot market and contracts will be cut back,'' a Gulf delegate said.
''They went beyond what the analysts were demanding -- it's a very aggressive cut,'' said Mexican Deputy Energy Minister Jorge Chavez Presa.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
A Kuwaiti delegate said the cuts would be first implemented fully in August loadings, which in turn would not be monitored until September.
''It will take some time for the cuts to work through the system on international markets,'' said OPEC President and United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri.
But he added: ''We are confident that the action we are about to take will remove excess supplies and thus banish the volatility so plaguing the market.''
In an encouraging sign for market bulls, the cuts would lower output by Saudi Arabia almost to the eight million bpd it held for much of the 1990s.
The pact faced a late glitch when OPEC number two producer Iran haggled over the size of its own cut. After a couple of hours of talk, Iran said it would cut by 305,000 bpd, 25,000 bpd less than it had agreed earlier in the day.
Insiders suspected the agreement was made possible at least in part by talks on Tuesday in Riyadh between Saudi's King Fahd and Iranian Foreign Minister Kamal Kharrazi, the latest in a series of friendly contacts between the rival Gulf oil powers.
U.N.-monitored oil exports from OPEC member Iraq, still subject to U.N. sanctions for its 1990 invasion of Kuwait, are excluded from the accord.
Bold Oil Rescue Pact Needs Time, OPEC Says
VIENNA, June 25 - OPEC's boldest oil price rescue attempt in years failed to jump start a recovery on Thursday but experts forecast gradual gains as promised output cuts take hold.
OPEC's core Gulf Arab elite displayed confidence that a pact on Wednesday to chop another five percent off output would drain brimming storage tanks and draw market applause.
''You can see the confidence in my face,'' Saudi Oil Minister Ali al-Naimi told reporters at the summer conference of the Organisation of the Petroleum Exporting Countries.
''It will take some time for the cuts to work through the system on international markets,'' said OPEC President and United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri.
But he added: ''We are confident that the action we are about to take will remove excess supplies and thus banish the volatility so plaguing the market.''
The 11-country producer group agreed to shave supply by a larger than expected 1.355 million barrels per day (bpd) for a year from July 1, doubling earlier reductions agreed in March in its first major cuts in a decade.
The initiative was in line with experts' estimates of how much oil had to go if producers were to start chipping away at the mountainous petroleum stockpile that has built up.
''It was a fantastic meeting for oil prices,'' said Merrill Lynch oil analyst Constantine Fliakos.
''This is a lot of oil to take out of the system and I think we are going to see an inventory drawdown in the third quarter because of the agreement,'' trading sources quoted Fliakos as telling an internal briefing with Merrill equity advisers.
The combined cuts, including those pledged in previous reductions agreed in March, come to 2.6 million bpd marking a cut of almost 10 percent from February's benchmark output.
Non-OPEC producers had pledged a total of over 500,000 bpd of cuts including reductions promised in both March and June.
''It may be one of the few times the market has not rushed to judgement, because the answer is down the road,'' said Peter Gignoux of Salomon Smith Barney.
But oil traders, who had already been expecting OPEC cuts, pointed to OPEC failure to fully adhere to cuts in the past, and were less than impressed by both the size of the reduction and the credibility of the cartel's vows.
''It's the adherence story again,'' sighed a Kuwaiti delegate, referring to the notoriously leaky cartel's effort to shore up shaky market credibility.
North Sea Brent crude was 44 cents lower at $13.17 a barrel on Thursday, $6 below the 1997 average.
Prices were on an upward trend until last November when OPEC raised output just as Asian demand was falling, oil storage tanks were swelling and the West baked in unusually warm weather.
The resulting glut battered prices to 10-year lows and chopped revenues of the cartel's Middle Eastern, African, Asian and Latin American members in the first half of 1998.
And clouds remain on the horizon in the form of deepening economic turmoil in Asia and a rush of new Iraqi supply.
But an early sign of compliance with the latest pact came with word from Nigeria that it would review its July crude sales and cancel some contracts as a result of the pact.
''The goal is simple -- to have a higher price. We are optimistic that we will duplicate last year's price,'' when Brent averaged $19.30 a barrel, a Gulf delegate said.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
''But in the end, the market will notice that less oil is available on the spot market and contracts will be cut back,'' a Gulf delegate said.
''With a little patience it will come right,'' said a senior Kuwaiti oilman.
OPEC Patches Self Inflicted Wound
VIENNA, June 25 - OPEC faces an anxious wait to learn if it has finally managed to clear up an oil market mess created by its own mistakes.
Counting the cost of a disastrous November decision to grab back waning market share, Wednesday's agreement to lop a further 1.355 million barrels per day from supply is the group's third stab at resuscitating oil prices.
The latest initiative is in line with most experts' estimates of how much oil had to go if producers were to start chipping away at the mountainous petroleum stockpile that has built up.
Yet besieged Organisation of the Petroleum Exporting Countries (OPEC) members have yet to see immediate benefit from the pact. Benchmark Brent crude has slid below $13.50 a barrel since details of the agreement emerged.
And producers' hopes of replenishing parched revenues are overshadowed by threats of deepening economic turmoil in Asia and a rush of new Iraqi oil supply, as well as the usual doubts about OPEC's ability to translate words into deeds.
''It may be one of the few times the market has not rushed to judgement, because the answer is down the road,'' said Peter Gignoux, head of the London energy desk at Salomon Smith Barney.
''The latest cuts don't address OPEC's structural problems,'' said Roger Diwan of Washington's Petroleum Finance Company (PFC).
''But it is a good compromise between price defence and defence of market share.''
The latest measure means OPEC has now pledged to chop some 2.6 million bpd of supply since nine year price lows spurred Saudi Arabia and Venezuela to team up with non-OPEC Mexico for the first round of cuts in March.
And this week's agreement is the latest chapter in the three countries' battle for supremacy in the voracious U.S. market -- where Venezuela's scorn for supposed OPEC limits had allowed it to poach Saudi market share.
Saudi Arabia's 725,000 bpd total cut this year wipes out almost all the gains it wrung out from November's OPEC meeting in Jakarta, where it sought to reassert its U.S. market muscle.
At the Jakarta talks, OPEC raised supply limits by 10 percent to 27.5 million bpd, the first time the group increased quotas in four years.
But Saudi Arabia, the world's largest producer, has jealously clung to its long standing 8 million bpd quota even after the latest cuts.
The kingdom has also managed to persuade Venezuela to slice 525,000 bpd -- by far the biggest percentage cut -- from its output, despite Caracas' previous refusal even to consider a cut.
Venezuela's stark shift, and its notoriety for quota-busting, will receive special attention as traders judge whether OPEC is sticking to its word -- a crucial factor if prices are to head back to producers' $15-20 a barrel comfort zone.
Memories of the chronic quota-busting that has dogged OPEC for so many years flared up immediately after the agreement as Iran's demand that its cut should be scaled back led markets to wonder whether there was a deal at all.
''Once OPEC can convince the market that the agreement is credible and genuine, prices will rise and get Brent back to $17 a barrel later in the year,'' said a senior European oil trader.
''At the moment buyers can afford to be choosy and wait and see if OPEC is doing what it says it is doing.''
This week's cuts led analysts to predict that consumers will draw down stocks, laying the foundations for a slow price recovery.
''OPEC is back from the brink,'' said Leo Drollas of London's Centre for Global Energy Studies (CGES).
''If they deliver on these cuts it will be enough to start eating into stocks and prices will be up to $16-$17 a barrel later this year.''
PFC's Diwan says that it now looks as if some 900,000 million bpd will be drained from stocks over the next six months, compared with a 1.3 million build so far.
Yet OPEC's calculations could still go awry if Asia's economic meltdown intensifies - especially in regional giant Japan, a crucial market for Gulf producers.
The organisation must perform a delicate balancing act, with analsyts warning that forcing oil prices too high too soon could jeopardise any fledgling Asian recovery.
The spectre of Iraq's resumption to full exports still hangs heavy, despite the latest row over nerve gas discoveries by U.N. arms inspectors.
Iraq - now excluded from the last two OPEC deals - will pump up exports in exchange for food and medicine in coming months, while some believe that the full lifting of sanctions could be less than a year away.
OPEC May Win $18 Oil Reward But Not Just Yet
LONDON, June 25 - A bold OPEC agreement to cut deeply into oil supply may reap rewards in the fourth quarter of this year with Brent crude prices climbing by a third to $18 a barrel, oil analysts said on Thursday.
Despite a surprise price slide soon after the deal was struck in Vienna on Wednesday, unwanted oil could soon drain from brimming storage tanks and begin to tighten glutted markets in October, they said.
''We could average $18 in the fourth quarter which is not bad,'' said Simon Trimble, oil analyst at Paribas Capital Markets in London.
''Through the course of the third quarter stocks will be drawn and at the beginning of the fourth quarter they will be in line with last year,'' he said, adding ''At that point prices could move sharply higher as the market starts to tighten.''
His views assumed compliance of about 80 percent from the notoriously leaky oil cartel, which usually fails to fully meet its self-imposed output quotas.
Analysts said much depends on how quickly excess oil is removed from the spot market.
Nervous oil traders, faced with trying to sell prompt cargoes, have slashed prices in recent months rather than face punitive costs of storing the oil on land.
Delegates said the impact of the cuts since March will not be felt by the market immediately. ''But in the end, the market will notice that less oil is available on the spot market and contracts will be cut back,'' said a Gulf delegate.
OPEC's latest agreement is to trim 1.355 million barrels per day (bpd) from supply meaning a total of 2.6 million bpd will be taken off the market when cuts made in March by the 38-year old cartel are added together.
John Toalster, oil analyst at Societe Generale in London described the cuts as ''impressively large'' and said the group had ''overcome political differences.''
But recent mild winter, faltering Asian demand and rising Iraq production had all worked against OPEC, he said. ''You won't really get firm evidence of the impact of the cuts until September.''
With 100 percent compliance ''yes the market would tighten'' but 75 percent ''is not really quite good enough.'' His Brent forecast of $15 for the whole of this year was still unchanged, he said.
Brent crude prices have averaged just $14.36 a barrel so far this year compared to $19.32 in 1997.
In the previous three years prices had climbed roughly $2 each year as Western demand recovered from a flat period in the early 1990s.
On forward swap markets, Brent was trading around $14.80 a barrel for the fourth quarter on Thursday.
But that price merely reflected a short-term downward pressure from traders still trying to dispose of cargoes of unwanted oil.
''The market needs time to digest the news but these are significant cuts which will reduce stocks and allow prices to rise,'' said Gary Ross of Petroleum Industry Research Associates.
''We were very surprised by the reaction of the market,'' said Jonathan Wright, oil analyst at Merrill Lynch in London, echoing the views of many others.
Wright said he had not changed his price forecast of between $17 and $18 a barrel for fourth quarter Brent but assuming full OPEC compliance ''we could be looking beyond that, possibly at $20.''
Petroleum Finance Company Ltd expects oil storage tanks to be drained quickly in the second half of this year even assuming some leakage by OPEC.
It expects a draw of 900,000 bpd in the second half of this year after a build-up by 1.3 million bpd in the first.
Leo Drollas of the Centre for Global Energy Studies said ''if they deliver these cuts that will start eating into stocks.'' He saw Brent prices possibly moving up to $16 to $17 a barrel.
A senior oil trading executive in Vienna said: ''Once OPEC can convince the market that it is credible and genuine prices will gradually increase, taking Brent to $17.''
Saudi Arabia, OPEC's dominant force, said on Thursday it was confident markets would come to recognise OPEC compliance. ''You can see the confidence in my face,'' Saudi Oil Minister Ali al-Naimi told reporters.
''The goal is simple -- to have a higher price. We are optimistic that we will duplicate last year's price,'' when Brent average $19.30 a barrel, a Gulf delegate said.
The 11-country group's agreement is to choke supply for a year from July 1 with the combined cuts of 2.6 million bpd amounting to almost 10 percent from February's benchmark output.
Non-OPEC producers had pledged a total of more than 500,000 bpd of cuts including reductions promised in both March and June, an OPEC communiqui issued after the Vienna talks said.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
A Kuwaiti delegate said the cuts would be first implemented fully in August loadings, which in turn would not be monitored until September.
In a bullish signal, the cuts would lower output by Saudi Arabia almost to the eight million bpd it held for much of the 1990s.
OPEC insiders said the agreement was made possible in part by talks on Tuesday in Riyadh between Saudi's King Fahd and Iranian Foreign Minister Kamal Kharrazi, the latest in a series of friendly contacts between the rival Gulf oil powers.
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