MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, NOVEMBER 25, 1997 (1)
Inside the Market
Some sectors escape the clutches of bearish 300
The mid-week column recalled that bear markets do happen from time to time -- current whistling in the dark notwithstanding -- and that the stock price disarray looked distressingly like another one.
That said, another week has ended in Wall Street with the bear market jury still out. It would have been surprising if the week -- split in two by the U.S. Thanksgiving holiday -- had been anything but inconclusive.
The Thanksgiving break was followed by a half-day session that might as well have been another holiday. It was kids' day on the floor of the New York Stock Exchange, and, as one commentator observed, there were many helping hands. Between being helped, traders handled the slowest activity of the year.
So we will have to wait for the real test. The bellwether Standard & Poor's 500-stock composite index has stubbornly worked its way up to the 950 level in a predictable rally off the recent lows. It will need to do better than that, and have another shot at its 985 high, to prove this has been more than one of those sigh-of-relief rallies, based more on hope than reality.
Already, commentators are speculating on a "Santa Claus rally" -- the propensity of most markets to do better in late December and in January than in other months. But any sighting of the big guy with a white beard will depend on news from across the Pacific. One cannot trivialize the effects of the Asian turmoil by pretending it will go away.
The South Korean market, the bellwether of the world's 11th largest economy, has now fallen about 18%. That country's currency has been heading in the same direction, and Friday there was a report that the government was doing the expected and asking for a larger aid package. The current package amounts to US$20 billion, which is much, much less than the debt of US60 billion due within 12 months.
There is some consolation in Japan from the feeling the government is going to use public funds to stem the bleeding. But, because financial institutions there (including insurance companies) record their stock market book losses (or profits) at their yearends, the Nikkei index had better stay at least reasonably buoyant. Another plunge below 15,000 and the alarm bells will be ringing.
The world trade effects have still to come and the political will of the Washington politicos to keep trade doors open has still to be tested.
If the outlook down there in the Big Apple is uncertain, a bear appears to be riding the Toronto Stock Exchange 300 composite index, the best market indicator we have. The TSE 300 is now down about 10%, and that is, at the very least, a stiff correction -- edging on a bear market by most definitions.
On the other hand, there can be no index that properly measures our Canadian markets.
About 26% of the weighting of stocks in the TSE 300 is in the raw materials sector. Another 23% is in making and selling widgets of various kinds to consumers and corporations (the consumer products and industrial products sectors respectively). And 29% represents interest-sensitive pipelines, utilities and financial services.
All three broad sectors march to different drummers. The raw materials side does best when corporations have the clout to raise prices to hold up their profit margins in an inflationary environment, which is precisely the opposite of what is going on now.
The manufacturers lack pricing power in the current disinflationary environment, but can still better their lot by increasing market share.
The interest-sensitive bunch thrives in a disinflationary climate, which is certainly the investment environment now.
Break the TSE 300 down into these three sectors and a mixed picture emerges.
The raw materials sector is suffering as product prices tumble, led by gold. Losses in the past four weeks range from 5% for the metals and minerals subindex to 22% for the gold and precious metals subindex.
The manufacturing sector is more or less holding its own. The consumer products index is actually up about 3% from the closing sessions of October; the industrial products subindex is marginally down.
By contrast, if you had put all your hard-earned pennies into interest-sensitive stocks a month ago, you would be smiling most of the way to the bank. The pipelines subindex has put on about 2% over the past four weeks, the utilities subindex more than 8% and financial services, despite recent weakness, has risen some 4.7%.
OPEC Ministers Hope Any Price Drop Will Be Short
OPEC ministers said Sunday that global markets will have room for the new oil they've agreed to pump, hoping they can limit any price falls to the short-term. Oil traders will have their say on the matter when futures markets open today.
Even some ministers who predicted a quick price drop are now seeking to play down any negative fallout by arguing the drop would be short-lived, even though they might be pumping up to one million barrels a day over their newly increased, official production ceiling.
"This rise is a very reasonable one," Kuwait's Issa Mohammed al-Mazidi said Sunday, the day after OPEC agreed to boost its stated output level by 10 per cent to 27.5 million barrels a day.
The old official ceiling was 25 million barrels daily, but widespread quota-busting is believed to have brought actual production to around 27.8 million barrels.
Al-Mazidi predicted prices will stay firm next year as global demand for crude oil rises, but he would not be drawn out on what might happen in the short run.
"When there are new agreements, naturally there is some kind of impact in the market," al-Mazidi said.
Any sustained drop in the price of oil, the world economy's most vital commodity, would be welcome news for consumers but a damaging development for 11-member OPEC and other producers.
This leaves everyone in OPEC hoping that the members who pushed the higher ceiling through have gotten their figures right on next year's supply and demand.
The Kuwaiti minister acknowledged OPEC might pump as much as 28.5 million barrels daily next year. That would be one million over the official limit and about 700,000 barrels a day over the real current production by the 11 members of the Organization of the Petroleum Exporting Countries.
Kuwait had sided with top producer Saudi Arabia and the United Arab Emirates against Iran, Libya and others who are worried prices could fall.
OPEC finally reached its new deal Saturday night, after four days of the most contentious talks the ministers have held in years.
Most of the new oil coming online will be produced by the Saudis and their Gulf allies in a deal that has no apparent benefits for smaller players who already are pumping oil at full capacity.
Libyan oil minister Abdalla Salem el-Badri had argued that OPEC should allow zero increase in crude output, and after losing that battle he predicted oil prices will rapidly fall by $1 US per barrel.
Saudi Arabia's oil minister, Ali Naimi, seized control of OPEC's agenda earlier in the month by indicating he wanted higher production. Naimi has the most oil in OPEC and therefore the most clout. Ministers ended up accepting a high production ceiling that was touted by the Saudis and their bullish Gulf neighbors.
OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
Falling Gas Prices, Hurt By Warm Weather, Could Force Alberta Firms To Cut Production
By CLAUDIA CATTANEO
The Financial Post
The El Nino-related collapse in natural gas prices could soon force some Alberta producers to lock in production.
Alberta spot prices closed at $1.44 a thousand cubic feet Friday, down 3› and well below the $2.30 range of only a month ago.
On the New York Mercantile Exchange, natural gas closed at US$2.57 per mcf on Wednesday, before the U.S. Thanksgiving holiday, down from about US$3.50 a month ago. (The price of Alberta gas is so much lower because of a lack of pipeline capacity to move it to the U.S.)
"The biggest factor has been the warm weather," said Chris Jacyk, manager of gas marketing analysis with Brent Friedenberg Associates Ltd. of Calgary. "That's really limited demand.
"With the high storage levels this year, it's got a few people jittery."
Peter Linder, oil and gas analyst with CIBC Wood Gundy Inc. agreed, saying, "not only are we seeing lower numbers than last year, the trend is going in a different direction -- down."
Alberta spot prices could approach $1 per mcf in the next month, he added.
"I could see, within a month, numerous producers announcing they are shutting in their production of natural gas."
That could mean weak first-quarter results for many producers, and potentially no relief until next summer.
But short-term pain will turn into longer-term gain as new pipeline capacity comes on line next fall, Linder said.
John Major Says Gulf Must Shape Up To Attract Funds
Former British Prime Minister John Major Sunday gave Gulf Arab states a checklist of things they must do to attract the foreign capital they badly need to diversify their oil-led economies.
"Job creation and inward investment are essential. Oil and natural resources are insufficient in themselves," he told a conference in Oman, adding the stalled Middle East peace process made the six Gulf Arab states' task all the harder.
Major said among things investors were looking for in the region were stable government, competent bureaucracy, developed infrastructure, skilled workforce, competitive taxes, free capital flows, clear company law and sound legal enforcement.
Saudi Arabia, Kuwait, Oman, Bahrain, Qatar and the United Arab Emirates are trying to lure foreign and private investment to develop their economies away from oil. But economists say red tape, lengthly decision-making procedures and poor legal enforcement in some Gulf states are keeping investors at bay.
A fast-growing and often unskilled population reliant on foreign labor is another deterrent to foreign cash, they say.
Calling the stalemate in the Middle East peace process "thoroughly unhelpful," Major urged Gulf Arab states to throw their weight behind an Arab-Israeli settlement.
He said although the Gulf had a higher world profile than some developing states thanks to foreign involvement in the region's oil industry, it faced new competition for funds.
In particular, Major saw Brazil, Indonesia, China, India and Russia increasingly becoming more attractive homes for international capital. "These five countries are going to change our world between now and 2020," he said.
"At the moment they form one half of the labor force, but less than one-tenth of total production. By 2020 these countries are going to double their share of production and account for one-and-a-half times the European Union's share of world trade (compared to one third now)," he said.
Saudi Muscle-Flexing Revives OPEC Vigor
Saudi Arabia served notice at OPEC talks that it is returning to center stage on world oil markets.
For those harboring doubts, OPEC discussions, which ended here Saturday, were a timely reminder that the giant petroleum producer has no intention of letting its influence over world oil affairs wane.
Riyadh and its Gulf allies Kuwait and the United Arab Emirates wasted little time in steamrolling fellow Organization of the Petroleum Exporting Countries oil exporters into the cartel's first major increase in output limits in four years.
Saudi Arabia's aim was to secure an OPEC mandate permitting it higher output while restoring some credibility to the group's tattered system of oil production quotas for which it remains almost the sole guardian.
It got exactly what it wanted. Ministers quickly signed off on a pact revitalizing fossilized quotas and raising supply limits by 10 percent to a collective 27.5 million barrels per day -- in line with current actual OPEC supplies.
"This isn't just about more oil on the market," said Mohammad Abduljabbar of Washington-based Petroleum Finance Company. "This was a political statement on Saudi Arabia's part."
"We regard this as a wholesale policy shift in the thinking and behavior of OPEC after four years of standing by and doing nothing," a Saudi official said. "This is an excellent agreement because people doubted OPEC could act and thought it was no longer influential in the market."
Natwest Securities in London said: "The Saudi role is more dominant than ever and their policy of maintaining market share and price stability remains intact."
Even Saudi Arabia cannot resurrect the clout OPEC held two decades ago when ministers dictated the price of world oil from their hotel suites.
Now the free market writes the rulebook.
But when OPEC next meets in June, traders at exchanges in London and New York, which arbitrate the price of energy, should probably sit up and take notice.
Saudi Arabia has indicated it expects the new pact to provide the base for further increases in OPEC output limits to match changing world oil demand.
"OPEC is restoring its role regarding supply and demand its oil," a senior Gulf official said. "One of the major roles for OPEC is to adjust output to demand."
Endemic quota cheating means OPEC output next year will quickly rise to 28.5 million bpd, a full million in excess of the official ceiling. Riyadh has calculated that restoring some credibility to OPEC's tarnished reputation is worth the risk of perhaps hurting world oil prices if northern winter oil demand disappoints.
It sees room for OPEC to take half of the expected increase of two million bpd in world oil demand next year as global oil consumption accelerates to 76 million barrels a day.
"In the short run, Saudi Arabia is gambling that prices will not crash," Petroleum Finance Company said.
Oil analysts and traders said oil markets initially will concentrate on the impact on supply.
"I think the reaction will be thumbs down," said Nauman Barakat of Prudential Securities in New York of his expectations. "I don't think the fact OPEC quotas are now closer to actual production will impress the markets -- traders won't buy that.
"The deal puts a lot of onus and responsibility in the market on Saudi Arabia," said Bob Finch, head trader at Vitol SA.
Nevertheless, Saudi itself expects oil markets will easily soak up extra cartel oil allowing prices for North Sea Brent crude next year to average a robust $20 a barrel. Brent is now just under $19.
Saudi Arabia's extra allocation under its new 8.76 million bpd quota will form the backbone of an extra 500,000 to 700,000 bpd of oil on world markets, analysts estimate.
"We will produce according to our quota and the market will take it easily," a Gulf source familiar with Saudi thinking said.
With no further plans in the kingdom to raise output capacity the world oil market's cushion of spare supply shrinks significantly -- cut by a third to just two million bpd.
Saudi Arabia will maintain 1.5 million bpd mothballed with a further half million between Kuwait and the UAE.
"That's going to mean markets are going to be even more sensitive if there's any sign of a major supply disruption in the Middle East," said an analyst at the meeting in Jakarta.
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