MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WED., JANUARY 7, 1998 (2)
OIL AND GAS
U.S. Spot Natural Gas Prices Drift Lower Amid Forecast
U.S. spot natural gas prices drifted lower Wednesday amid revised weather forecasts, but demand in the West prevented prices from falling further, industry sources said.
Revised forecasts show more moderate weather into this weekend, with cooler than-normal weather forecast for the Midwest and southern plains but continued above-normal temperatures seen in the East through early next week, according to Weather Services Corp.
Swing gas at Henry Hub was quoted mostly at $2.12, off an average of three cents from Tuesday's levels.
In the Midcontinent, prices were also a few cents lower around $2.09-2.10, while gas prices at the Chicago city gate slid to about $2.17-2.18.
Conversely in west Texas, Permian Basin gas was quoted up one cent at $2.07-2.08 as West Coast buyers still clutched onto the market. Southern California border prices were similarly firmer in the low-to-mid $2.30s.
Traders blamed the sustained western demand on forecasts for colder weather later this week in the Southwest and limited supplies from western Canada due to below freezing temperatures.
Baseload demand was also on the rise, traders said.
In generation news, the 750 megawatt (MW) unit 4 at the Four Corners coal plant in New Mexico was shut Tuesday night for about a week of maintenance.
Also in New Mexico, the 350 MW unit 2 at the San Juan coal plant, which tripped off line early Tuesday because of a tube leak, was expected to be back on line by late Thursday.
In the Northeast, where temperatures were expected to average 25-30 degrees F above normal into Thursday and still about 16-20 degrees above normal Friday, New York city gate prices continued to soften into the high-$2.40s.
Cooler weather is forecast for the Northeast this weekend, but temperatures are still expected to hover above normal.
Separately, early withdrawal estimates for today's American Gas Association storage report were mostly at 105-115 bcf, compared with a 15 bcf draw a year ago.
NYMEX
Oil prices closed lower Wednesday as traders ignored a decline in U.S. crude oil stocks and continued to focus on the outlook for larger world supplies and weaker demand in 1998. At the New York Mercantile Exchange, crude oil for February delivery ended $0.09 lower at $16.82 a barrel, setting a life-of-contract low for the third straight session.
The American Petroleum Institute said crude oil stocks in the United States in the week ended January 2 fell 7.7 million barrels from a week earlier.
But traders said the drop was simply a temporary year-end inventory adjustment for tax purposes.
"The market is carrying a growing burden of concerns about supply and demand, and the API data and the fact that Iraq may be able to sell more oil soon after being able to restart sales this week just added to it," said William Brown, head of New York petroleum consulting firm W.H. Brown & Co.
The API said gasoline stocks grew 4.5 million barrels and production rose to a feverish 8.4 million barrels per day from an already hefty 8.2 million barrels, signalling that more week-over-week supply increases are possible in the near term.
Stocks of petroleum distillates, which consist of heating oil and diesel, rose six million barrels. Strong distillate output of 3.5 million barrels a day outpaced heating demand for the winter that remains anemic, traders said.
February gasoline ended 0.41 cent a gallon lower at 51.94 cents and February heating oil 0.43 cent at 47.33 cents a gallon, with both setting fresh life-of-contract lows.
Crude prices hit 2-1/2 year lows earlier this week. An announcement by OPEC oil exporters in late November that they would raise production targets by 10 percent has keyed the slide, along with doubts about Asian demand due to financial crises there and expectations of more Iraqi oil sales.
The United Nations Security Council sanctions committee is expected to approve on Thursday a pricing formula for January Iraqi sales under the U.N.-monitored oil-for-food exchange.
Under the deal, the U.N. eased sanctions against Iraq and allowed Iraq to export $2 billion worth of oil every six months on a renewable basis in exchange for humanitarian aid.
Natural gas futures prices retreated Wednesday on the New York Mercantile Exchange amid forecasts for unseasonably warm weather in major heating regions during the peak consumption period.
February natural gas fell $0.037 to settle at $2.130
Natural gas futures have been in a virtual freefall for months as supplies in storage build sharply over last year's levels amid a lack of demand. Temperatures in the Northeast and the Midwest, the two largest regions where homes are heated by natural gas were well above normal in the fall and so far this winter. Cold temperatures last week were expected to cause stock levels to decline, but not enough to boost bearish sentiment.
The National Weather Service predicted after trading had ended that temperatures will remain at least 4 degrees above normal across the eastern half of the continent over the next 10 days -- a period when natural gas demand typically is at its highest.
Market participants were betting the American Gas Association, an industry group, would report late Wednesday yet another year-over-year rise in inventories in storage. Inventories currently stand at 3.129 billion cubic feet, or 3.4 percent, higher than this time last year, according to association figures released after the end of trading. That means that even a late cold spell is unlikely to tax supplies before the end of the winter heating season, analysts said.
REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
FEATURE STORY
World Oil Prices Hit Fresh Lows As Supply Rises Too Fast
London - Associated Press
The price of oil has plunged to its lowest level in more than two years, and analysts say there's little chance for a quick rebound.
Crude oil prices could fall further - a good deal for consumers, but bad news for producers - unless demand picks up or a panicky OPEC cuts back its recently increased output, experts said Wednesday.
"It's all downhill," said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. "The alarm bells must be ringing."
Analysts had predicted prices would weaken in the spring, but the recent drop in prices for the world's most vital commodity came much more quickly and with more severity than most had expected.
Oil futures for next-month delivery settled at $16.82 a barrel Wednesday in New York - a level last seen in 1995, a year when the spot futures price bottomed out at $16.60 in July.
The Organization of Petroleum Exporting Countries, meanwhile, said it was getting just $14.69 US a barrel on average. That's more than $6 below the group's $21 US target, the lowest since it sold oil for $14.65 a barrel on April 20, 1994.
The average OPEC price is always substantially lower than the New York futures price, because the New York Mercantile Exchange contracts represent a premium low-sulphur grade of oil that is easier to refine into fuels.
The recent diving market may not mean big windfalls for Western motorists, because the price of gasoline in many countries can be influenced more by taxes than by spot movements in petroleum markets. In Canada, however, the drop in world crude prices and softer demand for fuel has helped push gasoline prices lower in recent weeks.
Analysts say that if world oil prices continue to stay low, that could boost the economies of oil-dependent countries, while hurting those that sell oil.
Analysts cite several reasons for the recent drop in crude prices:
- The Asian economic crisis. Most recent growth in world oil demand has come from Asia. Drollas predicts the financial troubles there could cut the projected growth in Asian demand in half this year, from 800,000 barrels a day to 400,000 barrels a day.
- Iraq's resumption of crude exports. Iraq can now sell limited amounts of crude under an oil-for-food deal with the United Nations. Analysts warn that Iraqi crude sales could make markets tumble because the U.N. program specifies dollar amounts that can be sold, so more oil must be sold to meet the target if prices keep falling. Iraq has been barred since its 1990 invasion of Kuwait from freely exporting its crude.
- A thus-far mild winter in the northeastern United States and parts of Canada, where seasonal demand for home heating oil can prop up markets at this time of year. Analysts say severe winter weather could still rescue the market by depleting glutted oil stockpiles.
- Too much production from the 11-member OPEC cartel. Top producer Saudi Arabia miscalculated that demand would grow robustly and OPEC could safely sell more. Analysts believe the group has added another 300,000 to 400,000 barrels a day to its output since agreeing in November to pump more. Oil prices have dropped by around $2 a barrel since then.
- More oil from non-OPEC sources, such as North Sea producers and the Hibernia development off Canada's East Coast. Norway, Britain and several smaller players failed to bring much new production online last year. They're starting to pump it now, though, in quantities that are small by themselves but big enough to add up in a bearish market.
Off Newfoundland, Hibernia began producing oil for market only a few weeks ago.
"Against a background of relatively weak demand growth, where's the good news for prices?" asked Peter Bogin, an associate director at Cambridge Energy Research Associates in Paris. "There isn't any."
FEATURE STORY
Industry's Not Alarmed
Sun Herald - Mississippi
The expectation of Iraqi oil exports combined with recent warm weather sent crude oil prices to a 27-month low, but industry observers say they are not yet alarmed about the possible effect on the Gulf exploration boom.
U.S. crude oil prices are now below $17 per barrel, about $10 cheaper than a year ago.
Drilling and exploration companies have been relying on strong oil prices to justify deepwater drilling in the Gulf of Mexico, which has fueled a recent economic boom in southeastern Louisiana and helped revitalize the marine construction industry on the Mississippi Gulf Coast.
Pierre DeGruy, a spokesman for Texaco Inc. in New Orleans, said the price drop will not affect the company's 1998 spending plans. A potential price decrease was factored into the budget, he said.
But DeGruy said that if crude prices keep dropping and the cost of rigs, boats and other supplies does not, Texaco might re-evaluate its plans.
Warm weather has blanketed the Northeast and Midwest, sending temperatures to records highs in the past week from Newark, N.J., to Portland, Maine. Heating oil prices dropped 3 percent Monday on reduced demand, while gasoline futures fell 2.6 percent.
"The poor performances of refined petroleum products undermined crude," said John Saucer, vice president and analyst at Salomon Smith Barney in Houston.
Also, there is the expectation that the United Nations will approve Iraq's oil export plan that would add about 1 million barrels of oil a day to world supplies for six months.
Gary Guyton, an analyst at Howard, Weil, Labouisse Friedrichs Inc. in New Orleans, said deepwater drilling is feasible with oil at $15 per barrel.
"I don't think there will be tremendous impact on independents," he said. "It may have a slight psychological impact for a short time."
Large independents such as Burlington Resources, a Houston company that bought The Louisiana Land and Exploration Co. of New Orleans last year, do not react to price dips that quickly, said Al Petrie, the company's director of investor relations.
However, if prices stay in the mid-teens for six months or longer, the company will react, he said.
"We expect prices to have some volatility and oil trading within a wider range doesn't concern us," Petrie said.
Analysts said that while oil prices may not yet have hit their low, they don't expect the price to plunge into the low teens. Saucer said prices might range from $16 to $21 a barrel in the year's first quarter.
FEATURE STORY
Increased Supply, Lower Asian Demand Wreak Havoc On Prices
Recently slumping world crude oil prices, which took another slide to start the week, may be a harbinger for the remainder of the year, analysts say.
NYMEX's average monthly WTI oil price has fallen almost $3 (U.S.) since October 1997, slipping to average $18.35 in December from $20.22 in November and $21.28 the previous month.
Kevin Brown, managing director with ARC Financial Corporation, said his company is still setting an average WTI price of $20 for 1998, although he hinted the company may revisit its numbers and that "something in the $19 range" may be more appropriate.
Brown said one of the main determinates placing downward pressure on world oil prices is the impact of added Saudi Arabia and Iraq supply. The Saudis are due this month to raise output to a new Organization of Petroleum Exporting Countries quota of 8.76 million bbls per day. Meanwhile, Iraq is expected to resume exports under a United Nations oil for food deal, which will allow it to sell $2 billion worth of oil every six months.
Another trigger affecting current oil prices is demand impact in southeast Asia, Brown stated.
"I think it's likely, given that the economic growth rates are coming off quite sharply, there will be an impact on demand," he explained.
For 1997, world crude oil prices slumped compared to the previous banner year. In Canada, the average price for light sweet oil at Edmonton posted by Imperial Oil Limited, Shell Canada Products Limited, Petro-Canada and Suncor Energy Inc. declined to $27.83 (Cdn.) per bbl from $29.37 in 1996.
In December, prices offered by all four refiners reached lows for 1997 and collectively averaged $25.33 per bbl versus $27.79 in November.
World oil prices for 1997 also declined from the previous year's values. Contracts for WTI on NYMEX dipped six per cent to $20.62 (U.S.) per bbl from $22.03 in 1996. Meanwhile, North Sea Brent Blend fell seven per cent to $19.14 (U.S.) per bbl from $20.60 in 1996 and Saudi Arabia Light fell 10% to $17.21 from $19.08.
Brown said another wild card is the trend of the Canadian dollar. The weak currency has provided critically important support for Canadian oil prices over the past few years. ARC calculates each $U.S./Cdn. two-cent move in the exchange rate raises or lowers Canadian oil prices by about 70 cents per bbl.
As for heavy oil producers in Canada, analysts are predicting a tough road ahead in 1998.
"We're calling for an annual differential of just over $7 (Cdn.) per bbl," said Steve Kelly, a consultant with Purvin & Gertz, Inc. "The differential will definitely get wider and that's an outcome of the world supply/demand balance for residual fuel and the components tha contribute to that."
Kelly added the heavy/light split will widen through the end of the decade, which will cause heavy oil producers to scale back production. "As I understand it, some of that is happening now," he said.
Imperial's Bow River blend price in 1997 dropped to average $21.14 per bbl from $25.02 in 1996. For the last month of the year, the blend price dropped to a 1997 low of $16.45 per bbl compared with $19.40 in November.
In 1997, the annual differential -- charted using Imperial's respective fixings -- rose to $6.74 per bbl from $4.37 the previous year.
The split reached a high for 1997 in December at $8.88 per bbl and rose from the previous month's value of $8.40. Both November and December splits represent the widest differentials in the last five years.
On the natural gas side, Sproule Associates Limited is forecasting a Canadian plantgate price of $1.79 (Cdn.) per gigajoule in 1998 and $1.92 in 1999, although these figures were calculated before the relatively warm winter season started.
"If I was setting the price with the knowledge of the warm season, I probably would have been a bit softer than a $1.79 for 1998," said Nora Stewart, senior engineer and associate with Sproule. "Then again, depending on how long the current cold spell lasts, we can recover a great deal."
In 1997, average gas prices recorded at the AECO-C Alberta hub increased to $1.70 (Cdn.) per gigajoule versus $1.39 in 1996, on the strength of buoyant first quarter results. The average price soared to a high of $2.95 in January and fell throughout the year to reach a low of $1.35 in December.
With the current cold snap in Alberta, AECO-C climbed to $1.58 per gigajoule this past Monday.
|
