MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 12, 1998 (1)
OIL & GAS
NYMEX
Crude-oil and petroleum-product futures settled lower Monday on the New York Mercantile Exchange, as traders focused less on the conflict between Iraq and the United Nations and more on the continuing underlying bearish factors.
February light sweet crude oil fell $0.16 to settle at $16.47.
Expectations of higher crude output from OPEC members, including Iraq, and lower demand for crude products in Asia because of the currency and stock market crisis there hurt the complex.
Crude had opened lower after a U.N. official said the U.N. wants to at least double the amount of crude Iraq can sell under a limited food-for-oil agreement. Then, crude headed higher when it was reported that Iraqi officials weren't going to let an American arms inspector take part in inspections because the Iraqis feel his inspection team is biased. February crude bounced more than 30 cents after the Iraqi news agency reported that Baghdad wouldn't allow Scott Ritter to be part of any weapons inspections effort in the country.
But U.N. Secretary-General Kofi Annan said U.N. weapons inspections will continue despite Baghdad's warning. Mr. Annan also asked that Baghdad be patient and not make any "precipitous" decisions until the chairman of the U.N. Special Commission on Iraq, Richard Butler, meets with Iraqi leaders beginning Jan. 19.
February heating oil fell $0.49 to settle at $46.21. February unleaded gas fell $0.78 to $52.03.
February natural gas fell $0.044 to settle at $2.002
REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
FIRST QUARTER OIL & GAS FORECAST
Quarterly Update & Market Forecasts For The Canadian Oil & Gas Industry
Accompanying Table Of Prices 207.183.153.23
Canadian Dollar
The Canadian dollar has fallen substantially relative to the U.S. dollar over the past few weeks. Of the several reasons for the drop in value, the interest spread between Canada and the U.S. plays a significant role. Accordingly, the Bank of Canada will likely continue to raise interest rates until a noticeable strengthening occurs. Another reason for the Canadian dollar weakness concerns the current account deficit. In recent months, because of growing consumer confidence, spending on imports has increased at the same time that exports have fallen. Current weak commodity prices have worsened the situation as resources represent approximately 40 percent of all Canadian exports.
Looking ahead, there are a number of factors pointing to a recovery in the value of the Canadian dollar. The Bank of Canada appears set to continue the commitment of protecting the dollar through interest rate increases and buying the dollar. Additionally, Canada's economy is strong, enjoying minimal inflation and the reduction or elimination of deficits. Political uncertainty has also diminished.
Gilbert Laustsen Jung has lowered the exchange rate utilized in the January 1, 1998 price forecast for 1998 to $0.71, increasing the rate thereafter to previously forecast levels by 2001.
World Oil Prices
A combination of events during the last quarter of 1997 has led to a drop in crude oil prices. At the 103rdOPEC Conference in late November, member countries agreed to raise their crude oil production ceiling by just under 10 percent, from 25.033 million barrels per day to 27.5 million barrels per day. Actual OPEC crude oil production is not expected to increase by 10 percent however, due to past chronic quota violation and capacity limits. A minimum production increase of 0.4 million barrels per day is expected from countries which have respected quotas and have excess production capacity. Coinciding with the increased OPEC quotas was the declining tensions between the U.S. and Iraq and Iraq's agreement to renew the UN oil for food deal. With the increase in supply in world markets of approximately 0.5 million barrels per day, crude oil prices have declined. West Texas Intermediate crude oil has fallen from a high of $U.S. 25.23/BBL in January, 1997 to below $U.S. 19.00/BBL during the first half of December, 1997.
Gilbert Laustsen Jung has lowered the near-term WTI crude oil price relative to the October 1, 1997 price forecast with no change to outer years.
Canadian Crude Oil Prices
A record number of wells are expected to be drilled in 1997. The Canadian Association of Oil Well Drilling Contractors (CAODC) expects approximately 16,000 wells to be drilled in 1997 and 16,300 in 1998. Development drilling for oil has carried industry to its new peaks. Oil directed drilling to date has accounted for 70 percent of well completions. Crude oil pipeline capacity constraints are still apparent with continued high apportionment levels on IPL above the 20 percent level. IPL's SEP II, slated to be completed for the second half of 1998, will add incremental pipeline capacity out of Western Canada of 120,000 barrels per day and 170,000 barrels per day on the Lakehead Pipeline between Superior and Chicago. As well, IPL has announced a revised time line for the Terrace expansion project. The revised proposal will add 270,000 barrels per day of export capacity and IPL anticipates the line to be completed by late 1999. An additional 370,000 barrels per day can be added in 2002 if required. The strong U.S. demand for light crude and refined products is expected to continue in the near-term as the U.S. economy experiences healthy growth rates and conventional crude oil production continues to experience declines. While Canadian producers face stiff price competition with offshore imports to the U.S., the netback prices received for light crude by Canadian producers from U.S. refiners should remain near recent levels as long as the U.S. economy remains robust and the Canadian dollar remains weak relative to the U.S. dollar. An area of looming concern for the upstream industry in Western Canada, however, is the IPL Line 9 reversal. Ontario refineries have been interested in obtaining imported crude due to declining North American light crude production. North Sea production is light crude and Sarnia refineries are generally not retrofitted to take heavy crude feedstock. Light crude production from Western Canada will be impacted by possibly losing Sarnia market share and therefore pushing into the highly competitive Chicago market. Initial capacity upon reversal is 140,000 barrels per day with the ability to increase to 260,000 barrels per day by the next year. If approved, the in-service date is 1998. Gilbert Laustsen Jung estimates declining or minimal real growth in the price of light crude oil from this basin due to increased competitive price pressure.
The January 1, 1998 Light, Sweet crude oil price forecast at Edmonton is lower in 1998 relative to the October 1, 1997 forecast although the Canadian dollar weakness has somewhat mitigated the effect of the decline in the near-term U.S. WTI price forecast on Canadian crude oil prices.
The situation of wide differentials for heavy crude has not improved and in fact, continues to worsen. Refiners' ability to process heavy crude oil is lagging far behind supply. Therefore, refineries have numerous choices of heavy crude sources which, in turn, bids down feedstock prices. Additionally, recent quality concerns regarding lower quality shipped crude, particularly the Bow River blend, has led to refiner discounts and therefore even wider differentials. A decrease in supply will likely be the first result of wide differentials as capital expenditure plans for heavy oil are canceled or postponed based on marginal economics. IPL's announced accelerated expansion of the Terrace project will also help to improve the differentials. IPL's proposal to increase the viscosity limit for 1998 has been approved and the Echo Pipeline, which ships heavy crude from Lindbergh to Hardisty, has evaluated blending options that will eliminate condensate as an additive.
Husky has announced an expansion of their upgrader by approximately 23 percent and IPL plans to build a spur line to the BP Toledo refinery which plans to retrofit for 110,000 barrels of incremental heavy crude by the first quarter of 1999. The Mustang Project, jointly proposed by IPL and Mobil, will extend the capability of IPL shippers to reach the Patoka/Wood River heavy crude refining hub with very competitive tolls.
Differentials for heavy crude oil have been increased in the near-term relative to the October 1, 1997 price forecast to reflect the current situation but remain unchanged in later years.
US Gulf Coast Gas Price
Reduced winter demand for natural gas due to a mild winter to date has caused U.S. natural gas prices to fall, particularly during December, 1997. The Henry Hub Nymex contact traded at $U.S. 2.77/MMBTU at the beginning of December, 1997 and has dropped to levels below $U.S. 2.40/MMBTU by mid-month for next month deliveries. Storage levels for all areas in the U.S. are above last year's levels indicating low daily withdrawals. The longer the weather remains milder than normal, the less likely price volatility or price strength will occur, even with colder weather in 1998. Perhaps the only near-term positive for natural gas prices is the current coal shortage, with six major utilities in Texas forced to use natural gas and other fuels to generate electricity. This factor does not balance out the lack of any significant weather related demand. Demand for natural gas in the medium term is forecast to remain strong based on robust economic growth and increased use of natural gas for electricity generation.
Gilbert Laustsen Jung's October 1, 1997 price forecast of $U.S. 2.20/MMBTU for 1998 is considered reasonable and therefore no change has been made to the January 1, 1998 Henry Hub gas price forecast.
Canadian Gas Prices
Natural gas in the Western Canada Sedimentary Basin has experienced recent downward price pressure for two main reasons. Firstly, the weather in Western Canada has been well above normal for November and December, 1997. With lack of weather related demand, storage withdrawals during November to mid-December, 1997 have been well below levels required to empty storage by the end of the withdrawal season. The longer the warm weather and low storage withdrawal rates continue, the less likely price strength will occur even with the arrival of cold weather in 1998. The AECO-C spot price has declined from a high in late January 1997 of over $CDN 4.00/MMBTU to $CDN 1.44/MMBTU in mid-December, 1997. The second contribution to the current price weakness is the record level of drilling during 1997. Gas well completions for the first eleven months of 1997 are recorded at 3647 for Alberta, which is very close to the record 3738 gas wells completed during the first eleven months of 1994. Price weakness is also being experienced at Sumas, with the spot price declining from a high of just under $U.S. 4.00/MMBTU in January, 1997 to approximately $U.S. 1.40/MMBTU in November, 1997. Despite the current weakness in natural gas prices over North America, the difference between Alberta and British Columbia prices and U.S. Gulf Coast prices continues to be wide. The various pipeline proposals will alleviate the export capacity constraint issue with a possible 1.2 BCF/D of incremental pipeline capacity coming on in November 1998.
Gilbert Laustsen Jung has significantly decreased Alberta and British Columbia spot prices for 1998 relative to the October 1, 1997 forecast due to current demand and storage levels. Future prices remain unchanged assuming additional export pipeline capacity will narrow basis differentials and improve netback prices in this basin.
Natural Gas Liquids And Sulphur
Despite a drop in Canadian propane inventories in November, 1997, stocks in both Western and Eastern Canada are higher this year compared to the same time period last year. Butane stocks overall are also up this year, although by a smaller amount. Spot prices for propane at Edmonton have fallen from record highs seen last winter to more moderate levels of approximately $CDN 17.50/bbl. Current prices for propane and butane, however, are still above prices recorded for years previous to 1996/1997. Gilbert Laustsen Jung has increased the 1998 propane and butane price forecast at Edmonton relative to the October 1, 1997 forecast to reflect current price levels.
The sulphur price at Vancouver has remained fairly constant over 1997 despite strong demand and a high level of movement. Previously forecast rising demand from offshore buyers in 1998 may be tempered by the Asian monetary crisis. Additionally, increasing availability of sulphur from the Middle East and Japan will put additional pressure on prices negotiated for the first half of 1998. Another indicator of weakening prices is the increased amount of North American sulphur entering India which historically undermines Middle East prices and starts a downward price spiral, affecting both international prices and Vancouver prices.
Gilbert Laustsen Jung has lowered the FOB Vancouver sulphur price forecast in 1998 relative to the October 1, 1997 forecast with remaining years unchanged.
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