MARKET ACIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, MARCH 10, 1998 (4)
OIL & GAS
WORLD
Oil Price Steadies But Respite Will Be Brief
Weak global oil prices paused for breath on Tuesday but brimming storage tanks and a battle for market share between two of the world's largest producers will make the respite brief, traders said.
April futures for Brent blend, the international benchmark grade, touched a nine-year low of $12.85 a barrel on Monday in the wake of a defiant statement by Saudi Arabia that it would not cut crude output unilaterally.
Oil prices have fallen more than 40 percent from last year's average of around $19.30, dragged down by a 10 percent increase in OPEC's output ceiling and a collapse in demand wrought by Asia's financial crisis and a mild northern hemisphere winter.
On Tuesday Brent closed unchanged at $12.98 a barrel, having failed to sustain a gentle rally which took the market to the day's high of $13.21.
But a deadlocked dispute over production levels between Organisation of the Petroluem Exporting Countries kingpin Saudi Arabia and the cartel's biggest quota buster Venezuela dimmed the chances of prices holding.
"The medium term downtrend is clearly in place and the indicators still suggest further downside, with the 1988 level at $11.70 now a potential target," said Leslie Nicholas of brokers GNI in his daily report.
Venezuela last month pumped 30 percent in excess of its agreed quota of 2.6 million barrels per day and has rejected calls by Saudi Arabia and others for production restraint.
The kingdom, angered by its fellow OPEC founder member, on Sunday said it would not act alone to support oil prices and was prepared for a lengthy fight to retain its market share.
"We do not want to reduce production to find out that other countries, especially those who do not want to adhere to their quotas, flood the market, take our valuable customers," said Saudi oil minister Ali al-Naimi.
But Venezuela appeared unbowed by the turmoil in world oil markets and ready to plough on with its plan to reach six million barrels of daily capacity in four years.
"We are following a policy of income via volume. With or without OPEC we must put the Venezuelan people first," said Pedro Mantellini, senior advisor to state oil company Petroleos de Venezuela.
Washington-based consultants The Petroleum Finance Company described OPEC as paralysed by the battle of wills between the two producers and said prices would need to fall further to soften entrenched positions.
"The feeling is that prices must fall below $10 before the pain really starts to hit oil producing economies, but it is difficult to evaluate at this time how much Venezuela can take," said Nicholas.
The West's energy watchdog, the International Energy Agency, also sounded the alarm on Tuesday, pointing to slowing world demand growth and a rising level of oil stocks.
The Paris-based think tank in its monthly oil market report said concerns were growing that storage space for oil in a saturated market was running out.
It said projected supply and demand trends indicated the situation could get worse unless oil exporters followed some simple advice: "Less oil needs to be shipped."
A reassessment of Asia's economic prospects led the IEA to cut projected 1998 oil demand by 200,000 bpd to 75.1 million bpd, growth of 1.6 million bpd for the year.
Further gloom looms later this year when a United Nations plan to more than double the value of its "oil-for-food" deal with Iraq will see several hundred thousand barrels of extra oil inundating markets.
The deal to raise the export ceiling to $5.2 billion every six months from $2 billion will start when an aid distribution plan currently being negotiated in New York is agreed.
"The unresolved issue of how to reintegrate Iraqi oil, which has been largely ignored by OPEC for seven years, now requires urgent attention," the Petroleum Finance Company said.
"Not the least because it has raised its head at the time when market fundamentals have deteriorated to their worst condition in the last several years."
NYMEX
Crude Oil
NYMEX Crude Down Seven Cents To $14.26 In Dull Day
Crude futures at the New York Mercantile Exchange closed slightly down Tuesday in dull trading as prices bobbed and weaved on a narrow range off Monday's close.
Light, sweet crude for April delivery closed seven cents down at $14.26 a barrel.
Refined products closed higher as traders awaited weekly inventory data from the American Petroleum Institute. An earlier Reuter poll showed analysts expecting a moderate build in crude, gasoline and distillates in the API statistics.
April heating oil lost .10 cent at 40.83 a gallon while April gasoline was down .30 cent at 46.25 a gallon.
Short-coverings which lifted the market in early trading gave way to some small profit-taking later in the session, said one floor trader.
"There was not much news and basically the bearish fundamentals have not changed," said a floor trader at E.D. & F. Man International Inc.
"The API statistics might give us a clue as to what's in store and tomorrow may be the tell-tale day," the trader added.
Early trading pushed NYMEX crude to the day's high of $14.52 as a flurry of short-coverings pushed the market up from the day's opening of $14.43. Overnight ACCESS trading, which gave April crude a 14-cent gain at $14.48 a barrel on short-covering gave impetus to the morning session.
No viable support developed, however, triggering the downslide, with the day's low registering at $14.22, still above Monday's low of $14.15.
Brent crude futures at London's International Petroleum Exchange closed unchanged at $12.98 after a modest rally succumbed to bearish fundamentals, traders said.
Most of the developments during the day were bearish.
At the United Nations, a spokesman said talks between the U.N. and Iraq on implementing an increase in the oil-for-food program were expected to end on Thursday.
The talks, which began on Monday, are to work out details that will allow Iraq to raise the amount of oil it can sell from $2.0 billion to $5.256 billion every 180 days in order to meet urgent humanitarian needs of ordinary Iraqis hard-hit by past U.N. sanctions.
Iraq has previously said it can only sell up to $4 billion of oil every six months because of the state of its oil facilities. The U.N. is to dispatch a team this week to find out what needs to be done so the facilities can produce enough to meet the new monetary target.
The U.S. State Department said that King Fahd of Saudi Arabia, who was in hospital after a gall bladder infection, has had surgery.
Earlier, Crown Prine Abdullah told well-wishers that the king was in good health.
Market watchers said they did not see Saudi Arabia's oil policy changing in the event of a transition as those policies "are well in place."
But other experts fear instability after Fahd, who is 76, dies because Prince Abdullah and his immediate potential successors are all over 60 years of age and the kingdom could face the prospect of a new king every two or three years.
Saudi Arabia, OPEC's and the world's largest oil exporter, said in a strongly-worded statement Sunday it would not unilaterally cut its oil output amid low prices arising from a glutted market. It said it was prepared for a lenghty fight to retain its market share.
Saudi Arabia spearheaded in November OPEC's 10 percent increase in production to 27.5 million barrels per day (BPD). But OPEC is currently producing well over 28 million BPD, boosted by quota-busting members, the biggest of which is Venezuela, which has said it would not cut ouput by even a barrel.
The higher output went into effect as Asia went into an economic tailspin, weakening demand for oil in the region. Oil prices have also dropped partly due to a mild winter in the northern hemisphere.
Natural Gas
NYMEX Hub Natural Gas Drifts Lower Late In Sparse Trade
NYMEX Hub natgas futures on Tuesday mimicked yesterday's session, with the large number of market participants currently at GasFair in Houston keeping trade range-bound, industry sources said.
At 1435 EST, April was off 2.4 cents at $2.145 per mmBtu, as some late technical selling led the contract down to rematch the $2.14 low. May was down 2.9 cents at $2.185, while other deferred months slipped to unchanged to about 2.5 cents lower.
"It should be reflective of April prices," one trader said, referring to the market's disregard for the recent three-day cold spell.
In the short-term cash market, forecasts calling for significantly colder weather in the Northeast boosted prices at the New York city-gate to about $2.62-2.70, while Henry Hub was quoted mostly in the low-to-mid $2.20s. The Chicago city-gate market jumped nearly 10 cents to about $2.40, while prices in the Permian Basin stepped up to the high-teens to the low-$2.20s.
But heating demand is expected to gradually wane through this week and into next week, returning northeastern temperatures to near to slightly above-normal levels.
On the technical side, resistance levels were still pegged at $2.185, $2.23, $2.30 and $2.355. Support at $2.14 continued to hold late, with further support seen at $2.12 and $2.105.
NYMEX said 25,198 Hub contracts had traded as of 1420 EST. Open interest for March 9 was up 86 to 192,810.
Estimates for Wednesday's American Gas Association storage report ranged from 20 bcf to 80 bcf, versus a 57 bcf withdrawal a year ago, traders said.
However, more focus was on next week's AGA report, which will reveal how much of an impact this cold weather had on supplies, traders said.
Meanwhile, April KCBT futures remained below yesterday's settlement, trading down 1.5 cents at 1433 EST at $2.065 per mmBtu.
U.S. SPOT GAS
US Spot Natural Gas Gains Amid Numbing Midwest Temps
Below-normal temperatures sweeping across the Midcontinent continued to lift U.S. spot natural gas prices Tuesday, but further near-term gains may be cut short as milder weather was expected to return next week, traders said.
Next-day Henry Hub prices gained about eight cents from Monday to settle at $2.22-2.27. Meanwhile, NYMEX April natgas futures retreated to $2.155 midday from early highs of $2.185.
"Cash is stronger on the cold weather," said one trader, referring to cool air and gusty winds now penetrating the Midwest and creeping over to the Northeast. Demand for gas has chipped away at supply, fueling the bullish tone, he said.
But colder-than-normal temperatures in the eastern half of the U.S. were forecast to return to above normal as soon as next week, perhaps capping gains made over the last two sessions, traders said.
"Cash should look weaker over the next few days as the weather returns to normal," one trader said.
In the western Texas cash market, Permian and San Juan prices were quoted at $2.16-2.22, mostly unchanged from Monday.
Southern California border prices firmed about three cents to $2.43-$2.48.
In the Midcontinent, prices picked up about five cents to $2.19-2.24. On Northern at Demarcation continued to trade at a premium to all other Midcontinent pipes, settling in the upper $2.30s.
Chicago city-gate edged up four cents to $2.38-$2.43.
New York city gate prices jumped about 20 cents to the upper $2.60s on word that cooler weather was making its way eastward. Appalachian gas on Columbia, meanwhile, inched up two cents to $2.28-2.33.
In generation news, Texas Utilities 1,150 megawatt (MW) Comanche Peak 2 nuclear power unit was regaining power Tuesday after tripping off line last weekend due to a loss of its turbine cooling water pumps.
CANADA SPOT GAS
Canada Spot Natural Gas Eases In West Ahead Of Milder Air
Western Canadian spot natural gas prices turned a little softer on Tuesday as milder weather was forecast to arrive tomorrow, marketers said.
Spot gas at the AECO storage hub in Alberta was quoted mostly at C$1.76 per gigajoule (GJ), though some late morning deals were reported done at C$1.74. Prices on average were down about four cents from Monday's levels. Traders said they were expecting more softening again on Wednesday as milder air approached. Temperatures in southern Alberta were forecast to reach a high of +5 degrees Celsius on Wednesday and +7 on Thursday. Cooler weather is expected to return this weekend.
Meanwhile, April AECO was talked one cent softer at C$1.70, while winter business slipped to C$2.35-2.37 from C$2.40-2.44, and one-year eased to about C$2.18-2.20 from C$2.20-2.23 per GJ.
Maintenance continued on TransCanada PipeLines mainline, restricting about 156 million cubic feet a day of interruptible gas. The work is scheduled to last through March 27, the company said.
In the export market, prices at Sumas, Wash., also drifted about five cents lower to US$1.60-1.62 per million British thermal units (mmBtu).
Conversely in the East, colder weather pushed gas prices at Niagara about eight cents higher to US$2.38-2.44 per mmBtu.
MARKET ACTIVITY & COMMENTARY
The roughnecks in Canada's oilpatch were left in the mud yesterday as nearly everyone else climbed aboard the Toronto Stock Express for another thrilling ride into uncharted territory. Crude oil prices continued to dribble under the $15 level, keeping the market euphoria from reaching the oil and gas group.
The Toronto Stock Exchange 300 Composite Index gained 0.9% or 67.93 to 7295.99. In contrast, the Oil & Gas Composite Index fell 1.1% or 67.54 to 6363.62. Among sub-components. the Integrated Oils fell 0.7% or 61.55 to 8849.58. The Oil & Gas Producers dropped 1.4% or 76.44 to 5573.59. The Oil & Gas Service's was basically unchanged, losing 0.0% or down just 0.90 to 2752.53.
I have noticed the press has been reporting heavy volume in trading out of oil and gas shares. No doubt, there is a good extent of selling pressure. However, let me also point out that the overall volume in trading of oil and gas shares, since oil has fallen under $15.00, is considerably less than average volume over the past 10 - 30 - 90 day periods. I suspect complete panic has not taken place due to two reasons. The overall market environment remains strong and shares are already at depressed levels for many companies. But I also see the low - going lower. In other words, shares prices have yet to catch up with the declining rate that oil has fallen. I think that will happen, but on a gradual basis. Companies such as Northrock Resources and Tri Link Resources will suffer the most due to crude oil generating the majority of their revenue. Both these companies were among the top $$$ losers yesterday. Also among the top $$$ losers yesterday were Talisman Energy, Amber Energy and Imperial Oil - all weighted towards crude oil.
To a lesser degree, natural gas producers and service firms should also suffer due to the influence of lower oil pricing. It's simply the image for the entire energy sector that will be the culprit. I have been conserving capital for reinvestment into the oil and gas sector and my original planned timing was to do it 30 to 45 days from now. That plan has been cancelled and I would guess, shelved for another 3 to 6 month period. This may be one of those infrequent years where investment in the third or fourth quarter will be better suited for superior near term appreciation.
BUY - HOLD - SELL
Gordon Capital
Beau Canada Exploration (BAU-T: $2.40) BUY
CFPS for 1997 was $0.64 vs. $0.50 in 1996. Finding and development costs on a proven plus half probable basis increased slightly to $6.66/boe (up from $5.87/boe in 1996) with reserve additions replacing production by 2.5X. Liquids production was up 26% year-over-year to 10,454 bbls/d and gas production was up 16% to 71 mmcf/d. We have reduced our 1998 liquids production forecast to 9,000 bbls/d (a reduction of 1,000 bbls/d) to reflect the shutting in ofheavy oil production as a result of lower oil prices. Our 1998 gas production forecast remains 100 mmcf/d. Our fully diluted cash flow forecast is $0.60 in 1998 and $0.75 in 1999. Our 12-month stock price target remains $3.25. BUY
Maxx Petroleum Ltd. (MXP-T: $1.72) BUY
CFPS for 1997 was $0.52 vs. $0.57 - in line with expectations. Proven and probable reserves additions in 1997 replaced production 4X at a finding and development cost of $6.64/boe. The 1998 capital budget of $33 million is expected to be funded through internally generated cash flow. This years exploration program will attempt to diversify Maxx's production and reserve base by focusing on adding gas, primarily in west central Alberta. We have lowered our 1998 liquids production forecast from 8,200 bbls/d to 7,200 bbls/d and increased our gas production forecast from 12 mmcf/d to 17 mmcf/d. Consequently, our fully diluted CFPS forecasts is now $0.50 in 1998 (down $0.10) and $0.65 in 1999 (down $0.05). Maxx production remains heavily weighted to oil, as such, a US$1.00 change WTI translates in to a C$0.06 change in 1998 CFPS. Our current CFPS forecasts are based on WTI of US$18.50 in 1998 and US$19.00 in 1999. We maintain our BUY opinion on Maxx with a 12-month stock price target of $2.25.
Oil Shares Bounce On Upgrades, Price Outlook Rocky
Shares of oil majors wrestled back some of Monday's losses on the back of upgrades for four integrated oil companies from PaineWebber analyst Frank Knuettel.
Knuettel said that upgrades raising Texaco Inc (TX) and Occidental Petroleum Corp (OXY) to "buy" from "attractive" and for USX-Marathon Group (MRO) and Mobil Corp(MOB) to "attractive" from "neutral" reflected a reweighting of the integrated oil group to market weight.
"It was a combination of oil prices and a number of other factors," Knuettel said.
Marathon was the biggest gainer in the group, adding 1-11/16 to 35-13/16, while Mobil added 1-9/16 to 72-9/16, Occidental 11/16 to 26 and Texaco 2-1/4 to 58-1/16.
Knuettel is forecasting an average 1998 oil price of $18.00 per barrel for the world benchmark Brent blend, compared with a current price of around $13.00 per barrel for April delivery and an average of $19.30 in 1997.
Gary Hovis at Argus is also expecting a rebound in oil prices and a recovery in the sector's shares in the longer term.
He sees earnings for the international oil group rising 6.0-6.5 percent this year.
"I do not see stock prices falling that much from here. They have hit the bottom in terms of this mini-recession," he said.
However, other analysts are less sanguine on the oil price outlook, noting that the fundamental supply/demand situation remains sharply out of kilter and that Venezuela, the key OPEC overproducer, remains committed to raising output to maintain income.
Also, the Paris-based International Energy Agency trimmed its forecast of world demand for oil by 200,000 barrels per day, largely as a result of the Asian financial crisis and warm winter weather in Europe and the U.S. that has cut home heating oil demand.
"The medium term downtrend is clearly in place and the indicators still suggest further downside, with the 1988 level at $11.70 now a potential target," said Leslie Nicholas of brokers GNI in his daily report.
END - END
|
