MARKET ACIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, MARCH 11, 1998 (4)
FEATURE STORY
Mideast To Be Main U.S. Oil Supplier By 2010-Study
Middle East crude sales will grow to account for about half of North America's imports by 2010 from 20 percent currently, according to a study by the Centre for Global Energy Studies published on Wednesday.
The London-based think tank made the prediction in a report on the strategic importance to the United States of Middle Eastern oil.
''On the face of it, the current clash between the United States and Iraq is about weapons of mass destruction,'' it said, referring to a long-running dispute between the two countries over U.N. weapons inspections.
''However, as was the case with the 1990 Kuwaiti crisis, the deeper issues concern oil and how to secure 'unfettered access' to Middle Eastern supplies now and in the future.''
A summary of the report said that the CGES expected world oil demand to grow by 18 million barrels per day between 1996 and 2010, with incremental net oil imports/exports accounting for 85 percent of this growth, or 15.3 million bpd.
At 11.5 million bpd, the Middle East's contribution to the growth in world oil trade would be 75 percent of the total.
Although Latin America would remain a major oil-trading partner for North America, the Middle East would become North America's major supplier of oil by a long way by 2010, accounting for about half the region's imports.
''The thought of an extra 234 very large crude carriers plying the Cape route between the Gulf and the United States in 12 years time to help satisfy the United States' voracious appetite for oil explains rather succinctly the U.S. strategic interest in the Middle East,'' a summary of the study said.
At present only 20 percent of North America's oil imports come from the Middle East as against 45 percent from Latin America.
The International Energy Agency sees total world oil demand rising from 71.7 million barrels per day (bpd) in 1996 to 75.1 million bpd in 1998.
COMMENTARY
RBC
Crude Oil
Unfortunately for most, the fundamental picture still looks bleak. With U.N. inspectors now back at work, Saudi Arabia (the largest member of OPEC) standing firm on its production output and indications that the OPEC cartel may be in jeopardy because of the inability to control output, the market appears vulnerable to further downside. Additionally, recent figures would suggest that global demand is not keeping up with pace of supply. Support remains at the 1993/1994 low of $13.90/13.95.
The technical picture continues to show no signs of a short/medium term rally. Stay short until further notice.
Natural Gas
NYMEX gas prices continue to trade in a tight range but are still vulnerable to a fall towards $2.00. There have been no new fundamental issues of note. The technical picture remains neutral with a flag formation forming suggesting a potential breakout within two weeks. The AECO market remains quiet. Product: BTU Swap - a producer can swap natural gas exposure for oil exposure (in the belief that over the predetermined period crude prices will rally by more than gas). For example, for the period Nov '98-Oct '99, producer sells 10,000 MMBtu of gas and receives floating NYMEX less x then enters into a swap with RBC whereby he/she pays RBC the three day NYMEX average and in return receives monthly WTI divided by 7.6. (this is at historic lows). Settlement occurs each month. This trade makes sense if you believe the average oil price will rally by more than the gas price as indicated by the respective forward curves.
OIL & GAS MARKETS
World Crude
Oil Prices Slip As Early Confidence Fades
World oil prices were under pressure again on Wednesday despite early help from supportive U.S. industry stock figures.
Benchmark Brent blend crude for April last traded at $12.97 a barrel, still above a nine-year low of $12.85 touched on Monday, but well short of the intra-day high of $13.27.
Early gains were built on bullish weekly data from the American Petroleum Institute that showed U.S. stocks of crude and refined products fell against expectations of increases.
But the effect of the figures wore off as the market day drew to a close, with traders complaining of a lack of confidence.
Brokers also drew little hope for a market awash with crude from next week's long-scheduled meeting of a small group of Organisation of the Petroleum Exporting Countries ministers due to review supply and demand.
A decision last year by OPEC to raise its output ceiling by 10 percent for the first half of 1998 has contributed to a slide of $8 a barrel in Brent's price since October.
The meeting of OPEC's market monitoring committee in Vienna on Monday will try to recommend ways that the 11-country organisation can shore up prices.
But the committee has no power to adjust the group's system of production quotas.
''Unless they (OPEC) do something drastic you'll see the market come off,'' said one broker on London's International Petroleum Exchange.
''If they leave things unchanged there will be more pressure on the price.''
Market sentiment drew brief support from a comment by Venezuelan Energy and Mines Minister Erwin Arrieta that the meeting could lead to a full extraordinary meeting of the cartel to discuss the price crash.
But without agreement from OPEC kingpin Saudi Arabia there is no prospect of such a meeting.
OPEC has watched helpless over the past five months as prices have fallen more than 40 percent from last year's average of around $19.30.
Apart from the OPEC increase, the market has been hit by a collapse in demand wrought by Asia's financial crisis and a mild northern hemisphere winter.
A deadlocked dispute over production levels between Saudi Arabia and the cartel's biggest quota buster Venezuela dimmed the chances of prices holding.
Venezuela last month pumped 30 percent above its agreed quota of 2.6 million barrels per day and has rejected calls by Saudi Arabia and others for restraint.
The kingdom, angered by its fellow OPEC founder member, on Sunday said it would not act alone to support oil prices and signalled it was prepared for a long struggle to retain its market share.
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.
Further pain is in prospect later in 1998 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 being negotiated in New York is agreed.
NYMEX Crude
NYMEX Crude Falls After Rising On Stock Draws
Crude futures at the New York Mercantile Exchange fell, with sellers coming in late in the session, wiping out the day's early gains propelled by bullish inventory data.
NYMEX April crude closed at $14.18, down eight cents from Tuesday's close. Early trade had lifted front-month crude to the day's high of $14.56, a level from which it quickly backed down, hitting a low of $14.15, which was also Monday's low.
Heating oil for prompt delivery lost .56 cent to close at 40.27 cents a gallon. Unleaded gasoline for April delivery was up .60 cent to 46.85 a gallon.
Early trading got a lift from American Petroleum Institute's inventory data for the week ended March 6, released late on Tuesday, which showed draws in crude, gasoline and distillates and a big rise in refinery runs. The data differed with many analysts' expectations.
The Department of Energy released its own statistics Wednesday morning, also showing stock draws and an increase in refinery utilization.
''We are seeing a repeat of the previous days' trading pattern,'' in which market-moving news or technicals lift the market in the morning, but gives way in the afternoon when no solid support takes place, she said.
''Those who have been reluctant to sell a month ago when it appeared the Iraq situation could not be resolved are now saying it's safe to sell,'' she said.
U.N. Secretary Kofi Annan, who struck a deal with Iraq on February 23 that opens that country's presidential compounds to U.N. weapons inspectors, was at the White House Wednesday.
Annan talked with President Bill Clinton about the deal, which headed off a U.S.-led military strike against Baghdad for refusing to give U.N. weapons inspectors unimpeded access to suspected weapons sites. Such a strike could conceivably unsettle the oil supply situation in the area, according to market watchers.
With Annan seated at his side, Clinton told reporters that the U.S. would consult U.N. allies before taking any unilateral military action, but insisted there was sufficient authority under existing U.N. resolutions to strike if the inspections process broke down.
Before Annan clinched the deal with Iraq, the U.N. approved an increase in Iraq's ''oil-for-food'' program. Iraq could export as much as $5.256 billion of oil over six months, up from the currently allowed $2 billion, with proceeds going to humanitarian needs of Iraqi citizens.
Market watchers consider the increase bearish, but await results of a survey by U.N. teams to be sent this week to Iraq to see what can be done to improve Iraq's oil infrastructure so it can produce enough to meet the higher monetary target.
With the global oversupply situation unresolved, some analysts see crude future prices going further down.
Jim Ritterbusch, a trader at Sweeney Oil in Chicago, said he sees nearby crude dropping ''to below $14.00'' a barrel.
He said he does not see the Organization of Petroleum Exporting Countries moving to do anything to lift prices at this point, even with Venezuela saying an emergency meeting was possible after a production monitoring committee meeting in Vienna next week.
''I don't think Venezuela's (latest) statement is a big deal,'' he said. ''There must be at least some plan, a cohesion among producers, which sadly you don't have at this point,'' he said.
''If you cannot do it within a formal organization, you certainly can't do it across the world,'' he said.
NYMEX Natural Gas
NYMEX Natural Gas Ends Slightly Higher In Light Trade
NYMEX Hub natgas futures settled a little higher Wednesday, fueled early by firmer cash prices but stalled late by lethargic trade, industry sources said.
April finished on a quiet note at $2.172 per mmBtu, up 3.5 cents. May ended 2.7 cents higher at $2.206, while other deferred months were flat to 2.4 cents higher.
A slightly lower-than-expected AGA withdrawal figure of 54 bcf was seen as mostly bearish in the marketplace.
''It's pretty bearish. They're continuing to build, and it shows they'll have more gas in storage this summer than last year,'' one Texas-based trader said.
But April remained fairly steady on ACCESS, swaying between $2.16 and $2.175 at 1420 EST.
The AGA report indicated stocks as of March 6 were at 39 percent of capacity and 316 bcf ahead of a year-ago. In the East, stocks were down 45 bcf to 39 percent full, while producing region stocks tacked on one bcf, and the West eased 10 bcf.
In Wednesday's cash market, Henry Hub was quoted at $2.22-2.27, with the lower-priced deals surfacing late. New York city-gate was talked mostly in the mid-$2.80s, while prices in south Texas hovered in the low-$2.20s.
Most traders said they were expecting the continuing cold weather to support cash prices again on Thursday. Temperatures in the Chicago area are expected to moderate slightly to about 10-15 degrees below normal Thursday and to two to six degrees below normal Friday and Saturday. Colder air is forecast to return by Sunday.
Forecasts for Tuesday through Saturday were calling for below-normal temperatures across most of the region west of the Mississippi River, though above-normal temperatures are expected to cover the Northeast and the Great Lakes region. Seasonal weather is forecast for the remainder of the U.S.
Support and resistance failed to budge from On the technical side, April failed to retest support at $2.12 or resistance at $2.185 this afternoon after a marginal upswing this morning. Further resistance was seen at $2.23, $2.30 and $2.355, while support was pegged at $2.105 and $2.06.
According to a Reuters poll, most traders are expecting a withdrawal of 60-70 bcf in today's American Gas Association storage report. This compares with a 57 bcf withdrawal a year ago and a 47 bcf decline in last week's report.
NYMEX said an estimated 31,462 Hub contracts traded, off from Tuesday's revised tally of 34,616. The 12-month strip rose 1.8 cents to $2.354.
Meanwhile, April KCBT futures ended up 3.3 cents at $2.085 per mmBtu.
Separately, KN Energy said a line break this morning on its 12-inch gas line northwest of Denver, Colo., did not affect mainline supplies. The line, which serves only two industrial customers, including the Coors brewery in Golden, ruptured at 0815 CST and resulted in no explosion or injuries.
Canada Spot Natural Gas
Canada Spot Natural Gas Lower On Warmer Weather
Most Canadian spot natural gas prices eased on Wednesday as forecasts for warmer temperatures proved accurate amid ample supply, traders said.
Spot gas at the AECO storage hub in Alberta was discussed at C$1.70/1.725 per gigajoule, down about four cents from Tuesday.
The lower values had been expected as a result of a warm Chinook wind that blew into southern Alberta on Wednesday as well as higher field receipts on the NOVA intra-Alberta pipeline system, a Calgary-based trader said.
Above-freezing weather was expected to continue in the region until the weekend, when high temperatures were forecast at minus -2 to -5 Celsius and low temperatures were forecast at about -11 Celsius, Environment Canada said.
At the borders, gas at the Huntingdon-Sumas border point in the west was discussed as high as US$1.64 per million British thermal units early, but retreated to about US$1.55, down about four cents from Tuesday.
Traders said a combination of warm weather in the Pacific Northwest and tight transport capacity on the Northwest Pipeline had pressured prices.
Gas at Dawn and Niagara in eastern Canada was quoted anywhere between US$2.39 and US$2.44 per mmBtu, about even on average from Tuesday.
U.S. Spot Natural Gas
U.S. Spot Natural Gas Inches Higher But Sellers Emerge
U.S. spot natural gas prices posted marginal gains Wednesday, but momentum diminished as some industry players took profits from the past two sessions of robust buying on cooler weather, traders said.
''There was a lot of excitement in the morning, but we softened up at the end of the day as buyers realized they had enough supply,'' one trader said.
He said activity was thin amid a shortage of market players, most of whom were attending a GasFair conference in Houston. Volume was expected to return to normal Thursday as the industry conference concludes, he said.
Next-day Henry Hub prices held steady Wednesday at $2.22-2.27. Meanwhile, NYMEX April natgas futures swayed at the $2.16 level from early highs of $2.185.
Colder-than-normal temperatures in most of the U.S. continued to support demand, but further gains were stymied as normal weather was forecast to return to the eastern half of the country next week, traders said.
In the western Texas cash market, Permian and San Juan prices picked up three cents to $2.19-2.24. Southern California border prices retreated to $2.38-$2.43 on Wednesday, off five cents from yesterday's close.
In the Midcontinent, prices were flat at $2.19-2.24, while Northern at Demarcation settled mostly unchanged in the mid-$2.30s.
Chicago city-gate hovered in a range of $2.30-2.38, with most trades pegged at $2.36.
New York city gate prices continued to firm, jumping about 15 cents to the mid $2.80s, while Appalachian gas on Columbia gained five cents to $2.33-2.38.
In generation news, Texas Utilities' 1,150 megawatt (MW) Comanche Peak 2 nuclear power unit recovered full power Wednesday after tripping off line last weekend due to a loss of its turbine cooling water pumps.
Traders said this week's natural gas storage report should have little impact on prices. U.S. natural gas storage levels were expected to fall by 60 to 70 billion cubic feet (bcf) when weekly American Gas Association (AGA) data are released later today, industry sources said this week.
In the last report, overall storage fell 47 bcf, just below Reuters poll estimates of 50-60 bcf. Stocks rose to 313 bcf, or 31.7 percent, above a year ago.
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