MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, MARCH 24, 1998 (3)
OIL & GAS
MARKETS
Oil Falls As Dust Settles Around Riyadh Pact
LONDON, March 24 - World oil prices fell back on Tuesday after soaring nearly 14 percent on Monday on a surprise weekend deal clinched by oil producers to cut supply to glutted markets.
The softer tone emerged as oil traders paused for breath after Monday's panic subsided and checked for any signs of weakness in the landmark pact.
World benchmark crude, Brent blend settled down 51 cents at $14.53 a barrel at 2030 GMT, having peaked at $15.63 on Monday.
But this is still around $4.50 a barrel below the average price last year and there is no inflationary threat to oil-dependent Western economies, analysts say.
''There was a lot of short covering yesterday,'' said Bob Finch, head of trading at Vitol SA in London, the world's biggest independent trading and refining company.
But he remained cautious about further gains, pointing out that oil markets remain well supplied and storage tanks around the world are nearly full.
A knee-jerk reaction on Monday lifted prices by more than $2 a barrel after oil cartel OPEC surprised dealers by recruiting other oil producers to help trim up to two million barrels per day (bpd) of supply.
The deal struck in Riyadh between OPEC members Saudi Arabia and Venezuela and non-OPEC producer Mexico pencilled in cuts of 1.725 million bpd shared among OPEC's 11 members and six countries outside the cartel.
By Tuesday morning cuts had been announced for a total of 1.325 million bpd but dealers were still waiting for announcements from Russia, Norway and Indonesia.
Immediate reaction to the Riyadh pact was mixed.
Former Saudi Arabian oil minister Sheikh Zaki Yamani said the deal would not be enough to sustain price gains.
''Psychology is why we have the $2 increase,'' Yamani told Reuters Financial Television.
''But it can't continue against the fundamentals. (The cuts) are too little to eliminate the surplus.''
Yamani said that even after the cuts, OPEC members would still be producing about 27.5 million barrels per day (bpd), while demand for OPEC production in the second quarter was expected to be just 26 million bpd.
Venezuelan oil industry officials returned triumphant to Caracas on Monday, hailing a new era in world oil politics.
Oil analysts at Deutsche Morgan Grenfell still feel comfortable with their forecast of an average $15 a barrel for Brent this year.
The Riyadh pact is ''an effort by OPEC to stabilise prices rather than anything else'' said an analyst at the company. ''We feel that actual cuts (from the pact) will roughly equate to the current market oversupply'' he said.
He agreed with oil traders that brimming oil storage tanks and the prospect of rising Iraqi exports were bearish factors likely to cap any big price rally.
Last month the U.N. Security Council voted to more than double Iraq's ''oil-for-food'' deal to $5.26 billion worth of oil every six months.
Technical problems severely restrict Baghdad's export capacity but Iraqi officials said sales could rise by 700,000 bpd within six months if the United Nations approves urgent repairs to crude facilities.
Iraqi ambassador to the United Nations Nizar Hamdoon said on Tuesday that the rate of oil exports under the ''oil-for-food'' deal should be up to $4 billion per 180 days by the end of April.
Under the oil programme, Iraq is currently exporting at a rate that equates to around $3 billion every 180 days, or 1.3 million barrels per day, though it will have permission to export up to $5.256 billion worth once a new distribution plan for the proceeds is approved by the United Nations.
''Oil will flow (at Iraq's capacity) as soon as the distribution plan is submitted and that is before the end of April...my estimate is sometime in the second half of April,'' Hamdoon told Reuters.
Dealers said the oil market would reveal any weaknesses in the pact as demand weakens in the spring.
Financial turmoil in Asia and warm winter weather in the west has already trimmed demand although many expect further short-term price gains as the dust settles after the pact and OPEC holds an emergency meeting to ratify the cuts.
Some see prices heading back towards $16 but then being pur under pressure in the spring and summer.
''We might even find ourselves back in the high-$14s by June,'' said a trader.
Despite market scepticism some leading analysts saw the pact as having broken the Organisation of the Petroleum Exporting Countries out of its old mould.
Analyst Robert Mabro said it was a victory for oil producers because it showed Saudi Arabia and Venezuela have started to cooperate with each other following a long dispute over OPEC policy.
The agreement is also important because it involves non-OPEC producers, was secured with non-OPEC mediation, releases members of the producer group from the restrictions of OPEC output quotas and was carried out under a pragmatic veil of secrecy, he said.
''At least now a foundation has been laid. Now they can talk to each other. They can pick up the phone. The ice has been broken,'' Mabro said in an interview with Reuters.
NYMEX Crude Retreats, Ends Off 59 Cents A $15.92/bbl
NEW YORK, March 24 - Crude oil futures retreated in moderate trading at the New York Mercantile Exchange Tuesday, pausing after the market skyrocketed Monday on an oil producers' agreement to reduce output.
Many traders kept to the sidelines, with some buying as the market dipped, but not enough to hold any credible support above $16 a barrel.
At the close, NYMEX light, sweet crude contract for May was down 59 cents at $15.92, from Monday's closing of $16.51. The front-month contract went as low as $15.87 in afternoon trading, down from a peak of $16.35 early.
Heating oil for April delivery closed at 44.05 cents a gallon, off 1.11 cent. April gasoline dropped to 51.46 cents a gallon, off 2.50.
On Monday, front-month crude hit a high at $17.50, amid a euphoria that sprang from Sunday's agreement by OPEC and non-OPEC producers to lop off up to 2.0 million barrels per day (BPD) of oil in crude markets.
Analysts quickly raised concerns over whether the oil producers would stick to the agreement. They noted the inability of OPEC in the past to impose discipline on its members and wondered if the commitments now pencilled in would be adhered to in the coming months.
Venezuela, which produced about 30 percent above its officaL quota of 2.6 million BPD in February, agreed to reduce its production by 200,000.
''That's only part of its 700,000 overproduction,'' one trader noted, adding that the OPEC's share in the reduction estimated at about 1.3 million BPD would bring the group closer to its official quota.
The other prime movers in the agreement, Saudi Arabia, and Mexico, a non-OPEC member, agreed to cuts of 300,000 BPD and 100,000 BPD, respectively.
In London, May Brent crude settled at $14.53, 51 cents down from Monday's floor settlement. It held around $14.65 for much of the afternoon, but when NYMEX dropped below $16 a barrel in late trading, it drifted lowedr to record the day's new low at $14.45.
While the rally on OPEC news appeared short-lived, ''we are now more than $3.00 above last Tuesday's (nine-year) low.'' said a NYMEX trader.
''The jury is still out on this market,'' he added, and cautioned ''we may be heading for new lows if oil producers break their word.''
A further dampener in the day's session was news on Iraq's expanded oil for food deal. Iraqi Ambassaodr to the United Nations Nizar Hamdoon told Reuters on Tuesday the rate of oil exports under its U.N. deal should be up to $4 billion per 180 days by the end of April.
Under the oil program, Iraq now exports what is equal to about $3 billion every 180 days or 1.3 million BPD. Last month, the U.N. gave it permission to export up to $5.256 billion worth every six months once a new distribution plan for the proceeds is apppoved by the U.N.
Traders were awaiting release of stock inventory data by the American Petroleum Institute. A Reuter survey showed that analysts were expecting a draw of 1.2 million barrels in crude and a 2.28 million drop in distillates for the week ending March 20.
NYMEX Hub Natural Gas Ends Down Slightly With Soft Cash
NEW YORK, March 24 - NYMEX Hub natgas futures stayed on the defensive most of Tuesday and ended slightly lower, pressured by forecasts for much milder weather later this week that undermined the cash, market sources said.
April slipped 2.1 cents to close at $2.33 per million British thermal units after trading between $2.295 and $2.365. May settled two cents lower at $2.367. Other months ended down one to 1.5 cents.
''We could see a little more pressure tomorrow because of the weather moderating demand, but longer-term, I'm very bullish,'' said one Midwest trader, adding decent buying likely this spring by Texas and southern utilities to protect dwindling coal supplies should prop up shoulder month gas.
But most expected mild weather forecasts this week to keep the complex under pressure ahead of April's expiration Friday.
Forecasts this week still call for a significant warming trend for most of the nation, with late week temperatures in the Midwest expected to climb to as much as 20 degrees F above normal and in the East to 13 degrees above. Gulf Coast and Texas temperatures also are expected to stay mostly above normal for the period.
Withdrawal estimates for Wednesday's weekly AGA storage report range from 45 to 120 bcf. For the same week last year, stocks declined by 54 bcf.
Chart traders agreed April was overbought and due for a profit taking pullback after a 10 percent jump in seven sessions. They pegged interim April support at $2.29-2.30 and then in the $2.26 area, the 50 percent retracement of the recent leg up. Additional buying could surface at $2.20, but major support was still pegged at the recent low and double bottom at $2.105. More buying was expected at $2.06 and $2.00. Resistance remained at $2.43, with better selling likely at the contract high of $2.46.
In the cash Tuesday, Gulf Coast swing quotes slipped three to four cents to the mid-$2.20s. Midcon pipes were about three cents lower in the high-teens. Chicago city gate gas was off a nickel to the low-$2.30s, while New York was more than five cents lower at about $2.50.
The NYMEX 12-month Henry Hub strip slipped 1.3 cents to $2.47. NYMEX said an estimated 58,835 Hub contracts traded, down from Monday's revised tally of 88,459.
NYMEX April natgas futures expire Friday, March 27.
U.S. Spot Gas Prices Turn Softer With Warm Weather
NEW YORK, March 24 - U.S. spot natural gas prices turned softer Tuesday as significantly warmer weather forecasts dampened short-term demand, industry sources said.
Henry Hub cash prices were quoted mostly at $2.27-2.29 per mmBtu, from about $2.32-2.33 on Monday, stretching their discount to April futures to about five cents.
Forecasts called for much above-normal temperatures across the U.S. this week and into early next week, with the Chicago area expected to climb into the low-70s F by week's end and the Northeast seen rising to seven to 13 degrees above normal Friday.
In the Midcontinent, prices were quoted about three cents lower at $2.17-2.20, while Chicago city-gate prices retreated to about $2.32, traders said.
In western Texas, where temperatures were seen rising to about 80 degrees F this week, Permian Basin prices drifted two to three cents lower to $2.07-2.08. San Juan prices slipped a similar amount to about $2.00-2.03.
In the Northeast, New York city-gate prices were talked mostly around $2.50 as warmer weather seeped into the region. Appalachian prices on Columbia also felt pressure from warmer air, easing into the low-$2.40s today.
Meanwhile, withdrawal estimates for Wednesday's American Gas Association storage report have ranged from 45 bcf to 80 bcf.
Canada Natural Gas Prices Hold Amid Limited Stock Draws
NEW YORK, March 24 - Canadian spot natural gas prices in Alberta still clutched onto recent ranges Tuesday, as buyers snatched up spot gas instead of relying on storage, industry sources said.
''We're starting to see early injections,'' one Calgary-based trader said, noting storage withdrawals in the west totaled only 10 million cubic feet per day (mmcfd) on Monday.
Spot gas at the AECO storage hub in Alberta was quoted again at C$1.78 per gigajoule (GJ), while April business followed closely behind at C$1.775.
Tempering demand, however, were above-normal temperatures in southern Alberta. A high of +9 degrees Celsius was forecast for today in Calgary and was expected to continue through this week.
Meanwhile summer AECO prices were quoted at C$1.77-1.78, while one-year business also remained fairly steady at C$2.20-2.22 per GJ.
The daily transportation rate to Empress widened to about 30 cents, traders said. NOVA Gas reported that effective 0800 MST today the allowable interruptible (IT) at the Western Gate will be 68 percent of IT nominated, indicating a cut of 29.8 mmcfd. Nominations exceeded capability of 2,670 mmcfd, NOVA said.
In the export markets, prices at Sumas, Wash., were talked mostly unchanged in the mid-to-high US$1.30s per million British thermal units (mmBtu).
Demand was fairly weak in the U.S. Northwest, traders said, as temperatures were expected to hover about two to six degrees above normal through Friday.
Meanwhile, maintenance on TransCanada PipeLines' (TRP - news) natural gas system, which has been restricting flows by about 156 mmmcfd since March 2, is scheduled to end this Friday.
In the east, Niagara prices eased three cents to $2.43-2.47 per mmBtu amid a decline in April futures to a low of $2.295.
MORNING UPDATE
Asia Oil Prices Slip As U.S. Inventories Increase
SINGAPORE, March 25 - Oil prices eased in Asia on Wednesday, mainly due to the American Petroleum Institute (API) report which showed that U.S. refiners' crude oil inventories had risen week-on-week.
The API data, released late every Tuesday, showed an increase in crude stocks of 4.99 million barrels for the week which ended on March 20.
The report surprised the market. Analysts polled by Reuters had forecast API crude stocks would fall by 1.2 million barrels.
North Sea Brent blend crude futures on the Singapore International Monetary Exchange (SIMEX) were lower as a result, with May quoted at $14.30/$14.50 at 0650 GMT, although no trades were done.
May Brent on the International Monetary Exchange (IPE) in London closed 51 cents lower at $14.53 on Tuesday.
New York Mercantile Exchange (NYMEX) May crude futures trading in Asia on the electronic ACCESS system fell by 12 cents per barrel to $15.80 at 0650 GMT.
Asia oil prices leapt on Monday after Saudi Arabia, Venezuela and Mexico announced an agreement to cut world output by 1.6 to two million barrels-per-day.
Prices fell back on Tuesday in a technical correction, with the bearish API data leading to further falls on Wednesday.
Saudi Economy Still Not Clear of Oil Storm
DUBAI, March 25 - Saudi Arabia's economy this year is likely to post its worst performance since 1993 despite this week's upturn in sick oil prices, economists said on Wednesday.
They said soft oil prices meant the kingdom was on course for nominal gross domestic product (GDP) growth of less than one percent in 1998, compared to 7.1 percent last year.
"There will virtually be no nominal growth...An economic slowdown is in place, but not a disaster year," said Henry Azzam, chief economist at Saudi's National Commercial Bank.
Saudi GDP shrank by a nominal 3.8 percent in 1993, when a combination of low oil prices and post-1991 Gulf War debts of an estimated $50 billion weighed on the economy.
This year's slump in economic growth will be hard felt, particularly after two years of windfall oil earnings which spurred nominal growth as high as 8.6 percent in 1996.
The 196 billion riyals ($52.3 billion) 1998 budget forecasts revenue of 178 billion riyals and an 18 billion riyal deficit.
"The country came into 1998 on solid ground. It had repaid debts, the stock market had performed well. There was a lot of bullishness but it faded away in the first quarter," Azzam said.
Saudi Finance and National Economy Minister Ibrahim al-Assaf said on
Tuesday the kingdom's economic fundamentals were strong despite recent oil price weakness, but that Riyadh was revising its economic growth predictions.
The gloomy economic outlook comes despite a gain of nearly $2 a barrel in world crude prices, after a pact amongst oil producers was reached in Riyadh on Sunday to remove up to two million barrels per day (bpd) from oversupplied markets.
Prices slumped to their lowest level in nine years earlier this month because of oversupply, Asia's economic crisis and a warm winter in the northern hemisphere.
Oil accounts for three-quarters of Saudi state income and every dollar below the forecast price in its budget means some $2.5 billion forfeited by the kingdom.
Bankers estimated the budget was based on the equivalent of a North Sea Brent crude price of $15.50-$16.00 a barrel, which would earn the kingdom approximately $36 billion from oil.
Spot Brent crude for April delivery was trading in London at 1003 GMT at $14.10 a barrel, after falling to $12 earlier this year.
Saudi Arabia's Arab Light export grade was valued at around $12.50 a barrel, compared to $17.50 a year ago.
Despite the Riyadh pact -- which involves Saudi Arabia cutting output from 8.7 million bpd to around 8.4 million bpd -- Brent oil prices are unlikely to match 1997's average of $19.20.
"Psychology is why we have the $2 increase (this week)," Saudi former oil minister Sheikh Zaki Yamani said in an interview with Reuters Financial Television. "But it can't continue against the fundamentals. (The output cuts) are too little to eliminate the surplus."
Oil traders are still waiting for firm evidence the production cuts promised in Riyadh will be fulfilled, while oil demand is expected to falter seasonally in the second quarter as Iraq pumps more oil and Asia's economic crisis largely rules out any incremental demand from the region to boost prices.
"Yes, oil prices have gone up but this is just the third trading day since the (Riyadh) deal," said one Gulf-based oil trader.
Iraq's ambassador to the United Nations said on Tuesday the rate of Iraqi oil exports under its UN "oil-for-food" deal should be up to $4 billion every 180 days by end-April. Iraq is currently exporting $3 billion worth of oil every six months.
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