MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING WED., MAY 13 1998 (2)
OIL & GAS
Arabs Want Joint Efforts To Stabilize Oil Market
DAMASCUS, May 13 - Arab energy ministers on Wednesday urged better cooperation between OPEC and non-OPEC oil producers and consumers to stabilize petroleum markets weighed down by a glut of crude.
Better links were needed because sharp price changes damaged the economies of producers and consumers alike, ministers said in a communique after an energy conference in the Syrian capital.
''The conference stressed the importance of improving cooperation among OPEC and non-OPEC producers and the countries which import oil to help stabilise the oil market,'' it said.
Saudi Arabian Oil Minister Ali al-Naimi was among oil and energy ministers and officials from all Arab countries attending the four-day gathering, held every four years.
Naimi said on the sidelines of the conference that he had been encouraged by the withdrawal of supplies from the market by oil producers in the wake of a March pact aimed at rescuing weak prices.
Producers have pledged some 1.5 million barrels a day (bpd) of reductions, the lion's share from the Organiation of the Petroleum Exporting Countries members.
The landmark agreement on output reductions reached in Riyadh, Saudi Arabia, was widely hailed as a rare example of cooperation between OPEC states and major non-OPEC producers such as Norway and Mexico.
A Gulf source said at the Damascus gathering that further cuts could be made soon if prices stayed at their current weak level.
Benchmark Brent is still running more than $4 below last year's $19.30 a barrel average, with oversupply aggravated by weak Asian demand and increased OPEC output earlier this year to blame.
The communique also said Arab ministers affirmed a commitment to guarantee oil supplies to world markets ''within reasonable costs.''
A report by the Organization of the Arab Petroleum Exporting Countries (OAPEC), one of the conference organizers, said world oil demand would rise to more than 86 million bpd in 2005 from 73.8 million bpd in 1997.
The OAPEC report said combined Arab oil production would increase to 29 million bpd in 2005 from 21 million bpd in 1997.
These figures showed the Arab world's share of world demand would increase to 34 percent in 2005 from 28.5 percent in 1997, the report said.
Arab ministers also called for rationalisation in the use of oil and the other energy resources and for a balance between production and the revenue needed to achieve economic development, the communique said.
It said the ministers also noted that demand for natural gas was expected to increase in coming years and urged Arab states to invest in this sector to allow their gas products to reach the world market.
An OAPEC report said natural gas constituted Arabs' second most important source of energy after oil.
''The share of natural gas in energy consumption rose to 38.4 percent in 1996 from 35.8 percent in 1992,'' the OAPEC report said.
Arab countries' confirmed reserves of gas in 1997 stood at 32.6 trillion cubic metres, it said.
According to the OAPEC report, world demand for gas would increase to 2,885 billion cubic metres in 2005 from 2,185 billion cubic metres in 1996.
Tempers Fray As Brent Oil Ploy Causes Market Havoc
LONDON, May 13 Tempers were rising in London's oil trading community on Wednesday as a mammoth manoeuvre in Brent crude derivatives distorted prices and unravelled companies hedging strategies.
In a ''squeeze'' play, a few players appeared to have bought large amounts of derivative contracts in North Sea Brent, the world's benchmark oil grade, putting the rest of the market on the defensive.
The result is a series of head-spinning price rises that have wrenched the market out of kilter for near term derivatives, used by oil refiners and traders to limit exposures on the underlying value of their sales and purchases.
The effects have resounded through world oil markets, where some 20 million barrels per day (bpd) of crude, nearly half the world's exports, are directly priced using contracts linked to Brent.
''People are not happy at all,'' said a trader in London. ''While a couple of guys look to be making stacks of money, a lot of others are getting stung.''
The turmoil is resurrecting doubts over Brent's benchmark role. Only 600,000 bpd of Brent load each day and traders say it is fairly easy for one or two players to dominate the market.
The last price squeeze of such severity was four years ago, when private Swiss trading house Vitol SA and two other firms bought up most available Brent cargoes, forcing prices higher.
Light British regulation of the informal Brent market, conducted by telephone, means such trading strategies are perfectly legal.
Daily North Sea trade regularly sees smaller plays in which traders try to profit from the complex interplay between Brent physical and derivative contracts.
The current manoeuvre has seen the spread between June forward paper cargoes --- the current basis for pricing actual physical liftings -- and July paper somersault from a 30 cent discount barely a week ago, to a 30 cents premium now.
This has dislocated it from the rest of the market, where nearer months are trading at a discount to more distant periods.
June Brent futures traded on London's International Petroleum Exchange (IPE) and near term Brent swaps, or contracts for difference (CFDs), have also made hefty gains in recent days.
These parallel leaps are not necessarily part of the same play as the jump on Brent paper, but they reinforce the market's sense of vulnerability.
The effect will ripple further than the local, largely London-based market as IPE Brent is one of the oil industry's key instruments for hedging price risk.
''When the underlying physical market can get messed about like this it does obviously provide a bad basis risk for a futures contract,'' said one futures broker.
''I think some of the oil companies saw what was coming and got out early, but a lot of the funds will have been hit by this,'' he added.
IPE June Brent, which expires on Thursday, has had its its normal relationship with New York's NYMEX crude switched from a $1-$1.50 discount to near parity.
That has paralysed sales of European and West African crude to the United States.
The increased differentials for Brent fly in the face of the fundamentals on world oil markets which are groaning under the weight of physical supply, and dealers argue such upheaval is bad for the health of the market.
''After all this is over the CFD market could well go pretty dead for a while as things cool off,'' said one broker.
New players will be frightened from entering the market, depriving it of the liquidity it requires.
''The big players are in danger of killing the goose that laid the golden egg,'' said another.
''There's a clique of players that just hammer new firms as soon as they get into the market. State oil firms, say, just aren't going to be able to take that kind of risk.''
But others are more sanguine.
''No one gives a hoot as long as they are making money,'' was one comment.
US Stock Data Push World Oil Values Lower
LONDON, May 13 - Oil prices fell from early highs on Wednesday as bearish U.S. industry stock figures overcame the bullish effect of trading activity on crude derivative markets.
London futures for benchmark North Sea Brent crude ended 41 cents down at $14.70 a barrel, well below the intra-day high of $15.29.
Bearish signals emerged overnight from the United States, where weekly stock statistics from the American Petroleum Institute (API) showed a higher than expected rise in gasoline inventories.
Gasoline stocks rose 3.35 million barrels in the week ended May 8 against market expectations of a build of just 1.3 million barrels.
A further price-negative factor in the figures was that for refinery runs, which were expected to rise in the week but in fact dropped by 2.7 per cent.
"Gasoline will rattle the market," Prudential senior energy analyst Richard Redash said in the United States.
The negative effect eventually overcame gains whipped up by moves in the rarified world of derivatives trading which went against the grain of a physical market struggling to recover from a glut of unwanted petroleum.
The value of Brent, which is loaded onto tankers at Sullom Voe in the Shetland Islands, is important for world markets because it is used as the benchmark for the pricing of many other physical crudes.
Wednesday's initial gains derived from attempts by traders to make money on the interplay between markets for physical Brent and derivatives known as Brent swaps, in turn jolting values on the futures market.
Such turbulence tends to reduce the effectiveness of hedging, a price risk management process that ultimately depends on the convergence of the hedging instrument to the spot physical price.
Brent trades in many different forms, each with its own time horizon and structure, including physical crude, swaps, a forward paper contact and a monthly futures contract on London's International Petroleum Exchange.
Markets were also disappointed that further output cuts from OPEC and
non-OPEC producers were not imminent.
On Wednesday Qatari Oil Minister Abdullah al-Attiyah said he did not think there would be further cutbacks before a meeting of OPEC ministers on June 24.
Although a Gulf source said there were discussions on the possibility of making further cuts to support prices the Venezuelan state oil company president said more time was needed to assess the effect of previous cuts.
Luis Guisti said oil markets had stabilised since the Organisation of the Petroleum Exporting Countries and non-OPEC producers pledged to cut output by about 1.5 million barrels a day until the end of the year to support oil prices.
Oil prices have risen nearly $2 a barrel since the March 22 agreement sealed at a secret meeting in Riyadh which paved the way for the first significant supply cuts by oil producers in a decade.
But Brent is still running more than $4 below last year's $19.30 a barrel average.
NYMEX Crude Ends Below $15, Down On APIs
NEW YORK, May 13 - NYMEX front-month crude closed below the psychologically significant $15.00 a barrel, triggered by selling on oversupply worries due to stockbuilds in the latest U.S. weekly inventory data, traders said.
''People are beginning to get nervous about (June crude) expiration,'' said E.D. & F. Man International analyst Jim Fiedler. The NYMEX June contract expires on May 19.
He said bearish inventory data late Tuesday from the American Petroleum Institute pointed to ''very full'' storage PADD II, which includes Cushing, Okla., where API said crude had accumulated to nearly 82 million barrels in the week ending May 8.
The bearish data -- on top of concerns that OPEC was biding its time making any move regarding further production cuts to lift prices -- turned market sentiment somewhat into a ''selling mood,'' said another trader.
June crude settled at $14.95 a barrel, off 29 cents. (correcting decline).
The contract dropped to a low of $14.90 just after midday, retracing Monday's low. It earlier traded at a high of $15.32. The July contract settled at $15.68, down 15 cents on the day.
June crude held support level at around $15.10-$15.11 in the previous session Tuesday.
A break below those levels and through $14.90 ''could trigger further erosion,'' although new lows have recently garnered little downside followthrough, said Tim Evans of Pegasus Econometric Group.
E.D. & F. Man's Fiedler said there was a good chance that the market would ''fill the gap'' just below $15.
API reported a small build of 794,000 barrels in crude stock for the past week, while the Department of Energy, which released its data Wednesday morning, said there was a draw of 700,000 barrels.
But traders shrugged off the DOE crude data, concentrating on the brimming supply indicated in the important PADD II region.
Gasoline's weakness was on focus again as the API reported a larger than expected build of 3.35 million barrels for the past week and an even larger build of 3.8 million barrels in the DOE data.
The data came just two weeks before the Memorial Day weekend, the traditional start of the U.S. summer driving season.
The API statistics showed an implied demand of 7.755 million barrels per day (bpd) on gasoline, down from the previous week's 8.257 million bpd.
The June gasoline contract finished at 51.83 cents a gallon, down 0.90 cent. (corrects figures)
June heating oil also took a beating, ending at 42.65 cents a gallon, down 0.51 cent.
Meanwhile, the market interpreted as bearish a report from Petroleos de Venezuela in Caracas that it would take two to three more weeks to assess the impact of worldwide oil output cuts made in April.
OPEC and non-OPEC producers agreed to cut their output by 1.5 million barrels per day (bpd) under the Riyadh pact negotiated in March by Saudi Arabia, Venezuela and Mexico.
The cuts took effect April 1 and early reports have pointed to partial compliance by OPEC, which agreed to slash their output by 1.245 million bpd under the pact.
Venezuela said recently there was a need for additional cuts of about 500,000 barrels to shore up low crude oil prices.
While OPEC talk had fueled speculations of another quick action to address the issue as happened in March, the speculations have waned with denials of any possible fresh meetings between the oil chiefs of the three ''Riyadh Pact group'' nations.
However, on Tuesday, a Gulf source told reporters in Damascus that OPEC kingpin Saudi Arabia does not object to further cuts and that steps could be taken even before the June ministerial meeting of OPEC in Vienna if oil prices worsened from where they are now.
Positive market reaction to the news was short-lived, with traders turning their attention yet again to the oversupply situation.
In London, Brent front month crude ended sharply lower as the bearish U.S. inventory data sparked pre-expiry selling on the IPE June contract. IPE June Brent last traded at $14.70, down 43 cents, well below its intra-day high of $15.29.
NYMEX Natural Gas Ends Down
NEW YORK, May 13 - NYMEX Hub natural gas futures, pressured by some technical selling ahead of Wednesday's inventory data, ended broadly lower in moderate trade, then fell more on ACCESS after a bearish weekly stock report.
In the day session, June slipped 5.2 cents to close at $2.204 per million British thermal units, then in overnight trade dipped to $2.18 shortly after the weekly AGA data. July settled 5.8 cents lower at $2.251. Other deferreds ended down 0.4 to 4.9 cents.
"It was a bearish (AGA) number, but all the bearish sentiment may be priced into the market. I don't see it going much lower (near-term)," said one Texas based trader, noting long liquidation pressured the complex earlier today.
AGA said Wednesday that U.S. gas stocks rose last week by 100 bcf, again well above Reuter poll estimates in the 70-80 bcf range. Overall stocks climbed to 407 bcf, or 42 percent, above a year ago.
Eastern stocks jumped 53 bcf last week, putting the surplus to last year at 59 percent. Consuming region west storage, which climbed 17 bcf, was now flat to 1997 levels. Inventories in the producing region gained 30 bcf for the week and remained 44.5 percent over year-ago.
While the soft close today raised the possibility of a downside reversal, traders said some heat in Texas and forecasts for warmer U.S. weather later this week and next could limit the downside near term despite the hefty storage surplus.
Above to much above normal temperatures are forecast for the eastern two-thirds of the nation through next week, with the East expected to average several to 14 degrees F above and the Midwest five to 12 degrees above. In Texas, the mercury should remain four to eight degrees above normal for the period, while cool weather is expected for the West.
Technical traders noted the possibility of a key reversal today, but most said June was still in a range with little reason to break far in either direction near-term.
They pegged resistance in the $2.28 area, with the next level seen at last week's high of $2.355. Further selling was expected at $2.37, which is the 50 percent retracement point of the recent selloff. Major resistance was expected at the $2.63 double top from last month.
Key support was pegged at $2.105-2.11, a spot continuation chart low and last week's low, respectively. Major buying was expected at the $2.05 double bottom from Jan and then at $2.
In the cash Wednesday, Gulf Coast swing prices on average firmed two cents to about the $2.20 area. Midwest pipes were flat to down slightly in the low-to-mid teens though higher numbers were talked early. New York city gate gas was a couple of cents higher in the low-$2.50s, while Chicago was down two cents to the low-$2.30s.
The NYMEX 12-month Henry Hub strip slipped 3.4 cents to $2.407. NYMEX said an estimated 59,231 contracts traded, up from Tuesday's revised tally of 44,689.
U.S. Spot Natural Gas Prices Steady To Up Slightly
NEW YORK, May 13 - U.S. spot natural gas prices remained fairly stable Wednesday following a sharp incline over the past two days, industry sources said.
Warmer-than-normal weather is expected to cover most of the eastern two-thirds of the U.S. into next week, with temperatures forecast to average eight to 12 degrees above normal in the Chicago area and four to eight degrees above normal in Texas. However, cooler weather is forecast to prevail in the western U.S. during this period.
Cash prices at Henry Hub were quoted today mostly at $2.22-2.25 per mmBtu, with the higher-priced deals surfacing early.
In the Midcontinent, prices were also fairly steady at $2.12-2.15, with Chicago city gate pegged mostly at $2.32.
In west Texas, Permian prices rose two cents to about $2.09-2.10, while San Juan values stretched to about $2.02-2.03.
In maintenance news, Sea Robin Pipeline Co will perform maintenance at its Vermilion Block 149 natural gas compressor station offshore Louisiana Friday through the end of the month. The pipeline company also noted that the system's East Leg could experience reductions in available interruptible capacity during the shutdown.
Also, Northern's Keystone gas plant in western Texas is still scheduled to return to service Friday following unplanned maintenance.
As part of an ongoing expansion project, Transcontinental Gas Pipe Line Corp.'s (Transco) Mobile Bay Lateral from Compressor Station 82 to the Transco main line will be taken out of service this Friday and Saturday. During the outage, a new compressor unit will be added at Compressor Station 82, near Coden, Ala., and a new Compressor Station 83 will be constructed near Citronelle, Ala.
Also, the 750 megawatt (MW) Four Corners 5 coal unit is now expected to restart later today after restart attempts failed on Monday and Tuesday.
In the Northeast, gas at the New York city gate traded mostly in the low-$2.50s as warmer weather approached the region.
Separately, injection estimates for today's American Gas Association storage report were mostly 70-80 bcf, versus a 70 bcf gain a year ago.
Canadian Spot Natural Gas Prices Rebound Amid Less Supply
NEW YORK, May 13 - Canadian spot natural gas prices reversed their downward spiral on Wednesday as supplies tightened in western Canada, industry sources said.
Spot gas prices at the AECO storage hub in Alberta rebounded to about C$1.78-1.79 per gigajoule (GJ) after sliding to a low of C$1.00 on Tuesday.
June business was also quoted a little higher at C$1.82-1.83 from C$1.79-1.80, while winter prices climbed to about C$2.60. The one-year AECO market was seen around C$2.40.
NOVA field receipts dropped to 11.6 billion cubic feet (bcf) from 12.3 bcf the previous day. Linepack on the system as of late yesterday stood at 12.76 bcf, versus 13.1 bcf the day before.
Maintenance is underway at NOVA's Turner Valley unit 1 (scheduled to end Friday) and Schrader Creek units 1 and 3 (scheduled to end May 22). Beginning today, an oil leak will also be repaired at its Beiseker unit 1, while Turner Valley unit 2 is set to shut May 18-22 for maintenance.
NOVA also suffered a drop in gas delivered to the system overnight when a power outage blamed on the forest fires still burning in northern Alberta shut down some producer-owned gas plants in the region, a company spokeswoman said.
The plants resumed operation on Wednesday, however.
"The supply and demand balanced out during the day," she said.
Meanwhile, the allowable interruptible transport at the East Gate (Empress/Mcneil) rose to 24 percent, from 11 percent, of IT nominated, NOVA reported today.
In addition, TransCanada's system was undergoing maintenance, which will limit capacity in northern Ontario to 882 million cubic feet per day (mmcfd) Friday.
Westcoast Energy's 350 mmcfd Pine River plant in British Columbia is expected to return to service Thursday afternoon following a maintenance outage. Also owned and operated by Westcoast, the 700 mmcfd McMahon gas plant is scheduled to begin its maintenance outage this Sunday. The outage is expected to end June 5.
During the McMahon outage, Westcoast will also be doing work at its Bluehill (May 18-23), Buick Creek (May 20-22), Rigel (May 25-30), Kobes (May 25-June 1), Laprise (May 22), Stoddart (May 28-30) and the Siphon (June 1-6) compressor stations.
At the borders, Sumas export prices were quoted in the low-US$1.40s per million British thermal units (mmBtu), up about four cents from Tuesday. Station 2 prices were similarly talked higher at C$1.78-1.84. In the east, gas at Niagara traded at $2.38 per mmBtu, up about one cent from yesterday. |
