MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING WED., MAY 20 1998 (2)
OIL & GAS
OPEC Price Rescue It By Cuts Dilemma, Iraq Doubts
LONDON, May 21 - OPEC producers dismayed by fresh oil price falls are struggling to rescue glutted oil markets from profound uncertainties about output policy, analysts say.
At the core of the producer club's predicament is a dilemma about the much touted prospect of fresh output cuts aimed at curbing oversupply, they say.
Not for the first time, the group responsible for 40 percent of world output may have painted itself into a corner by signalling intentions it cannot fulfil.
Having publicly flirted with the possibility of more reductions following cuts agreed earlier this year, OPEC ministers risk gouging prices if they now fail to make the additional sacrifice, analysts say.
''People have been talking too much,'' said a senior oilman in an OPEC-member Gulf state.
''They've almost got themselves into a trap. There will be a psychological let-down in the market if they don't follow through.''
''The thing is, if we only hung on through this season, which is always the weakest cycle in the market, and let the agreement work itself out, prices would naturally recover. You have to stay cool.''
Ministers from the Organisation of the Petroleum Exporting Countries are expected to tackle the possibility of more cuts when they hold a scheduled ministerial meeting on June 24 in Vienna.
They will try to measure progress in a March accord between 10 OPEC and a handful of non-OPEC producers to withdraw 1.5 million barrels per day (bpd) from the market for the remainder of this year.
OPEC bigwig Saudi Arabia said this week it might be necessary for world producers to remove another 500,000 barrels per day from swollen supply if prices stayed low.
Some Gulf oil executives privately called the statement an admission that the March pledges to withdraw almost two percent of world supply would not be completely heeded.
The pact sealed in secret talks in Riyadh helped drag prices back from nine year lows touched in early March but markets now show every sign of slipping back to the levels that spurred the pact.
Benchmark Brent crude was valued at $13.85 a barrel on Thursday, almost $6 down from last year's average and equivalent to tens of billions of dollars in annual revenue losses for oil-dependent OPEC producers.
OPEC, excluding Iraq, went part of the way to delivering on its large 1.245 million bpd share, slicing output by 900,000 bpd.
But the cuts were countered by 300,000 bpd of gains in Baghdad's U.N.-monitored output, and heavy inventories in key western markets kept a lid on the price gains.
So despite the reductions, many analysts believe supplies are still too large to salvage markets drowning in unwanted crude.
And neither OPEC nor its new-found allies outside the organisation show signs of agreement on the necessity for further cuts.
Kuwait said this month it planned to push for more cuts. But Mexico, a non-OPEC architect of the earlier cuts, said recently the market outlook indicated more cuts would probably not be needed.
Russia will go to Vienna as an observer, its first such attendance for five years, in a limited advance for OPEC's campaign to share supply management with outsiders.
But analysts doubt that Russia, rebuilding its giant petroleum industry after years of disruption and decay, would be in any mood to deliver substantial extra cuts beyond a puny 61,000 bpd it offered in March.
''It remains the case that the major burden of cuts lies on OPEC,'' said Mehdi Varzi, oil analyst at Dresdner Kleinwort Benson.
OPEC watchers said matters may become clearer after a scheduled meeting of Gulf Cooperation Council (GCC) oil ministers on June 16 in Riyadh. OPEC members Saudi Arabia, Kuwait, the United Arab Emirates and Qatar and non-OPEC Oman are GCC members along with Bahrain.
There are further uncertainties.
Chief among them are talks on U.N.-monitored Iraqi exports that could determine whether its 1.5 million bpd or so of sales continue to reach world markets.
The so-called oil-for-food sales programme, under which Iraq can sell oil to buy food, medicine and other goods, is in dispute every six months when it comes up for renewal.
In the past, the dispute has prompted Baghdad to stop oil sales until its distribution plan is approved.
U.N. Secretary-General Kofi Annan said on Tuesday he doubted Iraq's plan would be approved before the current six month round of the programme expires on June 3, raising the prospect of an interruption to exports.
''It would be just the tonic the market needs,'' said Peter Gignoux, head of the energy desk at Salomon Smith Barney in London.
But on Wednesday, a U.N. official said the gap in talks on the aid plan was narrowing. ''We are still aiming to get it out on time,'' the official said.
Oil Droops As Stock Glut Tethers Prices
LONDON, May 20 - World oil prices dropped below the psychologically important $14 a barrel mark for the first time in two weeks on Wednesday as a glut in petroleum inventories deepened gloom among producers.
Benchmark Brent blend tumbled over 40 cents in late trading after heavy speculative selling of crude futures in New York.
Brent closed 65 cents down at $13.73 a barrel, a slight recovery on the day's low of $13.65. Brent had touched a high of $14.32 mid-afternoon but soon headed lower downwards.
The fresh losses occurred as weekly inventory data from the United States showed a sharp rise in crude stock levels.
The American Petroleum Institute, a leading indicator of inventory patterns in the world's biggest importer, said crude stocks last week swelled by nearly nine million barrels to their highest since August 1993.
The stock rise was further bad news for world oil producers who have endured a sustained price slump since late last year.
Brent prices have averaged just $14.55 this year, around $5.00 lower than last year's average.
Producers' revenues have been hit so hard that the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC producers banded together in March to hammer out a pact to remove some 1.5 million barrels per day (bpd) of supply from world markets.
But, after a brief rally on the news of the cuts, prices have retreated again.
Crude futures markets in New York late on Tuesday plunged below $13 to their lowest for nine years, although the collapse partly reflected local trading factors.
Traders are now focusing on the approaching June 24 OPEC meeting to see if further cuts will be made.
Frenzied speculation that key producers Saudi Arabia, Venezuela and Mexico could meet before June 24 to hammer out a further agreement has so far come to nothing.
A secret Riyadh meeting in March between the three countries, key rivals for market share in the United States, laid the foundation for the producer pact.
But the prospect of further cooperation between OPEC and non-OPEC members did get a boost this week when Russia's deputy prime minister, Boris Nemtsov, announced that Russia would attend the oil cartel's Vienna meeting.
Russia agreed to cut oil exports by 61,000 bpd as part of the producer pact.
Traders now wonder whether key Gulf producers, Saudi Arabia, Kuwait and the United Arab Emirates, where the national economies are especially hard hit by low oil prices, will be prepared to go it alone in reducing output
In recent years they have stood alone on curbing production to support prices, but have signalled that they now will act only in concert with others.
NYMEX Crude Plunges
New York - Crude oil futures prices Wednesday plunged a second day on the New York Mercantile Exchange after an industry group reported inventories rose more sharply last week than had been expected.
July Crude oil fell $0.83 to settle at $14.18.
The American Petroleum Institute reported late Tuesday that inventories across the nation had jumped to the highest level in nearly five years, leaving storage tanks brimming with oil.
Some 353.1 million barrels were in storage as of May 16, up 8.8 million barrels and the highest since 353.3 million barrels on July 23, 1993. Analysts say economic troubles in Southeast Asia have dimmed demand for oil in that region. That has spurred crude producers to seek other markets for their oil, which in turn has led to more U.S. imports at favorable prices.
Few observers believe producers will take any action before the 11-nation Organization of Petroleum Exporting Countries meets in late June in Vienna, Austria, to discuss prices.
The unexpectedly sharp increase in inventories overshadowed data implying strong demand for gasoline heading into the summer driving season. Unleaded gasoline stocks fell a steep 3.3 million barrels to 211.8 million barrels.
We are unable again to gain access to NYMEX reports related to natural gas pricing.
TOP STORIES
World Oil Shares Slide As Crude Outlook Turns Ugly
Oil shares were hit on Wednesday as crude prices tumbled after data showed crude oil stocks in the U.S., the world's largest oil importer, rose to their highest level since 1993.
Analysts now say that any pickup in crude prices, which hit a nine year low March of this year, may be delayed until later this year and companies are unlikely to see a pickup in second quarter earnings from the very depressed first quarter.
''There is not likely to be a rebound in share prices and the market for oil is very sloppy,'' said Fadel Gheit, analyst at Fahenstock & Co.
The two oil companies in the Dow industrials were the biggest percentage losers in the index, with Exxon Corp. (XON) down 1-5/16, or 1.8 percent, at 71, while Chevron Corp. fell 1-1/16, or 1.3 percent, to 81-1/8. in afternoon trading.
ABN AMRO Inc analyst Eugene Nowak cut his earnings forecast for Chevron's second quarter to $0.70 from $0.83, compared with a First Call consensus of $0.84, and warned that even $0.70 could prove to be too optimistic.
''Crude prices are continuing to underperform and I expect analysts to start revising down their second quarter forecasts,'' Nowak said.
After hitting a nine year low on March 17 of $11.96 per barrel, the international benchmark Brent blend has Brent has averaged just $14.50 so far this year, compared with $19.30 in 1997.
It took another turn down this week and remained under pressure after data from the American Petroleum Institute (API) showed that U.S. crude oil stocks rose 8.788 million barrels in the week to May 15.
Analysts had been expecting a drop of 2.5 million barrels, according to a Reuters poll.
"There was a big build in stocks," said Nowak.
Losses among oil shares were spread across the board and the S&P Oil International Index dropped 1.08 percent to 825.92, while the Dow Jones Industrial Average was up 0.5 percent to 9100 points.
Another bid loser among the oil shares was Amerada Hess Corp. (AHC), which dropped 1-4/16 to 55-3/16 after reporting yesterday that a rig being transported out to one of its biggest new fields had sunk.
ABN AMRO's Nowak calculated that this could cost Hess $0.80 per share in lost income next year if the 100 million barrel oilfield failed to hit peak production in 1999.
Oryx Energy Co. (ORX), Amerada's 50 percent partner in the deepwater Baldpate field in the Gulf of Mexico was also hit, losing 1-3/16 to 22-1/16.
Nowak calculates that delays could cost Oryx $0.75 per share at peak production.
Among other major oils, Amoco Corp. (AN) lost 5/8 to 41- 7/8, Mobil Corp. (MOB) 7/8 to 80-1/2 and Texaco Inc (TX) 1/16 to 58-7/8.
Fahenstock's Gheit believes that declining oil prices will force substantial changes in the industry and says that even the biggest companies may be hard put to fund their ambitious capital spending plans.
''If oil prices do not rebound, even Exxon will have to look at cutting back capital spending; the only company that is safe is Royal Dutch/Shell Group (RD.AS) (UK & Ireland: SHEL.L),'' Gheit said.
He added that oil price weakness is going to mean that many of the smaller oil and natural gas producers may not be independent for very much longer.
''The weakest will go first. Those companies whose balance sheets are stretched will go, while those who have kept their powder dry will be the winners,'' he said.
Spot Price For Oil Drops To Lowest Level In More Than A Decade
Edmonton Journal
Unrest in Indonesia and a glut in world markets are being blamed for the lowest spot prices for oil since the mid-1980s.
The benchmark West Texas Intermediate crude closed Wednesday at $13.28 US a barrel. That's up slightly from Tuesday's close of $12.80 US, but still down from Monday's $14.07 US, and off about 30 per cent since the healthy levels of 1997.
Crude oil futures prices also plunged Wednesday with the news that oil inventories across the United States are the highest they've been in five years.
Analysts said the key factor in the drop was a growing over supply of oil. World demand in April was 73.4 million barrels per day and supply was 75.4 million barrels, according to the Canadian Energy Research Institute in Calgary.
Nor will the gap between supply and demand end soon, said institute
analyst Judith Dwarkin.
"The rest of the year could be bumpy," she said.
Other analysts suggested uncertainty caused by political unrest in Indonesia was reducing demand in Asia, already reduced by the area's economic problems.
The 11-member Organization of Petroleum Exporting Countries will meet
in late June to discuss prices.
The Alberta oilpatch has already begun to suffer.
"Certainly, heavy oil right now is basically non-economic," said Andrew Hogg of First Marathon Securities.
"A number of the heavy-oil projects are not making any money and some
are losing money with every barrel that's produced."
Hogg says refiners start losing money on heavy oil when the price drops below $13 US a barrel.
The low prices were also reflected in the first-quarter results of Canada's oilpatch giants.
Revenue at Syncrude fell 33 per cent to $347 million during the first three months of 1998, compared with the same period in 1997. The synthetic oil producer is trying to cut its production costs, which averaged $17.86 a barrel over the first quarter.
Imperial Oil's profits also fell sharply to $113 million in the first quarter of 1998 compared with $191 million in the same period a year ago.
Suncor Energy Inc. reported falling first-quarter profits to $50 million this year from $60 million in the same period last year.
Petro-Canada's first-quarter profits fell to $36 million this year from $104 million in 1997.
Last February, PanCanadian Petroleum cut 200 jobs and eased its heavy
oil production.
Still, all of the expansion projects for Alberta's oilsands are going ahead.
"The way they go forward is a very long-term viewpoint," said Hogg.
"They don't look at the price on a month-to-month basis; they look where it's going to be over the next five to 10 years."
Alberta Treasurer Stockwell Day said slumping oil prices won't hurt the province as much as in the past because its economy is more diversified.
"All of the economic analysts say our strengths go beyond our oil industry and though we still rely on oil, our other strengths in the economy are very strong," said Day.
"When you take the high price of natural gas, it makes me agree with the economic analysts who look at Alberta and say we will continue to lead economic growth in Canada for 1998."
US 1997 NatGas Pipeline Capacity Record 84 Bcf/Day
U.S. natural pipeline capacity reached a record 84 billion cubic feet per day in 1997, according to a new report from the U.S. Energy Information Administration.
Total pipeline capacity last year increased by 15 percent from 1990 levels, the EIA said in its report that was released late on Friday.
EIA said it sees domestic natural gas output increasing six to seven percent through 2000, with most of the production coming from Gulf of Mexico, the San Juan Basin and the Rocky Mountain area.
''While planned pipeline expansions appear adequate to accommodate this increase, some may bottlenecks develop in moving new offshore production beyond onshore Louisiana,'' the EIA said.
However, any potential kinks in moving natural gas may be partially or completely offset by new or expanded underground storage facilities, according to the agency.
If all projects currently proposed through 2000 were built, natural gas capacity would increase by as much at 14.7 billion cubic feet a day, or about 17 percent from 1996 levels, the EIA said.
Separately, the the agency said the share of Canadian natural gas imports used to satisfy U.S. gas demand continues to grow, having increased every year since 1989.
''The most extensive development of new pipeline capacity during the next several years will occur along the corridors connecting Canada to the U.S. Midwest and Northeast markets to handle the ever-growing Canadian imports,'' the EIA said.
These expansions could allow an additional 5.9 and 7 billion cubic feet per day of Canadian natural gas to be handled by U.S. facilities during the next three years, an increase of more than 52 percent from 1997 levels, according to the agency.
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