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Commodities
Gold, Oil Drop Despite More Air Strikes
Gold prices fell to a 3-1/2-month low Friday as investors shunned the precious metal as a hedge against potential economic fallout from political instability in the United States and the bombing of Iraq.
In other markets, crude oil continued to hover near 12-year lows despite a third air strike against Iraq, while soybeans ended at their lowest level in 10 weeks.
"Gold appears to be losing its clout as a hedge against political insecurity," said James Steel, a commodity analyst with Refco Inc. "Gold managed to shrug off the air strikes in Iraq, the impeachment debate in Washington and the weaker dollar, all of which should have been bullish for gold.
"Commodities as an asset class just seem to be pretty unpopular," he added.
Gold for February delivery traded on the Commodity Exchange ended at $290.40 an ounce, down $2.50.
Gold prices remained under pressure from the threat of central bank selling. Switzerland's lower house of parliament voted this week to sever the Swiss franc's peg to gold, the first step in paving the way for the country's central bank to sell 1,300 metric tons of gold.
Although Swiss officials ruled out sales before 2000, "it brings the issue of central bank sales back to the forefront," Refco's Steel said.
Central bank sales were part of the reason that gold slid to 19-year lows over the summer.
Crude oil futures for near-term delivery on the New York Mercantile Exchange posted small losses in response to reports that Iraqi oil was still flowing despite a third wave of U.S. bombing.
Market participants remained jittery over the punitive U.S.-led strikes. One target hit was Iraq's oil refinery in Basra, and news of the attack created some support for prices, traders said.
U.S. Defense Secretary William Cohen said the refinery, which can handle 126,000 barrels per day of crude oil, was attacked because it was being used to illegally smuggle oil in violation of a United Nations program that allows the country to export up to $5.256 billion of oil every six months. Most of the proceeds go to buy food and medicine for Iraqi citizens.
But the market remained weak as the United Nations said Iraq's oil exports had been going on smoothly despite the bombings.
Crude for delivery in January closed down 8 cents at $10.95 per barrel.
"The inability of the crude market to rally despite the air strikes against Iraq simply reinforces its current weakness," said Jim Ritterbusch, a trader for Chicago's Sweeney Oil.
"Unless oil is taken out to balance supply and demand, the market will remain weak," he said.
Soybeans traded in Chicago fell to levels not seen since early October on weather that is seen as beneficial to crops in South America.
Widespread rains in most of Brazil's soybean belt last week and earlier this week largely alleviated recent dryness, meteorologists said. Scattered showers and thunderstorms were forecast for the region early next week. The outlook for Argentina's crop was also generally favorable.
"The additional showers early next week will further boost moisture supplies in the south (of Brazil), ensuring improving conditions for the crops," said a forecast from CROPCAST Services, a private U.S. weather service.
Soybeans for January delivery closed down 3/4 cent at $5.47-1/4 a bushel.
Crude Oil Likely To Return To 12-Year Lows, Analysts Say
December 18, 1998
By Sean Evers
Bloomberg News
Crude oil prices will likely return to 12-year lows going into the new year if a U.S.-led military strike on Iraq concludes this weekend without harming Iraqi oil infrastructure, analysts said.
In a survey, five oil analysts and traders agreed that without further action from the Organization of Petroleum Exporting Countries, and if Iraqi oil continues to flow, oil prices could fall further in the weeks ahead. Oil prices are already down almost 40 percent in the past 12 months.
Oil markets yesterday jumped more than 7 percent on concern that a military strike against Iraq could disrupt exports. Yet a series of U.S. and U.K. air strikes last night avoided Iraq's oil wells and related infrastructure, keeping shipments flowing to an already swamped oil market.
"There isn't any supply disruption and until there is, prices will resume their downward trend," said Peter Gignoux, head oil trader at Salomon Smith Barney. "We should be wondering just how low prices will go next year." Brent crude oil for February delivery slid as much as 56 cents, or 5 percent, to $10.80 a barrel on London's International Petroleum Exchange. Futures markets last week reached $9.60, a record low for the 10-year-old contract.
Iraq's oil ministry today said none of the country's oil infrastructure had been damaged in the attack, and officials hired by the UN to monitor Iraqi exports said the nation was still pumping oil.
Ramadan
Though British officials have said the attack will not be constrained by the Islamic holy month of Ramadan, analysts said they expect the strikes to end before then, which could be as early as this weekend.
"If we have a short attack all wrapped before Ramadan, then after all is said and done, I don't see any reason why anybody would pay more for crude than they were paying earlier this week," said Kevin Taecker, a Riyadh-based oil analyst with Saudi American Bank.
U.S. President Bill Clinton announced yesterday that he had ordered operation Desert Fox, which he described as a "strong and sustained" air strike on Iraq, as punishment for its lack of cooperation with UN inspectors trying to rid the country of weapons of mass destruction.
The bombs began dropping on the eve of a meeting in the Spanish capital of Madrid that brings together oil ministers from Saudi Arabia, the world's largest oil supplier, Venezuela and Mexico, which analysts now believe has been overshadowed by events in the Gulf.
Madrid Meeting
"Iraqi bombing pulled the carpet out from under Madrid meeting. Where yesterday a decision on further cuts appeared likely, now I think it's unlikely," said Mohammed Abduljabbar, an Oman-based advisor to the Petroleum Finance Co. "They will wait to make decisions about cuts until after the strike and they can assess the fallout."
The three nations meeting were architects of an agreement earlier this year, which led to an attempt by OPEC and non-OPEC producers to cut 3.2 million barrels a day of oil production from the market to relieve a supply glut.
Global oil inventories have swelled to about 6 billion barrels — enough to fill world demand for about 2 1/2 months, according to estimates from the Qatar oil ministry. As a result, refineries are likely to be well stocked.
"The military strike on Iraq will be short-lived and the impact on the oil market will be minimal," said Sun Weijun, executive director at Zhenhai Refining & Chemical Co., China's third-largest refiner.
American Petroleum Institute
November Statistical Report
When adjusted for inflation, wellhead prices that producers received for their crude oil in November fell to the lowest level in more than 50 years, to an estimated average of less than $10 a barrel, the American Petroleum Institute reported today.
November's wellhead prices were more than 40 percent lower than a year earlier. These low prices have resulted in widespread oil company budget cuts, especially in the exploration and development of petroleum in the United States.
API's Monthly Statistical Report noted that November's domestic crude oil production of 6.252 million barrels per day (b/d) was 3.2 percent lower than the same month a year ago.
Consequently, there were only 190 rigs drilling for U.S. oil in November, the lowest number on record and a striking 50 percent decline just since November last year, according to the latest Baker-Hughes Inc. rig count. By contrast, there were usually 300 to 400 rigs drilling for oil in the U.S. between 1992 and last year, and even during the late 1980s oil bust rigs drilling for oil exceeded 750 at times.
Imported crude oil totaled 8.806 million b/d, which was a 5.3 percent increase compared to November 1997. Total imports rose 8.4 percent since last November reaching 10.787 million b/d last month.
API analysts reported a sharp increase in permitted Iraqi oil exports during the second half of this year. In August an average of about 700,000 b/d of crude oil was imported into the U.S. from Iraq and in September about 520,000 b/d, enough oil to rank Iraq the fifth or sixth largest source of American petroleum imports. Iraq is allowed to sell its oil under the United Nations' program of oil sales for specified purposes including humanitarian supplies of food and medical items. Sales to the U.S. are monitored by the Department of Commerce. Based on estimated proven world oil reserves, Iraq is ranked second to Saudi Arabia with 112.5 billion barrels of oil.
U.S. gasoline deliveries, a key demand indicator, increased 4.5 percent above November a year ago to 8.323 million b/d, which was evidence of reasonably strong growth in gasoline consumption spurred by low retail prices. Growth in gasoline deliveries has averaged about 3 percent in recent months.
The last time gasoline deliveries increased as strongly was in 1986. Compared to retail prices then, 12 years ago, gasoline prices last month were 20 percent lower when adjusted for inflation. When compared to retail prices in November 1997, inflation-adjusted pump prices currently are about 15 percent lower, the lowest ever recorded, according to the Energy Information Administration.
Other highlights from the November report:
Abnormally warm weather caused a 2.1 percent decrease in distillate fuel oil deliveries to 3.362 million b/d compared to November 1997. However, distillate stocks of 150.1 million barrels were 6.7 percent higher than November 1997.
Kerosine jet fuel deliveries were 1.575 million b/d for a 2.3 percent decline from November last year.
November's residual fuel deliveries of 877,000 b/d were 8.4 percent higher than the same month last year.
Crude oil inventories of 336.6 million barrels last month were 4 percent higher than in November 1997.
Gasoline stocks of 206.8 million barrels were up 1.9 percent over last November.
Natural gas liquids production declined 1.6 percent from a year ago at 1.700 million b/d.
November's refinery utilization rate was 93.8 percent.
Total stocks of 1,066,700,000 barrels were 3 percent higher compared to November 1997.
Oil-Service Firms Face Tough Times
By KATIE FAIRBANK
AP Business Writer
Oil services companies, which build and maintain drilling rigs, have been among the hardest hit in an industry hammered by this year's downturn in crude oil prices.
While most eyes have been focused on the massive mergers and job cutbacks among big, diversified oil producers, the services sector has also been severely impacted as budgets for drilling equipment and services are slashed.
Angie Sedita, an oil-services analyst for the A.G. Edwards brokerage, calls it ''a year of carnage'' for these companies.
Prices for oil and its related products like gasoline have slumped to their lowest levels in more than a decade as demand from suffering Asian economies withers and as oil-producing nations continue to churn out crude despite a huge oversupply in world markets. Unseasonably warm weather as also dried up demand for heating oil in many countries.
Even the escalating tensions with Iraq this week has failed to lift oil prices, as investors believe that the U.S. and British air strikes will not disrupt the flow of oil from the region. The price of crude oil continued to decline Friday, falling 8 cents to $10.95 on the New York Mercantile Exchange.
With big oil companies taking in less money for every barrel of oil sold, they have been looking for ways to keep costs down. In addition to signing merger pacts and eliminating jobs at their own companies, they have also been cutting back on orders for equipment and maintenance, the bread and butter businesses of oil service companies.
With less demand from the oil and gas producers for oil-field work, the services companies have been making deep cuts in their own work forces. Recently reported cutbacks include 8,100 jobs at Halliburton Co. (NYSE:HAL), 5,600 at Schlumberger (NYSE:SLB) Ltd., 3,500 at Baker (NYSE:BHI) Hughes, and 2,500 job losses at Weatherford International Inc (NYSE:WFT).
Oil producers say that for some wells, it just doesn't pay to continue pumping.
''It's costing as much to get oil out of the ground right now as we're selling it for,'' said Morris Burns of the Permian Basin Petroleum Association. ''Nobody is going to go out and drill for $8 oil.''
Don Galletly, a vice president of Houston-based Weatherford, agrees. ''They'll limit the number of services they'll do to a well unless they see the price per oil getting better,'' he said.
In an effort to hold down costs, oil-service companies are also merging.
Weatherford International was formed in May by a combination of EVI Inc. and Weatherford Enterra. Halliburton Co. and Dresser (DI) Industries Inc. has gotten Justice Department approval to merge as long as the company divests some divisions. In May, Baker Hughes Inc. announced it would merge with Western (WAI) Atlas Inc.
The grim situation is a contrast to the buildup in the services industry that occurred during 1996 and 1997. At that time, the oil and gas service industry experienced a general improvement in product demand and pricing due to a strong world economy, which helped increase exploration and development. That means there are more jobs around today that must be cut.
Despite the cuts, few insiders have rosy views for next year, even if prices go up due to hostilities in the Persian Gulf. Most analysts say they expect spending on oil services to continue to fall.
''We think the near term is probably going to be similar to this year,'' said Galletly of Weatherford, whose company saw its stock price fall from over $50 a year ago to $17.25 Friday.
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