MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY DECEMBER 11, 1997 (3)
December 11, 1997
Crude-oil futures settled little changed on the New York Mercantile Exchange Thursday, while petroleum products edged lower. One energy analyst said the failure of the crude-oil market to react bullishly to a five million draw in U.S. crude oil stocks, as reported by the American Petroleum Institute Tuesday evening, gave sellers renewed confidence to hit the complex.
January light sweet crude gained $0.01 to settle at $18.15.
NYMEX Hub Natural Gas Ends Mixed
NYMEX Hub natgas futures ended mixed Thursday in a moderate session, with front months pressured all day by a soft physical market and bearish technicals after January's close yesterday below support.
January slipped 1.1 cents to close at $2.343 per million British thermal units. February settled 2.9 cents lower at $2.326. Other months ended mixed, with some 1999s up slightly.
"The technical picture is lower, and cash is weak and will probably stay that way short-term - there's no (cold) weather for at least two weeks," said one Midwest trader, adding any rallies will likely be met with good selling until some Arctic weather hits.
Much-below normal temperatures currently in Texas are expected to moderate by early next week. The National Weather Service 6-10 day forecast calls for above to much-above normal temperatures for the upper two thirds of the nation.
But some noted that other forecasters have raised the possibility of an influx of cold Canadian air later next week.
Traders said concerns were growing about the overall stock surplus to last year, now at 162 bcf, particularly if mild weather persists in major consuming areas.
Technically, support in January was pegged at $2.25, which is the low for January this year, with more buying likely around $2.14 and then at $2.05. Resistance was seen in the high-$2.50s and then in the low- $2.60s. Further selling was expected at the $2.81 double top from last week, and then at $2.84, $3.03, $3.11 and $3.21.
In the cash Thursday, Gulf Coast prices tumbled more than 15 cents to the mid-to-high $2.20s. Midcon pipes were talked about 15 cents lower in the high-teens. Chicago city gate gas was almost 20 cents lower at about $2.30, while New York was down more than 15 cents to the mid-$2.80s.
The NYMEX Henry Hub 12-month strip fell 2.3 cents to $2.259. NYMEX said an estimated 54,460 Hub contracts traded, down from Wednesday's revised tally of 69,176.
US Foreign Crude - First Canadian Hibernia Trades
The first cargo of Canada's newest crude stream, Hibernia, traded into an East coast refinery on Thursday, lighting up an otherwise dull foreign crude market, traders said.
The late December loader was heard traded at a premium of Dated Brent plus 60 cents on a delivered basis.
The Hibernia development is located in the North Atlantic, southeast of Newfoundland. Partners in the project said earlier this week the first producing well was pumping 40,000 barrels per day (bpd), with full production eventually seen as high as 180,000 bpd by the turn of the century.
Hibernia is a waxy, sweet crude with an API gravity of 32 to 34 degrees and a sulfur content of 0.2 to 0.5 percent. Its waxy nature means it can only go to refineries with heated delivery systems, traders said.
Latin American talk focused on Colombian Cusiana with two mid-January cargoes heard awarded by Ecopetrol in a sell tender at February West Texas Intermediate minus 50 cents. One of the cargoes, loading January 13-17, was heard reoffered onto the spot market.
Ecopetrol's first January tender fetched a firmer minus 48 cents, but two early January cargoes were heard sold on the spot market at a 50 to 55 cents discount.
"It certainly came off a little bit from December, but it looks like it has stablized now," one player said.
The Brent/WTI spread failed to widen out on Thursday, stifling buying interest for West African and North Sea barrels in the U.S. Gulf.
"West Africans still look expensive, but people are beginning to talk about bringing cargoes," said one trader.
Elsewhere, a Uruguayan buy tender for one million barrels of crude delivered at the end of February was withdrawn, an official at state-owned ANCAP said.
The official said the tender, which was due to be awarded on Thursday, would be rerun "in one or two weeks".
Charley Maxwell, The Dean Of Energy Analysts, Turns Contrarian
Charley Maxwell of Loewenbaum & Co. Inc. weighs all the many factors -- more production from Saudis and, yes, Iraq, Russian permits at 100% participation for Westerners and says the price of oil, dear sirs, is not going up: it's coming down. At least somewhat -- this spring.
At the very outset I want to express a personal bias. I am expecting the world economic system to fall to very low inflation rates soon, and from thence to zero inflation, and from there, possibly into mild deflation. All this I think may occur within the next two to three years.
Since none of us have had professional experience in other than an era of inflation, a move to zero inflation or below would present us with a new working universe.
(Of interest in this circumstance, the three Western occupation sectors of Germany held by France, Britain and the U.S. experienced modest deflation in 1948 through 1953, yet grew their GDP by 6% to 7% a year. So, deflation itself was not a problem here. However, we would guess that growth was facilitated by the absence of all previous debt (wiped out by World War II.)
So, I would assume that it is the accretion of debt from a previous era of inflation, when it made good sense to add debt, that represents the primary difficulty for economies to cope at the onset of deflation. Of course, without the subsidy of inflation, real estate rates tend to climb. Fixed yields have to be fully paid. Debt repayment must be made in newly expensive dollars. It could be a tough new economic world.)
A zero inflation situation (assuming it occurs) should eventually have some negative effect on commodity prices, crude oil among them.
Any commodity-based enterprise with high fixed (or sunk) costs of production, slowing market demand, and obligations to pass on its cash flows to banks, or lenders, or governments, or public welfare programs, is almost always forced to try to make up reductions in commodity prices by expanding output ... pressuring the price downward in the resulting competitive battle. National oil companies, and, to some lesser extent, commercial oil companies fall in this group.
This is a roundabout way of coming to my oil pricing outlook.
In the approaching Winter of 1997-1998, I'm projecting that Iraq will be allowed to continue producing some 750,000 barrels of oil a day. There may even be incremental output allowed on top of that as a reward for Iraq's compliance with U.N. disarmament monitoring, although these volumes, if any, remain to be settled. The Saudis will probably obtain a 2 million b/d increase in OPEC's formal quota limit to 27 million b/d at the [meeting in
November. They did so]. This adds a further 500,000 b/d to the actual output of OPEC (from Kuwait, Saudi Arabia, the UAE, Iran and possibly Libya.) So for the next three winter months, we will likely see prices holding at $19-$20 per barrel for West Texas Intermediate (WTI) crude, the benchmark price. But not for long.
FEATURE STORIES
The Canadian Association of Petroleum Producers (CAPP) has grave concerns about the Kyoto agreement, says CAPP President David Manning.
"In Kyoto, the federal government committed to such an aggressive target that consumers and businesses in every province will be scrambling to find ways to cope with this deal," says Manning.
"The federal government will have to fully determine and explain to all Canadians, industry and provincial governments what the costs will be before signing and ratifying the Kyoto deal, an agreement that commits Canada to a reduction of almost 30 per centby 2012."
Manning added: "Let's be clear. This is not an Alberta issue or an industry issue - this deal will affect the lives of every Canadian. The real issue is how the government will reconcile the targets agreed to at Kyoto and its commitment to no punitive taxes, more jobs and continued economic growth for Canada."
Manning also expressed disappointment at the lack of commitment by developing countries under the Kyoto Protocol. "Without the participation of developing countries, this is no longer an environmental agreement but rather a trade agreement that puts
Canada at a severe competitive disadvantage," says Manning. "In that context, Canada should not ratify any deal that is not first ratified by the United States, our greatest trading partner."
Manning added that CAPP members have tried to play a constructive role, looking for ways to help Canadians balance environmental and economic goals from the beginning of this process. "Ottawa abandoned a consensus with the provinces that was reached in Regina in favour of a more aggressive goal, with no clear explanation of how the goal might be reached," Manning added. "When Canadians understand what the Kyoto agreement means they will be shocked at the costs they are expected to shoulder given the fact their sacrifices will have minimal impact in reducing overall global emissions."
The federal government did not take Canada's special circumstances into account when negotiating on behalf of Canadians in Kyoto, says Manning. CAPP had recommended and continues to urge the federal government to incorporate the following elements into its position:
1. Link actions to scientific understanding and focus on long-term, flexible targets with measurable interim goals.
2. Take into account countries' different circumstances such as population growth, economic growth, export growth and energy efficiency.
3. Insist developing countries are signatories to any new climate change treaty - for a global plan to work, all countries must participate.
4. Ensure Canada gets credit for the export of energy efficient fuels, such as natural gas which have significantly reduced greenhouse gas emissions in North America.
5. Balance environmental concerns with other social and economic priorities such as jobs and economic prosperity.
Manning agrees the Canadian negotiators successfully fought for some flexible measures in the Kyoto Protocol. These include a form of joint implementation or Clean Development Mechanism, which will enable countries to finance emission-reduction projects in other developed countries and receive credit for doing so. There is also an agreement in principle to an international emissions trading regime. The regime will allow developed countries to buy and sell excess emissions credits amongst themselves. Carbon dioxide emissions from deforestation and carbon dioxide reductions resulting from newly planted trees (which act as "sinks", absorbing carbon from the atmosphere) will also be factored into the equation.
At the same time, Canada must continue to fight for credit for the environmental benefit of energy exports. "While not part of the protocol, we believe it's critical the federal government ensure that Canada gets credit for its energy exports before ratifying this deal," says Manning.
The Canadian Association of Petroleum Producers represents 170 companies which explore, develop and produce 95 per cent of Canada's oil and natural gas.
OIL INDUSTRY INSIDERS WORRY OTTAWA'S GREENHOUSE GAS DEAL MAY HURT PLANNED PROJECTS
By JERRY WARD -- Staff Writer
Some of the $18 billion in planned Albertan oil investments will be cancelled if Ottawa pursues greenhouse gas targets agreed to at Kyoto, Japan, industry players charge.
"If we ratify that agreement, you'll see projects cancelled," warned Myron Kanik, president of the Canadian Energy Pipeline Association.
"The reality is those are very aggressive targets and you cannot achieve those targets and have the kind of projects we've been talking about."
Investments totalling about $18 billion are on the books for the province's energy sector over the next 25 years.
The Canadian Petroleum Products Institute said effects of chasing the targets will ripple through Canadian society.
"It calls for profound changes in energy use for Canadians and will force lifestyle changes and choices Canadians may not be prepared to accept," said CPPI president Alain Perez.
The Business Council on National Issues said yesterday the Canadian commitment is "unrealistic."
BCNI says Canada's current emissions are about 20% higher than in 1990, due to the country's strong post-recession economic recovery.
"While the Kyoto commitment would require a cut of 6% from 1990 levels, the reduction from today's levels would reach about 20%," said CEO Thomas d'Aquino.
The BCNI is made up of CEOs representing a majority of Canada's private-sector economic output.
The agreement, signed by federal Environment Minister Christine Stewart yesterday, binds Canada to a 6% reduction in greenhouse gas emissions by 2010.
The treaty will result in a 5.2% reduction in total emissions of greenhouse gases - said to cause global warming - from 1990 levels by 2010. The European Union is to reduce its greenhouse gas emissions by 8% below 1990 levels, the U.S. by 7% and Japan by 6%.
"Canadian negotiators accepted an unrealistic reduction commitment that did not sufficiently differentiate between large, thinly populated, climatically cold, energy-intensive, largely export dependent countries," d'Aquino said.
David Manning of the Canadian Association of Petroleum Producers refrained from attacking the treaty, even though the oil sector has long opposed anything beyond voluntary measures.
"The flexibility tools have been reserved - they're in there," said Manning, referring to emissions trading and related measures. "What these tools do is they give the whole program more credibility."
Canada and the U.S. made it clear in Kyoto they agreed to the deeper cuts only because of the flexibility they expect through emissions trading.
On Wednesday, Ontario Hydro revealed that it plans to pay a California utility $30,000 US for its right to emit 10,000 tons of carbon dioxide. The emissions trade must still be finalized by managements of both companies.
CANUCKS IN DARK REGARDING CHANGES
One of the country's top oil executives says Canadians are in the dark when it comes to understanding how the Kyoto conference emission targets will change lifestyles.
To reach the levels agreed to, Canada would have to eliminate CO2 emissions of 105 million tonnes a year, said Syncrude Canada Ltd. chairman Eric Newell.
"If you take half the passenger cars off the road in Canada, you get a reduction of 27 million tonnes," Newell said yesterday from Fort McMurray.
"If you cut out all immigration between now and 2010 ... you only get a reduction of 33 million tonnes.
"If you shut down the whole fossil-fuel production industry in Canada you only get 90 million tonnes a year."
He said the debate should not be centred around Alberta and its production of fossil fuels.
"This is a very poorly understood issue," said Newell, noting public debate initiated by Ottawa will enlighten Canadians.
Newell also noted that developing countries such as China, India, Brazil, Mexico, Chile and Venezuela aren't part of the accord.
"They didn't even make a voluntary commitment," said Newell. "Unless they become part of this, as a planet we don't have a hope of achieving those objectives."
Emissions from the developing regions are expected to pass industrialized countries by 2010, Newell said.
MacLellan Announces Sable Deal
Nova Scotia Premier Russell MacLellan reduced the provincial rate for Sable Island natural gas on Wednesday, announcing a $20-million rebate program funded by the project participants.
The 10-year subsidy will bring Nova Scotia's gas discount to 20 per cent from 10. It is part of a tentative agreement between the province, the participants and Nova Scotia Power Inc.
"This is a momentous event in the life of our province," said MacLellan, who made better rates a priority when he took over the premier's job in July.
"Today I am here to announce that we have a new deal, a far better deal for Nova Scotia."
Under the agreement, natural gas distributors and retailers in the province will receive the rebate, which will supposedly be reflected in bills to consumers.
The project's biggest customer, Nova Scotia Power, will also become a participant by purchasing gas and a 12.5 per cent share of the 558-kilometre overland pipeline to New England.
Natural-gas liquids will be extracted at Point Tupper, N.S., apparently allaying concerns that New Brunswick's Irving family would do the job in Saint John, N.B. - at least for now.
MacLellan also announced the province's cash-strapped offshore company, Nova Scotia Resources Ltd., will join Mobil Oil and the project's other developers as an 8.4 per cent partner in Sable.
Nova Scotia Resources has a current debt of about $430 million. The Sable stake, which assures the province control over a portion of the resource, will cost it about $2 billion.
Where the money will come from, MacLellan said he didn't know. But he assured a news conference the province has not traded off consumer benefits for royalties.
"The royalty agreement is put in place and it will be made public probably very shortly," he said, adding there are only minor changes from the deal that was negotiated last spring.
Reading from a list of qualifying statements contained in the tentative deal, Opposition Leader John Hamm warned nothing is cast in stone.
"There's an awful lot that can happen between what was put before us today and the final contract," said Hamm.
New Brunswick Energy Minister Greg Byrne said he will look into the deal. Nova Scotia's neighboring province also gets discounts on Sable gas, though not for as much or as long.
The $3-billion project received approvals from Ottawa, the province and the National Energy Board last month.
On Tuesday, a consortium hoping to pipe the gas to New England via Quebec lost its appeal of a federal decision giving the $1-billion pipeline project to rival Maritimes and Northeast Pipelines, which plans a New Brunswick route.
TransMaritime Pipeline Project's appeal to the Federal Court of Canada could have put the brakes on its rival's efforts to get gas flowing from under the ocean floor by November 1999.
MacLellan said Nova Scotia Power's role in Sable gas will not affect Cape Breton's coal industry. The utility is its No. 1 customer.
"I've given my undertaking that I will do what I can to see that coal is not threatened," he said.
"There will not be any attempt to extend the natural-gas pipeline into industrial Cape Breton until ... a feasibility study has been undertaken and complete dialogue has been exercised with the community."
A lateral pipeline will be built into the Halifax area. Others may be negotiated as demand dictates. The deal also contains training components.
David Mann, Nova Scotia Power's president and chief executive officer, called the deal a good one. He said the firm's pipeline investment amounts to about $170 million.
"We will be able to finance that without a whole lot of difficulty," said Mann. "It gives us an opportunity to be a player and be at the table. That's extremely important to us."
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