MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY DECEMBER 12, 1997 (3)
OIL & GAS
Oil Prices Slide To Near 18-Month Low
World oil prices slid on Friday to within sight of an 18-month low touched the day before on growing fears that a flood of oil will swamp markets next spring and summer.
The world benchmark crude, Brent blend, settled 10 cents lower at $17.31 a barrel, having dipped briefly on Thursday to an 18-month low of $17.20.
"Supply is well exceeding demand," said a broker at London's International Petroleum Exchange.
Prices remain under the psycologically important $18 level and many analysts expect a raft of bearish factors over the coming months to keep prices down.
This year prices have averaged $19.43 after falling sharply from $25 in January.
The recent down trend began two months ago from nearly $22 and accelerated this month after the Organisation of Petroleum Exporting Countries (OPEC) agreed to raise oil output by 10 percent next year.
Adding pressure has been a speculative bear raid by financial funds which have been aggressively selling oil futures since the OPEC deal was struck two weeks ago.
Analysts said a slackening of growth in world demand had undermined confidence and oil buyers in Asia would have less purchasing power next year due to a currency crisis in that region.
Asian demand growth had been downgraded by between 200,000 and 400,000 barrels per day (bpd) for next year and may end up being cut more if China were sucked into the crisis, they said
But the full impact of Asia's financial crisis on oil consumption remains unclear and could slice deeper into demand. The region accounts for a quarter of world demand and over the past five years has contributed nearly 50 percent of global growth in crude demand.
Meanwhile, countries outside of OPEC are gearing up to
produce more oil next year.
Many oilfield projects are at risk of delay due to a shortage of rigs and other technical supplies but nevertheless many analysts expect 1.2 to 1.4 million bpd of fresh production next year.
Iraq has also been piling downward pressure on the markets in
recent days.
This week Iraq's oil minister, Amir Mohammed Rasheed, said he hoped to resume oil exports in a "few weeks" but only after Iraq and the United Nations agree on a distribution plan for food and medicines.
Oil traders are not generally expecting Iraqi oil back on the market until at least next year.
Iraq is allowed to sell $2 billion worth of oil every six months in a deal with the United Nations under which Baghdad gets food and medicines.
Iraq suspended oil exports on Friday, at the end of the second six-month deal, and said it will not restart the pumps until an aid deal is agreed.
Baghdad also wants the United Nations to speed up delivery of the aid bought with the proceeds from its oil sales.
There was also the prospect of a jump in the amount of oil Iraq is allowed to sell. Iraq sold just under 700,000 barrels per day (bpd) in the first year of the deal and the United Nations might increase the amount next year to $3 billion or $4 billion.
That, say oil traders, would take Iraqi sales to a million bpd or more and add weight to the world's oil surplus just as demand begins to slow in the spring.
NYMEX Crude Ends Tad Up Amid Light Short Covering
NYMEX crude settled marginally higher Friday after giving up strong gains when short covering dried up and left traders skittish about taking positions ahead of the weekend.
January crude finished six cents higher at $18.21 on thin volume. Light short covering sent the prompt month up as much as 28 cents to a session high of $18.43 after it broke technical resistance of $18.35.
The $18.35 level was previous support that was broken Wednesday, sending spot crude as low as $17.98, the first time it traded under $18.00 since February 13, 1996.
Prompt crude's recent low had given it a $2.00 loss since late November when OPEC decided to increase its production ceiling by 10 percent.
The most recent CFTC Futures Commitment of Traders Report showed speculators holding the largest net short position since mid-1993, and analysts said the bearish fundamental picture has meant only light short covering.
''We are in a lull in the downturn, but shorts are not in a rush to cover,'' said Pat Hughes, analyst with Chevron Corp [NYSE:CHV - news] in Walnut Creek, California.
''The first quarter of 1998 should be bearish given probable Iraqi oil sales, higher OPEC production and prospects of demand from Asia are looking worse and worse,'' said Hughes.
Meanwhile, refined products took heart from less selling in the cash markets and January heating oil settled 0.37 cent higher at 51.82 cents a gallon while January gasoline ended up 0.51 cent at 54.60 cents a gallon.
Charts: oilworld.com
Canada's Hibernia Makes Debut In U.S. Crude Market
Canada's Hibernia crude, which traded for the first time on the spot market this week, is a key addition to the menu of foreign crudes on offer in the United States, traders said on Friday.
The new offshore development, located southeast of Newfoundland, came onstream in November and will eventually supply five large cargoes a month of sweet, waxy crude to refiners on the East coast.
The first cargo, due to load later in December, was sold on Thursday to a major East coast refiner at a premium of around 60 cents to Dated Brent on a delivered basis.
Hibernia was priced against the North Sea benchmark because it will compete with West African and North Sea grades also sold on a Brent-related basis.
The grade has a refining value similar to Angolan Cabinda, said a trader for one of the partners in Hibernia.
The waxy nature of the crude means it has to be transported in a heated ship and in cold weather can only go to refineries with heated delivery systems.
"There could be problems if it had to go through an undersea pipe but if it goes directly ashore into the system then there's no problem," said the trader involved in marketing Hibernia.
"A wide breadth of people will be buying it, it could even go down to the Gulf," he added.
Two 800,000 to 850,000 barrel tankers, the Kometik and Mattea, will load offshore and shuttle crude to the refineries.
The crude is likely to be sold only on a spot basis until the Newfoundland onshore terminal is completed next year, after which sales will be made fob, the trader said.
"I'm sure ultimately the partners will take a look at term contracts, but probably not until the terminal is in place," he said.
Hibernia's current output from one producing well is 40,000 barrels per day. A second well is coming onstream in the next few days, while a third and fourth well are already being drilled, said a spokesman for Mobil Corp , an equity holder in the project.
Peak production of 135,000 to 150,000 bpd is expected to be reached in about a year, he added.
Partners in Hibernia are Petro-Canada with 20 percent, Mobil unit Mobil Oil Canada Ltd with 33.125 percent, Chevron Corp unit Chevron Canada Resources Ltd with 26.875 percent, Murphy Oil Corp's Murphy Atlantic Offshore Oil Co Ltd with 6.5 percent, the government of Canada's Canada Hibernia Holding Corp with 8.5 percent and Norsk Hydro A/S with five percent.
US Foreign Crude - Cusiana Most Lvely Grade
Colombia's light sweet Cusiana grade was the center of activity in the foreign crude market on Friday, with the first half of the January program already sewn up.
Two cargoes, loading January 13-17 and 15-19, were awarded in an Ecopetrol tender on Thursday at a discount of 55 and 56 cents to February West Texas Intermediate at Cushing, traders said.
The two buyers were said to be an East Coast independent and a European major.
The earlier cargo was heard resold on Friday at a premium of "a few cents""to the original price.
One of the foreign equity holders in Cusiana was also showing a January 19-24 cargo at around WTI minus 50 cents.
"The market (for Cusiana) seems to have stabilized around the mid-50s," said one trader. "I find that a bit surprising given a general lack of foreign oil in the Gulf."
The value of Cusiana has slipped some five to 10 cents from levels seen for late December cargoes. Traders said that a weakening value for key domestic grade Louisiana Light Sweet St.James was pressuring Cusiana.
Alternative foreign grades were scarce, with Nigerian Qua Iboe and Forcados seen languishing in the Gulf and attracting little interest from buyers.
Nevertheless, traders noted that the Brent/WTI spread was creeping towards the level required for an open arbitrage, typically around $1.50 a barrel.
The spread stood at over 80 cents in favor of WTI on Friday and traders noted that the heavy discount of around 50 cents for physical Brent barrels also helped the arithmetic of Brent-related sales.
"At the moment West Africans are still uncompetitive by around 10 or 15 cents, but things are heading in the right direction," said one player.
On the sour market, a late December Oriente offered into the Gulf earlier in the week at WTI minus $2.85 was heard placed, but not into the United States.
The seller was offering Oriente loading from January 10 at around the same level.
NYMEX Natural Gas Ends Mixed
NYMEX Hub natgas futures ended mixed Friday in a lackluster session, with a steady cash and some pre-weekend short covering offset by concerns about milder weather next week, market sources said.
January climbed 1.4 cents to close at $2.357 per million British thermal units. February settled 0.7 cent lower at $2.319. Other months ended narrowly mixed.
"We saw a little short covering going into the weekend, but the weather forecast looks pretty mild next week, so we could see some pressure Monday," said one East Coast trader, noting weekend cash prices held relatively steady today.
While below-normal temperatures are expected to dominate most of the nation through the weekend, normal tomabove-normal weather is expected by early next week.
And with the year-on-year stock surplus growing, few expected a significant rally until some Arctic weather hits.
Technical support in January was still 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 first at Thursday's high of $2.38 and then in the high-$2.50s and low-$2.60s. Further selling was expected at the $2.81 double top from last week.
In the cash Friday, Gulf Coast weekend prices held steady in the mid-to-high $2.20s. Midcon pipes were up slightly to the high-teens. Chicago city gate gas was little changed in the low-$2.30s, while New York was down a few cents to the low-$2.80s.
The NYMEX Henry Hub 12-month strip eased 0.1 cent to $2.258. NYMEX said an estimated 28,717 Hub contracts traded, down sharply from Thursday's revised tally of 54,506.
NYMEX Reference quotewatch.com
Canada Spot Narurl Gas Drifts Lower With Mild Weather
Canadian spot natural gas prices turned softer Friday as above-normal temperatures continued to cover Alberta and the U.S. Northwest, industry sources said.
Temperatures in Calgary are expected to reach a high of 12 degrees C Saturday, followed by a high of eight degrees C Sunday and four degrees C Monday.
As a result, spot gas at the AECO storage hub in Alberta was quoted at C$1.30-1.31 per gigajoule, off two cents from Thursday.
January AECO was also talked softer at C$1.36-1.37 per GJ.
At Sumas, Wash., spot gas prices also drifted lower to the low-$2 per million British thermal units (mmBtu) area. These prices are down 11 cents from Thursday when service on Westcoast's T south line was restricted to firm, causing prices to surge.
January Sumas was quoted steady at $1.70 per mmBtu.
Forecasts called for above-normal temperatures in the Northwest through early next week.
In the East, Niagara gas sold again in the low-US$2.40s amid a supportive natural gas futures market.
North American Rig Count
Canada Rig Count Up 3 To 480 vs 391 One Year Ago
U.S. Rig Count Down 2 to 1,012 In Week Ending Dec 12
The number of rigs exploring for oil and natural gas in the United States stood at 1,012 as of Friday, down two from the prior week, and 171 above the year-ago total of 841, Baker Hughes Inc. reported Friday.
The number of rigs drilling on land rose by five to 866, while rigs working offshore fell by four to 124. The number of rigs active in inland waters rose by three to 22.
Among the individual states, the biggest changes occurred in Texas, down by nine to 378, and Louisiana, down seven to 211.
A total of 361 rigs were exploring for crude oil in the Gulf of Mexico, down four from last week. The number of rigs searching for gas rose by two to 647, while the number of miscellaneous drilling projects remained at four.
There were 223 rigs drilling directionally, 66 drilling horizontally and 723 drilling vertically.
In Canada, the number of working rigs rose by three to 480, vs. 391 one year ago.
The weekly rig count reflects the number of rigs exploring for oil and gas, not those producing oil and gas.
Separately, there were 170 rigs under contract in the Gulf of Mexico as of Friday, unchanged from the previous week, Offshore Data Services said.
The utilization rate for rigs working in the gulf, based on a total fleet of 176, was 96.6 percent.
The number of working rigs in the European-Mediterranean area remained at 107 rigs under contract out of a total fleet of 111, a utilization rate of 96.4 percent.
The worldwide rig count was unchanged at 581 out of a total fleet of 606, with a utilization rate of 95.9 percent.
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