MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, JANUARY 6, 1997 (3)
OIL & GAS
NYMEX
Oil Prices Change Little As Gasoline Declines
Oil prices changed little and gasoline prices extended their declines Tuesday as the United Nations approved Iraq's oil-for-food program.
Light, sweet crude oil for delivery in February rose two cents to $16.91 US on the New York Mercantile Exchange. The February gasoline contract fell .49 of a cent to 52.35 cents a gallon.
Secretary-General Kofi Annan has approved Iraq's plan for distributing humanitarian supplies bought under the oil-for-food program, paving the way for Iraq to resume oil sales, the United Nations said Tuesday.
Traders were worried Iraq's return to oil markets would boost already ample supplies.
Last month, the Security Council renewed the program under which Iraq can sell up to $2.14 billion worth of oil every six months to buy food and medicine.
But the Iraqis refused to resume exports until the United Nations agreed to their distribution plan. Iraq's oil minister, Amer Mohammed Rasheed, said in Baghdad that exports would resume a few days after the plan was approved.
U.N. officials said Iraq must also submit a plan for setting the price of oil to be sold this month. The plan is updated monthly based on world market prices. U.N. officials said they expected no major delays in submitting and approving the pricing plan.
Iraq has been banned from freely exporting petroleum since 1990, when the Security Council imposed sanctions to punish the country for invading Kuwait, which led to the Persian Gulf War.
February heating oil was 0.16 cent lower at 47.76 cents a gallon. Natural gas prices were also lower, with contracts for delivery in February settling at $2.182 per 1,000 cubic feet, down 2.5 cents.
In London, North Sea Brent blend crude oil for delivery in February settled at $15.67 a barrel, down 12 cents.
NYMEX Hub natural gas futures mostly ended lower Tuesday in a moderate session, pressured by some technical selling when early buying on supportive weather and a firmer physical market stalled, industry sources said.
February slipped 2.5 cents to close at $2.182 per million British thermal units after stalling early at $2.25. March settled 2.7 cents lower at $2.166. Other months ended flat to down 2.1 cents.
"We found support early, bounced on some spec buying, but very heavy selling came in when we (February) got near $2.25," said one Midwest trader, noting revised forecasts for a more moderate cold front later this week also added to the pressure.
Forecasts this week call for above-normal temperatures in the Midwest and East. Colder air is expected by the weekend in the Midwest and Texas, but some forecasters expect the impact to be short-lived, with a strong jet stream pushing the Arctic mass back into Canada later next week.
Early withdrawal estimates for Wednesday's weekly AGA storage report range from 75 bcf to 180 bcf.
Chart traders pegged February support at Monday's low of $2.085 and then at $2.05, with psychological support at $2. Resistance was seen at $2.34, with further selling likely at $2.46, $2.515 and the double top at $2.68.
In the cash Tuesday, Gulf Coast prices firmed about a dime to the $2.10 area. Midcon pipes were more than 10 cents higher at about $2.10. New York city gate gas mostly was quoted in the $2.50s, off about a dime on mild weather in the region. Chicago was in the low-$2.20s, up from about $2.10.
The NYMEX 12-month Henry Hub strip slipped 1.6 cents to $2.214. NYMEX said an estimated 38,576 Hub contracts traded, down from Monday's revised tally of 42,635.
CANADA SPOT GAS
Canadian Spot Natural Gas Prices Pushed Higher By Cold
Below-freezing temperatures in western Canada and forecasts for more cold in the U.S. Northwest pushed most Canadian spot natural gas prices higher on Tuesday, traders said.
Spot gas at the AECO storage hub in Alberta was quoted at C$1.59-1.60 per gigajoule (GJ), indicating a gain of about five cents from Monday.
February AECO was talked equally firmer at C$1.52 per GJ.
Environment Canada said temperatures in southern Alberta were not expected to climb above -20 degrees Celsius until at least Saturday, with a low of -35 C forecast for Friday.
Meanwhile, the trading range narrowed today at Sumas, Wash., following Monday's flurry of activity, causing prices to swing between $1.90 and $2.30 per million British thermal units (mmBtu). Most deals were reported done today at $2.00-2.10, up from late deals done on Monday around $1.95, as a cold front approached the region.
In the East, export prices at Niagara were quoted at US$2.30-2.32, up about eight cents from Monday, after some early buying on NYMEX sent the February Henry Hub contract to a high of $2.25.
Oil Dips To 21/2-Year Low
Sydney Sharpe, Calgary Herald
Oil prices dipped below $17 US this week for the first time in 2 1/2 years, sending shudders throughout Calgary's oilpatch.
"It's come down further and faster than most people projected," said Ken Croft, an analyst with Levesque Beaubien Geoffrion Inc.
Prices dropped below $17.00US., primarily because there's more supply than demand. Commodity traders are concerned about the impact of expanded oil supplies when Iraq resumes exporting oil under a United Nations oil-for-food plan within the next few days, which would add to the glut.
The Organization of Petroleum Exporting Countries has also increased its production by 10 per cent.
The Asian currency crisis and the unseasonably warm weather brought by naughty El Nino have also undermined oil prices.
"The most recent things have been the widening worry about the Asian flu, and the degree to which it will start impacting on economic growth," said Wilf Gobert, an analyst with Peters & Co., who also derided El Nino. "Obviously a cold turn in the weather in the East could strike a responsive cord that this is the bottom, and the worst is over."
If not, the low oil prices are not expected to change.
Analysts are concerned over the period of time Asia will need for economic resurrection.
Yet they also believe that OPEC won't allow such low prices to continue indefinitely.
"OPEC has never let oil prices flounder for long," said Gobert.
"When they go into these big swoons, it has an impact on spending activity."
For every decrease of $1 US per barrel below the government's forecasts, the province can deduct $190 million Cdn every year from its coffers.
But the province should still be the winner for its budgetary year, which runs from April 1, 97 to March 31, 1998. Alberta Treasury spokeswoman Trish Filevich noted that they had estimated oil at $18.85 US for the budget year.
For 1997, the price of oil averaged $20.61 US, down from the 1996 average of $22 US. The consensus among analysts for 1998 is $19 US.
Analysts say they're not ready to throw in the towel yet.
"Merrill Lynch & Co. analyst Bob Hinckley, is sticking with his oil price forecast of between $19 and $19.50 US. "We see this as temporary," he said.
What A Deal
Diesel fuel markets continue to display bearish trends across the world. Against all historical odds, distillate values are the lowest they have been in more than a year and persist on showing no signs of increases for the near future. Prices are held down by dispirited crude oil costs, an abundance of product supply and a warmer than normal winter across the Northeast and Midwest. Analysts suggest supply is so plentiful, prices are likely to remain down for some time to come.
NYMEX crude oil futures are trading in the low $17 bbl range supported by a wealth of global supply. Reporters forecast Iraqi crude will hit world markets in the next few weeks, which will add to the feebleness in the marketplace. U.S. refineries support this augmentation in supply, operating at more than 96 percent of capacity. According to resources, there is plenty of supply across the nation's pipes, spot and rack markets, not to mention the building inventories added to by the refiners.
Low cost crude is lending great support to humble heating oil futures. NYMEX heat is supporting a 48.25 cents per gallon bottom and resisting a 48.75 cents per gallon top; levels not heard of at this time of the year. Heating oil is so low, the commodities exchange is sending out huge "margin calls" to cover financial levels of secured contracts. A "margin call" is when the current day contract price has dropped so far below the purchase price, the equity in the fund is not enough to cover the losses. In cases such as this, the exchange calls on the contract owner to cover the loss difference.
Wholesale and retail markets are in tandem with commodities markets, extremely bearish for this time of year. The national wholesale average is 53.87 cents per gallon, down more than 700 points from this past fall. Wholesale product is a steal right now due to high supply levels, low based product and refining costs and other season factors. Depressed wholesale values continue to lend support to retail markets. Truck stop retail prices have been trending down for more than a month and show no signs of increasing in the near term. The national retail average is $1.1315 and should not move higher without the support of increases in wholesale arenas.
What to do now? Buy as much fuel as you can, wherever you can. Prices are so low, they could be at their bottom and ready to bounce back given the right market environment. According to the DOE, domestic demand is at extremely high levels, which could lead to higher prices for the future. Also, watch the weather! If we get any extended period of cold weather, product will move quickly and prices will tend to rise. For now, buy-buy-buy.
REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
MARKET ACTIVITY
A whole lot of shakin goin on. Several stories are being written about the oil and gas sector and the public companies whose shares continue to be negatively impacted due to the negative short term outlook. I am listing a series of articles which might appear to overlap each other, but each has some unique content.
Oil And Gas Shares Plummet On Weak Outlook
Claudia Cattaneo & Ian McKinnon - Financial Post
Oil and gas shares took it on the chin on North American stock exchanges yesterday as investors concerned about the weak outlook for oil and gas prices bailed out in droves.
The TSE oil & gas index closed at 6138, a 313-point drop.
Analysts say some companies are better equipped than others to weather the downturn. Integrated ones are probably best positioned.
"They get some hedge effect from their downstream operations," said Michael Tims, president of Peters & Co. Ltd. in Calgary. "Part of their business benefits from lower crude oil prices because it lowers their input cost on the refinery."
Suncor Energy Inc. (SU/TSE) closed yesterday at $46.90, off $1.70. Imperial Oil Ltd. (IMO/TSE), ended at $88.15, down $1.75. Petro-Canada (PCA/TSE) closed at $23.35, down $1.35. Shell Canada Ltd. (SHC/TSE) closed at $23, down 95›.
Senior producers are in better shape than smaller firms. For one, they can stand a higher level of debt, said Peters' analyst Craig Langpap.
Among those, companies that are more leveraged and have more aggressive spending plans are the most vulnerable because if they cut their budget their growth disappears, said New York-based Bob Hinckley, with Merrill Lynch & Co.
"If people see you are weighted toward oil, you are overspending your cash flow, and your balance sheet is levered, they are going to flee your stock," he said. "The momentum guys will sell at any price. Survival in some cases is an issue, in other cases it's a matter of postponed growth."
Peters' picks of companies best able to weather the storm because of a debt to 1998 cash flow ratio of less than two times include: Alberta Energy Co. Ltd., Anderson Exploration Ltd., Canadian Natural Resources Ltd., Norcen Energy Resources Ltd. and PanCanadian Petroleum Ltd.
"Larger companies can stand to have higher debt levels, because of access to public debt market. The smaller companies, we'd like to see them with debt levels with one and a half times and less 1998 cash flow," said Langpap.
The sector's downturn started in October in reaction to overheated conditions. But recently it's been fuelled by a poor outlook for crude oil and natural gas. Oil declined below US$17 a barrel on Monday. It closed up US14› at US$17.03 yesterday.
Hinckley, like most in the industry, reduced his price forecast for 1998 by US$2, to US$19 to US$19.50 for West Texas Intermediate.
While he sees the shakeup as an outright sector downturn, he said the industry is better positioned this time than in previous cycles because balance sheets are in better shape.
Natural gas leveraged companies may provide a buying opportunity. There is a strong likelihood of higher natural gas prices later in the year because of expanding pipelines.
The industry will get little relief from hedging activities. Tim Simard, a principal with Risk Advisory in Calgary, estimated less than 10% of production is hedged against commodity price risk this year, down from as much as 25% last year. Risk management is down because many companies lost money on hedge contracts last year. Producers also bowed to feedback from investors, who said they don't want companies
to hedge their production
Scott Inglis, of Calgary's FirstEnergy Capital Corp., said his list of companies looking for acquisitions includes Amber Energy Inc., Anderson Exploration Ltd., Northrock Resources Ltd., Penn West Petroleum Ltd., Pinnacle Resources Inc. and Poco Petroleums Ltd.
Likely standing in the crosshairs are Barrington Petroleum Ltd., Blue Range Resource Corp., Newport Petroleum Corp., Northstar Energy Corp., Orbit Oil & Gas Ltd., Petromet Resources Inc., Ranger Oil Ltd. and Tarragon Oil and Gas Ltd.
Besides high debt and a heavy oil focus, other dangers that could put a firm on the block in the near future are high finding costs and ceiling test writedowns coming from 1997 yearend accounting tests, Inglis said.
He expects Renaissance Energy Ltd., in a first for the firm, to make a large acquisition. "Their strategy has been to spend less when activity is high and buy when things are out of favor -- and things are out of favor."
Renaissance's debt level is in good shape and the company needs to make a move to lift the pressure on its shares. The firm's stock (RES/tse) tumbled $2.10 yesterday to $26.50, down from a high of $50 last year.
Technology-focused service firms that can help lower finding and development costs are best positioned to ride out the current selling wave, another analyst said.
"In a declining price environment, to a point, these companies can withstand that because they improve success rates in drilling or make drilling more efficient," said Scott Lamacraft of Sprott Securities Ltd.
He has targeted firms with a technological advantage and international markets. He recommended buying Tesco Corp., Ryan Energy Technologies Inc., NQL Drilling Tools Inc. and Shaw Industries Ltd.
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