MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 16, 1998 (3)
OIL AND GAS
NYMEX
At the New York Mercantile Exchange, oil prices closed mostly higher in technical trade ahead of the three-day holiday, traders said.
Indications that speculators retain a huge "short" or selling position in crude oil prompted some buying support ahead of a biweekly report from the CFTC on trading positions.
That was confirmed after the close of trading as the CFTC data showed speculative short positions as of January 13 totaled 70,368 contracts, three times the number of longs or large buyers inthe market.
That kind of imbalance, or the expectation of it, usually prompts a nervous price move in the opposite direction.
February crude oil ended 17 cents higher at $16.51 a barrel. February heating oil ended up 0.52 cent at 46.75 cents a gallon and February gasoline up 0.60 cent at 50.99 cents.
Oil fundamentals remain extremely bearish, with renewed oil sales by Iraq adding to supplies already overburdened by a planned 10 percent rise in output targets this year by members of the Organization of Petroleum Exporting Countries. Traders also fear Asia's financial crisis will trim demand this year.
Natural gas futures ended higher across the board Friday in a moderate session, with firmer physical prices and more short covering again driving spot-February above technical resistance, market sources said.
February climbed 8.2 cents to close at $2.176 per million British thermal units, just over trendline resistance in the $2.17 area. March settled 7.4 cents higher at $2.159. Other months ended up 1.1 to 6.1 cents.
"This was mostly a short squeeze, but we're starting to see some modest fund buying too. Feb closed above the down trendline and this is the first time we closed above the 18 day moving average since November," said one Midwest trader, adding he expected still-bearish fundamentals to limit any move up.
NYMEX will be closed Monday for the Martin Luther King holiday.
Most traders agreed they were caught off guard by the four day rally that saw February jump more than 10 percent after diving to a new contract low Tuesday. But without any Arctic cold on the horizon, most expect the move up to be short-lived.
Mostly seasonal temperatures are forecast for much of the nation next week, with Texas expected to stay mostly above normal. Some above normal readings are also forecast for the Midwest.
Chart traders agreed the technical picture turned more positive this week after February's upside reversal, particularly with rising open interest accompanying the recent gains.
February's close today above the down trendline should set up a test of next resistance at $2.25. Further selling was expected at $2.34. Support was pegged at $2.085 and then at the new contract low of $1.97, with spot continuation support seen at $1.85-1.88.
In the cash Friday, Gulf Coast weekend quotes firmed a few cents to the $2.05-2.10 area. Midcon pipes were little changed in the low-$2s. Gas at the New York city gate held steady in the low-$2.50s, while Chicago also was little changed in the mid-teens.
The NYMEX 12-month Henry Hub strip gained 4.4 cents to $2.254.
CANADA SPOT NATURAL GAS
Canadian spot natural gas prices were mixed on Friday, as milder weather in the west clashed with a rising futures contract, traders said.
Spot gas at the AECO storage hub in Alberta was quoted at C$1.39-1.41 per gigajoule (GJ), steady to down one cent from Thursday's levels.
February AECO business was also quoted at C$1.39-1.40 per GJ.
Temperatures in Calgary are forecast to warm to highs of 20 and 34 degrees Fahrenheit on Saturday and Sunday, respectively, according to Weather Services Corp. However, cooler weather is expected to return by next week.
In the export market, Sumas spot gas was quoted lower at US$1.86-1.91 per million British thermal units (mmBtu), off 13 cents from Thursday.
Sources attributed the slump to forecasts calling for temperatures of six to 12 degrees above-normal through this weekend in the U.S. Northwest.
In the East, Niagara spot gas was boosted early by a strengthening February futures contract on NYMEX. Deals were reported done at the export point at US$2.23-2.26 per mmBtu, indicating a gain of about five cents from Thursday.
OIL & GAS PRICE REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
NORTH AMERICAN RIG COUNT
In Canada, the number of working rigs fell by three to 506 versus 410 one year ago.
The number of rigs exploring for oil and natural gas in the United States stood at 989 as of January 16, down one from the previous week, and 171 above the year-ago total of 818, Baker Hughes Inc reported.
The number of rigs drilling on land stood at 834, while rigs working offshore fell by seven to at 132. The number of rigs active in inland waters rose by one to 23.
Among the individual states, the biggest changes occurred in Louisiana, down by 10, in Oklahoma, up by seven. Kansas and Wyoming were up by four, while Texas was down by four.
The Gulf of Mexico rig count fell by six to 130.
The number of rigs searching for gas fell by 27 to 598, the number of rigs searching for oil rose by 26 to 387, while the number of miscellaneous drilling projects remained at four.
There were 228 rigs drilling directionally, 60 drilling horizontally and 701 drilling vertically.
The weekly rig count reflects the number of rigs exploring for oil and gas, not those producing oil and gas. For more detail, go to bakerhughes.com .
HEADLINE STORY
Energy Trusts Poised For Shopping Spree
Claudia Cattaneo - The Financial Post
Energy royalty trusts with deep pockets are going shopping for cheap oil and gas assets in anticipation of a sector revival from recently declining prices.
Calgary-based NCE Resources Group said Friday it is ready to spend between $300 million and $500 million for new producing assets, companies and stocks in the Canadian oil and gas sector.
President John Driscoll said his company is targeting more than six oil and gas producers for acquisition for its NCE Energy Trust, which buys companies for conversion into trusts.
It's also in the process of launching a mutual fund that would only hold shares of junior and intermediate oil and gas companies.
The Enerplus Group, which runs the EnerMark Income Fund, the Enerplus Resources Fund and Westrock Energy Income Fund One and Two, could buy more than $1 billion in assets this year, said Eric Tremblay, vice-president of corporate development.
After sitting on the sidelines last year because of the sector's overheated prices, the Calgary-based group, which manages assets worth $1.8 billion, is in an ideal position to grow because of its low debt, he said.
"First-quarter results across the oilpatch will be disappointing," he said. "There is a good chance stock prices might go down further ... and we might see a flood of new properties coming into the market."
Calgary-based ARC Financial Corp., with $300 million in assets in its ARC Energy Trust, is also in the market to make significant acquisitions, after buying $100 million in producing properties in 1997, said senior vice-president Nancy Lever.
"There is potential there will be more distress sales of properties and prices should come down" now commodity prices are lower, she said.
While the oil and gas sector is out of favor because of the poor price outlook, Driscoll is convinced it won't be long before the tide turns.
Oil prices have slumped because of the Asian economic crisis and promises of increased world supplies from members of the Organization of Petroleum Exporting Countries.
But Driscoll said any slack in demand from Asia will be taken up by countries in central and eastern Europe with growing economies, while supply increases from OPEC members could evaporate because tensions in trouble spots could explode into full-fledged conflicts at any time.
"Right now, the whole market is playing into our hands.
"There are an awful lot of great companies out there that are trading at very deep, deep discounts to their cash flow and asset values. The sector has either hit bottom or is very, very close to bottom," he said.
After investing a record $3.7 billion last year in income-producing instruments linked to the oil and gas industry, up from $2.4 billion in 1996, analysts predict investors will cool off because weaker oil and gas prices mean lower cash flows and smaller distributions, and because growth by asset acquisition is expected to slow down as fewer investors participate in equity issues.
Another deterrent is performance. On average, energy trusts had a total return of -5% in 1997, said analyst Brian Ector of CIBC Wood Gundy Inc. in Calgary - better than oil and gas producers, but still a negative return.
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