MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, FEBRUARY 4, 1998 (3)
NYMEX
At the New York Mercantile Exchange, gasoline prices closed lower for a fourth straight session as dealers worried about oversupply in the cash market.
"Gasoline has been under pressure since values have been declining in the New York Harbor. The futures are following the cash play," said Gerald Samuels, managing director of ARB Oil in New York.
March gasoline finished 1.09 cent lower a gallon at 49.86 cents.
Oil inventory data released Tuesday evening by the American Petroleum Institute said that stocks of reformulated gasoline (RFG), the sole grade deliverable against the NYMEX contract, rose 2.7 million barrels in the U.S. Northeast for the week ended January 30. RFG is primarily used in that region. March crude ended 13 cents a barrel lower at $16.37 amid no major news in the United Nations standoff with Iraq over weapons inspections. March heating oil ended 0.51 cent a gallon lower at 45.54 cents.
CRUDE OIL
Crude oil and petroleum-product futures settled lower on the New York Mercantile Exchange Wednesday, as conflicting signals on the outcome of the U.N.-Iraq crisis kept many traders on the sidelines.
March light sweet crude oil settled down $0.13 to $16.37.
Most players were hesitant to do anything as prospects for a resolution of the U.N.-Iraq standoff were cloudy. Earlier in the day, news that the White House downplayed Russian President Boris Yeltsin's comments that a war with Iraq could spark a world war and that it rejected an Iraqi gesture to open some sites to U.N. arms inspectors was viewed as mildly supportive.
"By his actions, Clinton might run into a world war. He is acting too loudly," the Interfax news agency earlier quoted Mr. Yeltsin as saying in the Kremlin. "One must be accurate with such weapons, and not threaten to shower them with airplanes and bombs," Mr. Yeltsin said in a reference to Iraq.
Mr. Yeltsin spoke at a meeting with First Deputy premier Anatoly Chubais. It was Russia's most critical statement so far concerning the possibility of a U.S. strike against Iraq. Russia is against the use of force threatened by the U.S. and Britain and has tried to mediate, but with little success.
NATURAL GAS
Natural gas futures, pressured up front by a soft physical market, ended mixed Wednesday in a moderate session, then on ACCESS showed little reaction to a weekly stock draw below expectations.
March eased 0.8 cent to close at $2.299 per million British thermal units, then on ACCESS traded on either side of unchanged after the stock data. April settled 0.8 cent lower at $2.313. Other months ended mixed, with some 1999 and 2000 contracts finishing up slightly.
"The market's not reacting much to the AGAs, but this is a bearish number. It builds the year-on-year surplus to 250 bcf," said one Texas-based trader.
AGA said Wednesday that U.S. gas stocks fell last week by 102 bcf, below Reuter poll estimates in the 115-125 bcf range. Overall stocks climbed to 250 bcf, or 18.5 percent, above last year.
Eastern stocks lost 76 bcf and were 17.5 percent above last year. Consuming region west storage, which dropped six bcf last week, was one percent over 1997 levels. Inventories in the producing region declined 20 bcf for the week but remained 33.9 percent above year-ago.
While technicals still look supportive, traders said the market seemed to be struggling here, with storage ample and mostly mild weather ahead.
Forecasts into next week still call for mostly above-normal U.S. temperatures. After a brief cooldown in the Northeast and Mid-Atlantic by Sunday, more moderate temperatures are expected early next week. In the Southeast, cool temperatures this week should warm by early next week.
Technically, traders still pegged March resistance at Monday's high of $2.38, with more selling expected at $2.50 and then at prominent highs in the low-$2.70s. Support was seen at $2.18, with more buying likely at $2.03. A close below the recent $1.96 spot low could set up a test of daily continuation chart support in the $1.85 area.
In the cash Wednesday, Gulf Coast swing quotes slipped several cents to about the $2.20 level. Midcon pipes were down a similar amount to the low-to-mid teens. New York city gate gas was little changed at about $2.50, while Chicago was a couple of cents lower in the mid-$2.20s.
The NYMEX 12-month Henry Hub strip fell 0.7 cent to $2.41.
U.S. NATURAL GAS SPOT PRICES
U.S. spot natural gas prices drifted lower Wednesday as continuing mild weather across most of the U.S. took its toll on demand, industry sources said. Forecasts are still calling for above-normal temperatures across the U.S., except in the Southeast, through next week. Cooler weather is forecast to arrive in parts of the Midwest by early next week, but warmer-than-normal weather is forecast to return by midweek, Weather Services Corp said. Swing gas at Henry Hub was quoted mostly in the low-$2.20s per mmBtu, though trades were reported done anywhere from $2.19 to $2.27.
Florida Power and Light Co said this morning about 85,000 of its customers in the Miami area were still without power following Monday's storm.
In the Midcontinent, prices were similarly weaker at $2.11-2.14, with Chicago city-gate quoted at $2.25-2.27.
In the western markets, the two Diablo Canyon nuclear units, totalling 2,160 megawatts (MW), resumed full power this morning after dropping to 50 percent earlier this week.
At the southern California border, prices retreated seven cents to near $2.20.
Permian Basin prices were also softer at $1.96-2.02, and San Juan prices were quoted mostly at $1.94-1.95.
In the East, New York city gate prices were quoted in the mid-$2.40s to low-$2.50s as a wind-packed storm headed up the East Coast, threatening extensive coastal flooding.
AT THE PUMPS
The national retail price for a gallon of gasoline at the pump this week was just over $1.06 a gallon, the lowest level in 26 months, the U.S. Department of Energy said Wednesday. The price for gasoline has dropped half a penny since last week and is down 17.5 cents a gallon from the same period a year earlier, the DOE said.
Since reaching its recent high at the end of last August, gasoline has dropped 18.3 cents in price -- falling in all but one of the last 23 weeks -- according to the DOE. Gasoline stocks stood at 217.9 million barrels at the end of last week, up 400,000 barrels from the previous week, the DOE said. A barrel holds 42 gallons.
COMMENTARY
Crude Oil
The crude oil markets have witnessed some near term volatility on the back of Iraq's non-compliance with U.N. weapon's inspectors. It does appear that this will be resolved and as such based on fundamentals, the market outlook is for further softening. Support is at $16.50 and $16.00. The technical picture has not changed with the medium term outlook still bearish and the short term picture neutral to bearish. If the Iraq situation fades, prices will most likely retreat to their recent lows.
Crude oil prices had a wild ride in January dropping to a four year low of $15.74 on news of stock increases and then jumping $2.00 only four days later on news of potential Gulf military conflict. The month ended downward around $17.00. The United States government is attempting to drum up international support for military action in the Persian Gulf to force Iraq to destroy all their weapons capability. They have positioned a third aircraft carrier in the gulf to ready themselves if necessary. Activity in the short term appears to be on hold, as the US is not getting unanimous approval from the international community.
US crude oil stocks grew 14.5 million barrels during one week in December dropping prices as the market reacted to the build during a month of typical stock drawdowns. World oil demand grew by 2.5 % in 1997 or 1.8 Mmbpd. Acording to some analysts, the outlook for 1998 sees a 1-1.4 million barrel per day oversupply of crude oil. Worldwide non-OPEC production is estimated to increase by 1.2 MMbpd, OPEC is expected to produce 1.2-1.6 MMbpd over last year, and demand is expected to increase 1.4 Mmbpd over 1997.
Dec Edmonton/Bow River heavy oil differential averaged $8.59 Cdn.
Natural Gas
NYMEX gas prices have been well supported and shown good strength in the past few days. Prices are approaching their 200 day moving average and could face some resistance at around $2.45. The technical picture for gas looks a little more positive than in previous weeks, both short term and longer term.
Alberta prices have also shown some strength in recent weeks, with large storage draws being quite bullish for prices. The near term trend is upward, but we would expect some softening as we move towards March (especially if no cold weather materializes)
OIL & GAS PRICE REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
MARKET ACTIVITY
INDEXES
The Toronto Stock Exchange 300 Composite Index fell 0.2% or 10.82 to 6762.63. In comparison, the Oil & Gas Composite Index fell 0.4% or 24.40 to 6313.81. Sub-components were mixed. The Integrated Oil's fell 0.0% or 2.06 to 8722.53 and the Oil & Gas Producers fell 0.8% or 47.24 to 5556.33. The Oil & Gas Services bucked the trend, climbing 2.4% or 62.84 to 2705.15.
COMMENTARY
Increasing talk is taking place regarding recovery in the oil services sector. In review of past week activity in the markets and especially at yesterday's activity, one would think such a move is in progress.
The Oil & Gas Services Index gained 2.4% yesterday while the TSE300 fell 0.2% and the Oil & Gas Composite Index fell 0.4%. It was much the same in the U.S. The Dow struggled to hold steady Wednesday, but - oil service and driller stocks spiked. The Oil Service Index ticked quietly upward throughout the trading session, gaining 6.09, or 6.25%, to 103.57.
One of the main indicators of that strength is the anticipated high drilling rate being carried from 1997 into 1998. Even with talk of reduced drilling budgets for this year, drilling will still require a huge demand in equipment and services. In addition, shares have been hammered down to very attractive price to earnings multiples when compared to last year.
However, let me suggest that one not throw caution to the wind. Do not put yourselves in a sink or swim situation. Oil prices need to stabilize and improve somewhat before the service sector will see a sustained rally. I don't see this happening over the near term. Oil prices artificially rebounded with tensions in Iraq. The fundamentals are still in place to hold crude at lower price levels. In addition, any moves upward may be capped by selling pressure and profit-taking along the way. The recent rebound in service shares will allow investors to get out before they suffer further losses as they have seen since mid October through January.
I forsee one more major selling period sending shares of companies in the sector downward towards previous recent lows. Thereafter, it won't be a case of sink or swim, just wading thru water to further profit.
INDEX CHARTS
TSE 300.......... canoe.quote.com
O&G Composite. chart.canada-stockwatch.com
Integrated Oil's.... chart.canada-stockwatch.com
O&G Producers.. chart.canada-stockwatch.com
O&G Services..... chart.canada-stockwatch.com
NEW PHLX OIL SERVICE SECTOR
bigcharts.com.
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