TOP STORY
Oil Prices Slide To Four-Year Lows
Canadian Press
Sagging world oil prices hit a slippery slope Monday, sinking to four-year lows as OPEC members continued to bicker over how to curb a massive global supply glut.
The benchmark West Texas Intermediate light crude dipped 64 cents Monday on the New York Mercantile Exchange to close at $14.28 as jittery traders balked at the growing war of words.
The latest blow to prices was an announcement this weekend by Saudi Arabia that it would not impose quotas without an ironclad agreement with other members of OPEC.
The news compounded a world oversupply problem triggered by the Asian economic crisis and warmer world temperatures brought on by El Nino.
The United States alone is experiencing a 100 million barrel per day surplus, a problem that's showing no signs of letting up.
"It's another nail in the coffin," said Peter Linder, an oil and gas analyst with CIBC Wood Gundy in Calgary.
"There's a lot of pressure on the OPEC countries now to get to the table and work to cut back production."
The Organization of Petroleum Exporting Countries, which controls about 40 per cent of the world's oil supply, is expected to call an emergency meeting this week.
In the meantime, Alberta producers are scaling back capital expenditure plans as the province prepares to cope with sinking oilpatch royalties.
Provincial Treasurer Stockwell Day based his 1998-99 budget on a $17.50 barrel, but the province can still break even if oil prices average $16 for the year, according to a Calgary analyst.
The main voice of the country's oilpatch, the Canadian Association of Petroleum Producers, called the pricing problem a "short-term situation" that won't grind the industry to a halt.
"We see a shift towards the natural gas side as increased pipeline capacity opens up," said association vice-president Greg Stringham.
"All in all, there will be an easing off on production, but I think that shift will balance things out to a large extent."
But Stringham admitted the association is eagerly awaiting news from the upcoming OPEC meeting.
"The fact that they're getting together is a good sign," he said. "Just because they haven't been able to agree immediately on what action to take isn't cause for alarm."
FEATURE STORY
Turf-Battle For U.S. Oil Market Share Heats Up
By Atiya Hussain
The turf-battle for a share of the U.S. oil market is intensifying, as rising domestic output of heavy, sour crudes runs up against aggressive competition from major foreign producers.
Venezuela, Saudi Arabia and Mexico, already locked in a tight three way battle to be the biggest source of U.S. oil imports, are also having to contend with rising production of heavy U.S. crudes, particularly from the giant Mars and Poseidon fields offshore in the Gulf of Mexico.
''This is going to be a war here,'' said one buyer of sour crudes in the Gulf. ''They (Mars and Poseidon) are just more competition for the Venezuelans and Mexicans because they are both are sour and heavier,'' the trader added.
Mars is ''sour'' in that it has a relatively high sulfur content of two percent, and is fairly ''heavy'' with an API (American Petroleum Institute) level of 31 degrees. Poseidon, with 23.2 API gravity and 2.7 percent sulfur, is heavier and more sour.
Shell Oil (RD.AS) (quote from Yahoo! UK & Ireland: SHEL.L), which operates the Mars field in the deepwater sector of the Gulf of Mexico, expects to see peak production of 140,000 barrels of crude oil a day and 140 million cubic feet of gas a day by mid-year 1998, company officials said. Currently, the field is producing 123,000 bpd.
Poseidon crude output should more than double by end 1999, although Texaco officials weren't able to be specific about how it will increase over that period.
''As more facilities, especially deepwater projects, come on line, you can definitely expect an increase in what Poseidon carries,'' said Pierre de Gruy, spokesman for Texaco. ''We're optimistic that by the end of 1999, the Poseidon pipeline will be carrying 200,000 bpd,'' he said.
The Poseidon pipeline system, operated by Texaco, was carrying 90,000 bpd of crude at the start of March, up from 67,500 bpd at the end of 1997. Texaco used to blend Poseidon with Eugene Island crude, a lighter, sweeter crude, but in anticipation of higher volumes, separated the fields in January.
Sour crudes are cheaper than lighter, sweeter grades because they require more refining to yield higher-value products like gasoline. Though many refiners have been upgrading plant, adding coking units to process heavier grades more economically, sour crude prices have declined even more rapidly than sweet grades since the start of the year, mainly because of oversupply worries.
Amid the fierce competition, Venezuela has aggressively pursued a strategy of buying refineries or entering into joint-ventures in order to secure an outlet for its growing output. Venezuela's latest in a string of deals was in February with Amerada Hess, agreeing to buy a 50 percent stake in a new joint-venture company which will own Hess's giant refinery in St. Croix, Virgin Islands and to build a new coking unit.
Similarly, Mexico, no longer content to lag behind Venezuela in the U.S., is expected to announce shortly a joint-venture between state owned Petroleos Mexicanos (PEMEX) and one or more refineries in the U.S. Gulf Coast. PEMEX already has a similar deal with Shell's Deer Park, Texas refinery.
Meanwhile, Iraqi sours are steaming toward the U.S., carrying Basrah Light. But traders are also citing rumors that Kirkuk, a crude that normally sells only in Europe, was on offer in the U.S., yet another sign of pressure on the sour market.
OIL & GAS
WORLD
IPE Brent Breaks To New Nine Year Low
IPE front-month Brent crude oil broke to new nine year lows on Monday as a combination of bearish technicals and Saudi Arabia's tough stance in the face of low prices brought commission house selling into the market.
April Brent broke to a low of $12.86 a barrel, the lowest price since November 1988 when the prompt contract hit $11.70 a barrel.
Prices fell in the day after Saudi Arabia made clear over the weekend that it would not act to rescue a glutted market only to see overproducers within OPEC take its customers.
Brokers said prices were pushed lower in the afternoon by commission house selling and expected more sellers to come into the market now that this key level had been broken.
''I would have thought there will be more sellers come in now,'' one said.
March gas oil ended earlier at nine year lows, down some $4.75 at $124.25 a tonne and just 25 cents off the intraday low.
NYMEX
Crude Oil
NYMEX Crude Closes Off Sharply To $14.33/bbl
Crude futures at the New York Mercantile Exchange dropped sharply, touched off by Saudi Arabia's statement Sunday that dashed hopes for an emergency OPEC meeting to help lift depressed oil prices.
At the close, NYMEX sweet crude for April delivery was off 58 cents on the day at $14.33 a barrel, clawing its way back from a low of $14.15 a barrel hit in afternoon trading.
In early trading, front-month crude touched $14.69, a fling from an opening of $14.62, but no support developed and prices fell rapidly.
Heating oil closed down 1.22 cent at 40.93 cents a gallon while gasoline was off 2.02 at 46.28 cents a gallon.
Earlier, Brent front-month crude at London's International Petroleum Exchange broke to new nine-year lows amid a combination of technicals and Saudi Arabia's tough stance.
April Brent hit $12.86 a barrel, the lowest since November 1988 when prompt contract hit $11.70 a barrel. It later recovered a bit, closing down 61 cents at $12.98 a barrel, off the intraday low of $12.85 and above the four-year low of $12.90.
On Sunday, Saudi Arabia's Oil Minister, Ali al-Naimi said it would no longer act as ''swing'' producer to balance global supply and demand for oil.
He called on cheating OPEC members to ''take significant and tangible steps to reduce their production.'' Saudi Arabia, OPEC's lynchpin and largest producer, would not reduce production, he said, warning it would not let rivals grab its hard-won customers.
Last month, Saudi Arabia raised the possibility it might back an emergency meeting of OPEC to discuss sliding oil prices if members producing above their quotas curbed production.
In response, Venezuela, known as the biggest OPEC quota buster, repeatedly said it would not cut its oil production one bit.
In his statement Sunday, Al-Naimi said any OPEC rescue plan for the oil market was being delayed by members that ''are not prepared to reduce production.''
''This means that coming up with a joint solution within OPEC to restore stability to the market would be very difficult indeed,'' he said.
Hopes that an emergency meeting had helped the market from sliding down at a bigger range than it has done so far, but after Sunday's statement by Saudi Arabia, those hopes were dashed.
Venezuela currently produces about 30 percent above its official quota of 2.6 million barrels per day (BPD). In November OPEC raised its production quota by 10 percent to 27.5 million BPD, but production in the cartel is now running at about 28.7 million BPD.
Nigeria and Qatar are also known to be producing above their OPEC quota.
''The market believes OPEC will not do anything for the time being to curtail production,'' said John Lichtblau, president of the New York based Petroleum Industry Research Foundation.
While a small committee within OPEC is set to meet on March 16 and may appeal to members to curtail production, ''it does not mean anything,'' he said.
''A general malaise is bothering the market,'' a floor trader said, referring to the festering oil glut. ''It's killing us,'' he added.
And there is really no news that can prop up the market right now, said Lichtblau.
''It is now assumed that there will be no military action against Iraq,'' he said, following U.N. teams' smooth start of their arms inspection tasks last Friday.
The U.N. teams' return to Iraq came in the wake of U.N. Secretary General brokering an agreement with Saddam Hussein. So far, the Iraqi leader has kept his part of the bargain, but analysts are skeptical he would stay that way over the long haul.
''It is also assumed that Iraq's oil exports will increase,'' with the U.N. approval or a plan raising the ''oil-for-food'' deal with Iraq to $5.2 billion every six months from $2.0 billion, Lichtblau said.
For another, warm weather is coming, ''which means less demand for heating oil'' he noted.
In addition, there is continued demand weakness from Asia because of economic troubles in that region.
Meanwhile, the U.S. Energy Information Administration has left unchanged its estimate that world oil demand this year will total 75.3 million barrels per day (BPD).
But the U.S. Energy Department's statistitcal agency raised its oil demand forecast for 1999 by 200,000 barrels to 77.5 million BPD.
The EIA forecast for world oil supply this year and next year remained unchanged at 75.7 million bpd and 77.6 milion bpd.
It lowered the estimate of U.S. oil production this year by 10,000 barrels to 6.37 million bpd and cut next year's output forecast by 70,00 barrels to 6.29 million bpd.
Due to oversupply of oil in international markets, the EIA lowered its forecast for imported oil price U.S. refiners would have to pay this year to $14.92 per barrel from last month's estimnate of $15.15 a barrel. For 1999, it estimated price for imported oil at $15.17, from $15.42.
The forecast is based on assumption that Iraq would continue to export about one million barrels of oil a day and does not take into account the recent U.N. decision to allow Iraq to more than double its crude exports.
Natural Gas
NYMEX Hub Natural Gas Ends Firmer In Fairly Idle Trade
NYMEX Hub natural gas futures passively ended today's session higher, boosted early by cold weather and firmer cash prices, industry sources said Monday.
After swaying between $2.14 and $2.185, April finished four cents higher at $2.169 per mmBtu. May settled up 4.4 cents at $2.214, while other deferreds ended up 1.5 to 3.6 cents.
''I think it's definitely going to be up again tomorrow, but probably not by much,'' one trader said, noting the absence of traders due to the GasFair conference in Houston will likely keep trading fairly quiet over the next couple of days.
On the technical side, resistance after $2.185 was seen at $2.23, but some traders doubted April's ability to break through that level in Tuesday's session. The next resistance points are $2.30 and $2.355. Support was pegged at $2.14, and then at $2.105 and $2.06.
The cash market was more sensitive to the cold weather, climbing an average of 10 cents from Friday. Gulf Coast quotes were in the mid-teens, while Chicago city-gate prices hovered in the low-$2.30s. South Texas prices rose a similar amount to about $2.11-2.13, and New York city-gate business was reported done in the low-to-mid $2.40s.
While the cold weather is expected to support the market in the near-term, some traders said that next week's forecasts calling for mostly normal temperatures may lead to some downward movement.
Separately, the 12-month strip gained 2.7 cents to $2.359.
U.S. SPOT GAS
Chilly Midcontinent Temps Boost U.S. Spot Natural Gas
U.S. spot natural gas prices rose across the board as cooler Midcontinent temperatures and gusty winds generated solid demand, gas traders said.
''The weather has moved over and got below freezing, and with the wind, there is a lot of (power) demand,'' said one cash trader in Texas.
A shortage of supply coupled with traders short-covering their positions were also cited as reasons for the market's bullish tone, the trader said.
Next-day Henry Hub prices picked up at least six cents from Friday's levels, settling within a range of $2.14-2.20. Meanwhile, April natgas futures at the Hub hovered off session highs around $2.16 in midday trade.
In the western Texas cash market, cooler weather bolstered Permian and San Juan prices at least 12 cents to $2.16-2.21. Southern California border prices were also well bid in the low-$2.40 range.
In the Midcontinent, prices rallied about nine cents to $2.14-2.19. On Northern at Demarcation traded at a premium to all other Midcontinent pipes, firming to $2.28-2.30.
Chicago city-gate traded as high as $2.34 before settling in the low-$2.30s.
Following the Gulf market higher, New York city gate prices gained about ten cents to the low-to-mid $2.40s, while Appalachian gas on Columbia firmed six cents to $2.26-2.29.
In addition to cooler-than-expected weather, an unexpected outage in Texas helped support the market, traders said.
Texas Utilities' 1,150 megawatt (MW) Comanche Peak 2 nuclear power unit tripped off line Sunday due to a loss of its turbine cooling water pumps, the Nuclear Regulatory Commission (NRC) said Monday.
The utility company said the plant would reconnect to the grid later today.
CANADA SPOT GAS
Canada Spot Natural Gas Carried Higher By Cold Weather
Colder weather and an uptick in futures carried most Canadian spot natural gas prices higher on Monday in active trade, marketers said.
Spot gas at the AECO storage hub in Alberta was quoted mostly at C$1.79-1.80 per gigajoule (GJ), though early business was reported done at C$1.83. Prices on average were up 10 cents from Friday's levels.
''Intra-Alberta loads are up a little today,'' one Calgary-based source said, noting temperatures were around -20 degrees Celsius this morning.
By Wednesday, however, forecasts are calling for a return to a high of zero in southern Alberta.
Meanwhile, April AECO was also talked a little firmer at C$1.71, while winter business was quoted at C$2.40-2.44 and one-year at C$2.20-2.23 per GJ.
Ongoing maintenance on TransCanada PipeLines' mainline, scheduled to last through March 27, is restricting about 156 million cubic feet a day of interruptible gas, the company said.
In the export market, prices at Sumas, Wash., mostly traded at US$1.65 per million British thermal units (mmBtu), up about three cents from Friday. Values at Kingsgate were also quoted higher around US$1.67 per mmBtu.
In the East, gas prices at Niagara in southern Ontario were talked at US$2.33-2.34 per mmBtu, rising about three cents from Friday, as cooler weather approached the region.
Temperatures in the region are expected to dip into the low teens on Tuesday and Wednesday.
MARKET ACTIVITY
Although the overall markets performed in a very positive manner yesterday, the oil and gas sector did not fare well. As noted in the previous articles, falling oil prices was the contributing culprit.
The Toronto Stock Exchange 300 Composite Index rose 0.6% or 42.45 to a record high of 7228.06.
In comparison, the Oil & Gas Composite Index fell 1.5% or 98.77 to 6431.16. Among the sub-components, the Integrated Oil's fell 1.0% or 91.63. The Oil & Gas Producers fell 1.7% or 94.91 to 5650.03 and the Oil & Gas Services lost 2.1% or 59.73 to 2753.43.
Gulf Canada Resources, Canadian Occidental Petroleum, Renaissance Energy, Alberta Energy, Petro-Canada, Ranger Oil and Poco Petroleums were among the top 50 most active traded issues and all were to the downside.
Imperial Oil fell $2.20 to 81.55, Seven Seas Petroleum $0.90 to $27.50, Pendaires Petroleum $1.00 to $9.00, Remington Petroleum $0.75 to $16.50, Canadian Natural Resources $0.60 to 26.90, Penn West Petroleum $0.55 to $16.00, Rigel Energy $0.55 to $12.25, Anderson Exploration $0.50 to $16.15 and Berkley Petroleum $0.45 to $13.85.
Oil service stocks were also affected on th edownside. Dreco Energy Services fell $3.00 to $42.00, Tesco $0.95 to $21.85, Precision Drilling $0.70 to $24.90 and Plains Energy Services $0.60 to $8.90.
I've been saying all along there was absolutely no reason for oil prices to stabilize in the $15-16.00 range and we would see crude fall further. I suspect shares in both oil and gas companies will now drift lower, catching up with the extent oil prices have fallen. This will be the last major downturn in shares of these companies. Exactly how deep oil prices fall, remains in question, How long a period of time will be involved until shares once again stabilize, is anyone's guess. OPEC is the key over the next few months. Thereafter, world economies must begin to grow, thus increasing energy demands. This particularly applies to the Far East.
For investors, sharpen your pencils and continue to perform due diligence on the companies that interest you. Be patient and wait for the initial sign that will generate increased oil pricing. Shares in oil producers will then react strongly to the upside. I urge the same caution to those caught up in the natural gas euphoria. The clouded situation of depressed oil prices will take some toll on the gas producers also. We have entered into a dull period for the entire oil and gas sector. What appears to be bargains today, will be better bargains tomorrow. I'm taking profits and putting my capital aside for reinvestment at the appropriate time.
BUY - HOLD - SELL
Gordan Capital
IPSCO (IPS-T:$42.65) BUY
ISPCO Announces Large diameter Pipe Order
IPSCO announced that it has won an order for 44,000 tons of project pipe for Interprovincial Pipe. We expect IPSCO to ship a total of around 1.4 MM tons of steel products this year. This order will take roughly three months to complete and extends the backlog at IPSCO's spiral pipe facilities through July of this year. Separately, IPSCO's order from Alliance pipeline has increased from 285,000 tons to 400,000 tons with deliveries scheduled to begin Aug 1 of this year. We believe delays remain a strong possibility. However, from a valuation perspective, we would view a one year delay on Alliance as relatively immaterial. We continue to forecast EPS of $3.35 for 98 and $4.20 for 99. We continue to rate IPSCO a BUY with a 12-month target price of $47.
Barrington Petroleum Ltd. (BPL-T:$4.60) BUY
Year-end Results
Reported fully diluted CFPS for the year ended December 31, 1997 was $0.95 vs. $0.89 in 1996. In 1997, Barrington added 30 million boe of proven plus probable reserves replacing production by 3.8X at a finding and development cost of $5.32 ($7.73 proven only). However, during 1997 the company revised downward the reserve additions booked in prior years by 4.1 million boe of proven and 1.4 million boe of probable reserves. On an adjusted basis, the 1997 finding and development costs were $6.55 proven plus probable ($9.69 proven only). Gas production in 1997 was up 37% year-over-year to 111 mmcf/d, while liquids production rose 57% to 7,138 bbls/d. The board has set the 1998 capital budget at $100 million this is expected to be funded through $60 million of cash flow, $21 million from the exercise of outstanding warrants and stock options and $19 million of debt. Barrington exited 1997 with production of 20,100 boe/d. We are forecasting 1998 average production of 20,000 boe/d (gas of 120 mmcf/d with liquids of 8,000 bbls/d). Our fully diluted CFPS forecast remains $1.00 in 1998 and $1.20 in 1999. We are maintaining our BUY recommendation with a 12-month stock price target of $5.50.
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