MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, MARCH 25, 1998 (2)
Oil Rises As OPEC Prepares Emergency Meeting
LONDON, March 25 - World oil prices rose on Wednesday after the Organisation of the Petroleum Exporting Countries announced an emergency meeting to ratify a historic pact aimed at boosting flagging
oil prices.
World benchmark Brent blend crude was 30 cents higher at $14.83 a barrel at 1635 GMT, with most of the gains coming after OPEC announced plans to hold an extraordinary meeting in Vienna on Monday.
One broker attributed the rise to "pre-OPEC nerves."
''We're seeing the full extent of having an OPEC meeting around the corner,'' he said.
Dealers who are normally sceptical about the sincerity of OPEC output pledges said the fractious group's agreement to meet was evidence of an encouraging seriousness about complying with the pact.
OPEC Secretary General Rilwanu Lukman said the 11 members from Africa, Asia, Latin America and the Middle East would meet as ''part of efforts to stabilise the oil market'' following painful price losses in recent months.
Lukman added in a letter to members the meeting was to ''confirm the understanding recently reached regarding a cut from current production in order to support the market,'' an OPEC source said.
The pact cheered producers by triggering a rise of more than $2 a barrel on Monday. Prices slid on Tuesday as an initial buying frenzy wore off and traders began examining the agreement's fine print.
The agreement, announced in Riyadh on Sunday and orchestrated by Saudi Arabia, Mexico and Venezuela, aims to remove some 1.7 million barrels a day (bpd) from glutted world oil markets.
By Tuesday morning cuts had been announced for a total of 1.405 million bpd but dealers were waiting for a definite statement by Norway, which is still considering whether to take any action and cut production.
''The market can now focus on the prospects for a gradual recovery in the oil price,'' said J.P. Morgan Securities.
''This deal creates a floor for the oil price and should end talk of single digit prices.''
The pact mandates cuts from April 1 until the end of 1998 by all OPEC states bar Iraq plus Mexico, Oman, Norway, Russia, Malaysia and Egypt, according to OPEC sources.
Cuts pledged so far amount to 1.4 million bpd but the sheen has been taken off the pact by a statement from giant producer Russia that it will not cut output.
Further disquiet has arisen because of announcements of smaller cuts than agreed and signs that some OPEC producers may differ over the interpretation of the accord's provisions.
Already Indonesia and Iran have said they will cut output from their OPEC quotas not their actual production.
Since these two countries produce markedly below their quotas their announced ''reductions'' would have no effect on crude volumes.
OPEC kingpin Saudi Arabia has insisted all producers involved in the accord should reduce from current supply levels, rather than official OPEC quotas, for a combined cut of 1.3 million from the group.
Uncertainty also lingered over likely Iraqi exports. The U.N. Security Council last Friday approved a measure more than doubling the amount of oil that Iraq can sell over six months from the current $2 billion, but Baghdad said it did not have the capability to export that volume.
NYMEX Crude Ends Up 56 Cents At $16.48 On OPEC Meet
NEW YORK, March 24 - NYMEX crude futures gained 56 cents Wednesday to settle at $16.48 a barrel from Tuesday's $15.92, strengthened by OPEC's decision to convene an emergency meeting Monday in Vienna to ratify an agreement to reduce production.
The NYMEX May contract bounced from a loss of 59 cents on Tuesday, during which the market slipped following a $1.90 rise on Monday, when the market overreacted to Sunday's announcement from Ridayh of an agreement by Saudi Arabia, Venezuela and Mexico to cut output.
The market hit a high of $16.50 in the afternoon before pulling back and traders said that as support levels strengthen in the coming days, they see the market reaching for the $17-a-barrel area.
''Commission houses came in to buy long,'' said a NYMEX floor trader, who added that speculative fever appeared to have been moderated.
''I expect some bumps along the way as we await the outcome of the OPEC meeting next week,'' another trader said.
''The sentiment seems to have changed for the better,'' he said, noting that the gains coming from last week's $12.80 low cannot be dismissed lightly.
The market is, however, still below its price in October, when it peaked at more than $23, he noted.
Heating oil for April delivery settled up 1.07 cents at 45.12 cents a gallon from Tuesday's 45.05. Front-month gasoline closed with a gain of 1.04 cent at 52.50 cents a gallon from Tuesday's settlement of 51.46 cents a gallon. Buying boosted gasoline, at the back of inventory data from the American Petroleum Institute and the Department of Energy. The API put the draw on gasoline for the week ending March 20 at 773,000 barrels, while the DOE reported a decrease of 1.1 million barrels.
There was a 2.575 million barrel draw on distillates in the API data and 1.3 million barrels decrease in the DOE statistics, near or in line with expectations.
A crude build of 4.994 million barrels in the API data and 6.5 million barrels in DOE's figures appeared to have been due to a jump in imports. The market ignored the data, anyway, moving on bullish sentiment sparked by OPEC's announcement of the Vienna meeting.
IPE Brent surged to a high close Wednesday, with the prospect of OPEC confirming a deal to cut the global oil glut, sending dealers to buy.
May Brent last traded at $15.14 a barrel, up 61 cents on the day, and nearly a dollar above the weak $14.15 opening caused by the bearish API and DOE data.
NYMEX Hub Natural Gas Ends Up
NEW YORK, March 25 - NYMEX natural gas futures, lifted by reports of firmer physical prices, ended higher Wednesday in an active day session, then on ACCESS drifted on either side of unchanged following fairly neutral weekly inventory data. In the day session, April climbed 3.5 cents to close at $2.365 per million British thermal units, then on ACCESS traded between $2.355 and $2.38 shortly after the AGA stock report. May settled 3.7 cents higher at $2.404. Other months ended up one to four cents.
"It (the AGA number) was pretty neutral. It was within expectations," said one Midwest trader.
AGA said Wednesday U.S. gas stocks fell last week by 78 bcf, just above Reuter poll estimates in the 65-75 bcf range. Overall storage slipped to 194 bcf, or 23.3 percent, above last year.
Eastern stocks a week ago fell 67 bcf and were 30 percent above last year. Consuming region west storage, which rose four bcf last week, was 4.2 percent over 1997 levels. Inventories in the producing region dropped 15 bcf for the week but remained 24.9 percent over year-ago.
While a buoyant cash helped firm paper today, some remained concerned about the milder weather expected later this week.
Forecasts later this week call for a warming trend for most of the nation, with temperatures in the Midwest expected to climb to as much as 22 degrees F above normal and in the East to 15 degrees above. Gulf Coast and Texas temperatures also are expected to stay mostly above normal into early next week.
Chart traders agreed the technical picture improved last week when April broke above key resistance, but Monday's failure to break to a new recent high left some skeptical. Key April resistance remained at $2.43, with better selling likely at the contract high of $2.46. Interim support was seen at $2.29-2.30 and then in the $2.26 area, the 50 percent retracement of the recent leg up. Additional buying could surface at $2.20, but major support was still pegged at the recent low and double bottom at $2.105. More buying was expected at $2.06 and $2.00.
In the cash Wednesday, Gulf Coast swing quotes firmed almost a nickel to about the $2.30 level. Midcon pipes were up a few cents to the low-$2.20s. Chicago city gate gas was a nickel higher in the mid-to-high $2.30s, while New York gained more than five cents to the mid-to-high $2.50s.
The NYMEX 12-month Henry Hub strip gained 3.6 cents to $2.506. NYMEX said an estimated 70,152 Hub contracts traded, up from Tuesday's revised tally of 58,898.
NYMEX April natural gas futures expire Friday, March 27.
U.S. Spot Gas Prices Rebound Despite Mild Weather
NEW YORK, March 25 - U.S. spot natural gas prices defied warmer-than-normal weather forecasts Wednesday, as most prices tacked on about five cents from previous levels, industry sources said. Traders said most of the gas was moving westward.
Enron Corp.'s [NYSE:ENE] Houston Pipe Line Co reported today it expected two of three gas compressors at its Bammel station in Texas, shut yesterday due to an operational problem, to be returned to service later today.
Henry Hub cash prices were quoted mostly at $2.33-2.34 per mmBtu, up from about $2.27-2.30 on Tuesday.
In the Midcontinent, prices regained three cents to the low-$2.20s, while Chicago city-gate prices were talked at $2.35-2.39.
Continuing warming trends across the U.S. showed temperatures in the Chicago area and southern plains about 12-22 degrees above normal, according to Weather Services Corp.
In western Texas, where temperatures were seen rising to about 80 degrees F this week, Permian Basin prices rose six cents to $2.11-2.15. San Juan prices jumped a similar amount to about $2.06.
In the Northeast, New York city-gate prices were talked at $2.53-2.57 as temperatures were expected to rise to 10-15 degrees above normal Friday through Sunday.
Meanwhile, withdrawal estimates for today's American Gas Association storage report have ranged mostly from 65 bcf to 75
Canada Natural Gas Prices Maintain Strength Amid Warmth
CALGARY, March 25 - Canadian spot natural gas prices maintained their recent strength despite warm temperatures on Wednesday as storage injections picked up, straining already-tight supplies, traders said.
Spot gas at the AECO storage hub in Alberta was quoted at C$1.79/1.80 per gigajoule, about even with Tuesday prices. April AECO was talked slightly higher at C$1.80 per GJ, while the summer term was also quoted at C$1.80.
One Calgary-based marketer said the Carbon, Alberta storage facility operated by utility Canadian Western Natural Gas had turned around to injection service and volumes were also being added to the Sabine facility.
''I think prices are going to hang in there, with day prices locking horns with the months,'' the marketer said. ''Even with the warm weather, I don't see it dropping.''
Environment Canada said high temperatures in the southern Alberta region were expected to remain well above freezing through Sunday. Overnight lows were forecast at -4 to -7 Celsius.
In British Columbia, Westcoast Energy Inc (NYSE:WE; W.TO) compressor station 2 prices were quoted flat to slightly higher compared to AECO.
Gas for export at Huntingdon-Sumas was quoted in the US$1.40 per million British thermal units range, about on par with values over the past two weeks. April Sumas fetched US$1.36/1.37 per mmBtu.
Alberta gas at for export at Kingsgate, B.C. was pegged in thin trade at about US$1.60 per mmBtu, about even with Tuesday, another Calgary-based trading source said, adding prices remained firm in reaction to strong prices at Malin, Ore.
In the east, gas at Niagara and Dawn in southern Ontario was discussed in the US$2.50/2.54 range, up about five cents on the day, reflecting a similar rise in the NYMEX April futures contract price.
RIYADH + RELATED UPDATES
OPEC Must Be On Best Behaviour At Oil Pact Baptism
LONDON, March 26 - OPEC producers will seek to smooth over policy differences that could strangle a price rescue pact at birth when they meet to approve an oil output cut next week, OPEC delegates said on Thursday.
The fractious cartel must be on its best behaviour at talks in Vienna on Monday as it ushers in a historic accord to shrink a disastrous glut of crude, they said.
Memories of previous price slides triggered by public OPEC rows will be the ghost at the feast as delegates prepare to baptise the Organisation of the Petroleum Exporting Countries' 1.25 million bpd contribution to the deal with other world oil producers.
Last weekend's announcement from Riyadh has helped pull prices up $3.50 a barrel from a nine-year low earlier this month, giving delegates every incentive to protect the accord due to take effect from April 1.
International benchmark Brent blend was valued at $15.35 a barrel on Thursday, a $2 gain since the accord came to light.
At current prices that makes pledged reductions worth $8 billion a year of extra revenues for the governments of oil dependent OPEC member countries.
But the omens for the accord's survival are mixed.
Ripples of discontent are already emerging after Iran and Indonesia said they would cut output from their official OPEC output quotas, not actual production as is assumed under the pact.
The issue is crucial. Since these countries in fact can produce only markedly below quotas established last December, their announced "reductions" would have no effect on crude supplies
In Vienna, Iran is expected to take issue with the industry consensus about its performance and argue that it is actually producing at quota and should cut from quota.
Others could point out that Iranian officials had earlier this year confirmed their country actually produced 200,000 bpd below its 3.94 million bpd quota.
OPEC kingpin Saudi Arabia has made clear commitments under the accord were made from current supply levels, rather than official OPEC quotas.
"No doubt, this may cause some difficulties. It was clear from the outset that the cuts must be from production not quota," said one delegate from a Middle Eastern country.
He said OPEC's best approach would be to gloss over differences in the hope that a harmonious meeting will convince markets of producers' sincerity.
Analysts said the agonising impact of months of low prices was still helping to concentrate the minds of producers with more evidence of the pain emerging on Thursday.
Foreign contractors in Saudi Arabia said state-oil firm Saudi Aramco had been forced by weak prices to review its spending plans on a series of refinery and oilfield development projects.
The agreement, announced in Riyadh and orchestrated by Saudi Arabia, Mexico and Venezuela, aims to remove a maximum 1.7 million barrels a day (bpd) from glutted world oil markets.
Under the accord, cuts from April 1 until the end of 1998 were expected from all OPEC states bar Iraq plus Mexico, Oman, Norway, Russia, Malaysia and Eygpt, according to OPEC sources.
Cuts pledged so far amount to 1.4 million bpd, including 1.25 from OPEC producers. Russia says it will not cut and Norway, the world's second largest exporter after Saudi Arabia, is still mulling a decision.
Actual OPEC output excluding Iraq was just short of 27 million bpd in February.
OPEC insiders said that sort of number would be used as a benchmark against which to measure the group's aggregate reduction.
An agreement on 1.25 million of reductions would leave a 10 member OPEC, excluding Iraq, aiming to squash supply for the rest of the year down to 25.75 million bpd.
Mexico Says Has "Serious Commitment" On Oil Pact
MEXICO CITY, March 25 - Mexico believes it has obtained a ''serious commitment'' from other oil producers to keep to production cuts agreed in Riyadh in last weekend's historic pact Mexican Energy Minister Luis Tellez said on Wednesday.
Tellez said he was optimistic weak world oil prices would slowly stabilize at higher levels once the cuts take effect on April 1.
''We believe we have a serious commitment and are sure it will stabilize supply and prices,'' Tellez said, referring to an agreement between Organization of Petroleum Exporting Countries (OPEC) members and non-OPEC giants such as Mexico to cut back crude supply in a campaign to boost prices.
The chair of oil monopoly Petroleos Mexicanos (Pemex), Adrian Lajous, told reporters it had already sold its crude contracts for April to conform with Mexico's scaled back exports of an average 1.74 million barrels per day (bpd) for the year.
He added that the government's aim of $13.10 per barrel for Mexico's average crude exports for the rest of the year assumes West Texas Intermediate benchmark prices of between $17.50 and $18.00 per barrel.
Mexico's average export price for the first quarter was $10.70 per barrel and exports were about 1.842 bpd on average for the quarter, Lajous said.
''Pemex will reduce its supply. We are a serious country and that is our commitment,'' Tellez added.
Yet he warned that Mexico's agreement under Sunday's Riyadh pact is on the condition that other participating countries also follow their cutbacks.
He said OPEC nations have a monitoring system to ensure compliance with the pacted supply cutbacks. ''For the other non-OPEC countries it is simple to monitor. We know where they export and have statistics.''
Nigeria Cuts down Oil Production
LAGOS (March 26) XINHUA - Nigeria's revenue projection this year will fall by an estimated 584.4 million U.S. Dollars as a result of the cut in crude oil production.
The Ministry of Petroleum Resources announced Monday to cut down its daily production of about two million barrels by 125,000 barrels, in a desperate bid to forestall the downward slide in the oil price in the world market, along with similar concerted actions by other oil producers.
Revenue estimates from the oil sector for the 1998 fiscal year were based on production of 2.175 million barrels per day (BPD) at an official selling price of 17 dollars per barrel.
It is not clear whether the 125,000 BPD cut would be taken from the 250, 000 BPD set aside for domestic consumption or from the 989,750 BPD set aside for export.
Economic watchers, however, have long predicted a review in the government's revenue projection in this year's budget following the drastic fall in oil price since the beginning of the year.
The largest oil producing country in Africa, Nigeria has planned to earn 11.7 billion dollars from oil sources this year, which contributes the bulk of the 19.3-billion-dollar budgeted revenue for the year.
Egypt to Keep Oil Output Despite OPEC Cutback
CAIRO (March 26) XINHUA - Unimpressed by a move by several oil producing countries to ease world oil glut, Egypt is to maintain its current production level, an English weekly reported Thursday.
The Al Ahram Weekly quoted an official as saying that Egypt, which is not a member of the Organization of Petroleum Exporting Countries (OPEC), will keep its oil output at 850,000 barrels a day (bpd).
The official said Egypt's oil production had fallen from 900,000 bpd a few years ago, even though consumption is increasing annually by about 4 percent. "Our production has been stable for the past few years and we have no plans to reduce it," he added.
Egyptian Minister of Petroleum Hamdi el-Banbi has expressed appreciation of the coordination among oil producers to cut oil supplies by between 1.6 million and 2 million bpd in a bid to prevent a price collapse.
OPEC members Saudi Arabia and Venezuela, and non-OPEC Mexico
orchestrated a cutback pact last Sunday to shore up prices, a move followed by a number of other OPEC members.
So far the pledges on slimming production have totaled 870,000 bpd and given an immediately boost to oil prices, which had already been at their lowest level in nine years.
The depressed oil prices were a direct result of an OPEC decision last November to raise output ceiling from 25 million bpd to 27.5 million bpd, a mild northern hemisphere winter and the Southeast Asia financial crisis.
The Egyptian minister, however, blamed some OPEC members like Qatar and Nigeria for exceeding their quotas. Egypt will be badly affected by the sagging prices since oil represents 10 percent of its gross domestic products, he said.
"But we will try to reduce losses by increasing locally refined products and reducing the export of crude oil," said Banbi.
He added that the responsibility to protect and stabilize the market falls on all oil producing countries, whether OPEC members or not.
COMMENTARY
Royal Bank Of Canada
Crude Oil: Crude oil prices received a strong boost on Monday as OPEC members agreed over the weekend to cut back production by between 1.6 and 2.0 MMBbls per day. Thus far most members have agreed to the reductions, in particular Saudi Arabia, Venezuela and Mexico who combined will remove 1.1 MMBbls per day. This is seen as a positive sign, but maybe only temporary, short term relief. The big uncertainty is whether members actually comply with the output cuts. So fundamentally we look for the market to consolidate in the $15.50 - $16.50 range in the short term. The near term technical picture has become more bullish with a possible retracement expected before any further gains are made. Longer term, the market remains oversold with a neutral to slightly bullish slant.
Natural Gas: Natural gas prices staged a nice rally over the past week breaking out to the upside of our target range (seen as near term bullish). This was caused by a larger than anticipated storage draw and some cooler weather. We do, however, remain somewhat cautious in the near term. Long term however, we are beginning to ready ourselves from the long side as the charts begin to indicate a potential rally - maybe as high as $3.00. AECO gas prices have also shown some strength this past week, in particular the summer strip (up +/- $0.07).
Product: Natural Gas Capped Enhanced Crude Oil Swap (even more attractive now)- Producer can enter into an enhance crude oil swap by selling a natural gas cap and embedding the premium of sale of the cap into the oil swap. This is an attractive product with gas prices relatively strong and crude oil prices having rallied back some, but still below most budget levels. Producer can achieve an $18.25 swap for balance of 1998 by selling a $2.50 NYMEX call for the same period.
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