MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING TUESDAY, MAY 26 1998 (3)
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Commodities Feel Asian Heat
Turmoil in Indonesia adds to pressures on worldwide prices
The Financial Post
Economic and political uncertainty in Asia are back on the front burner and commodity prices are feeling the heat, with various indexes hitting five-year lows in recent days.
The latest factor to raise uncertainty is the change of power in Indonesia with Suharto resigning as president in favor of B. J. Habibie.
The turmoil in Indonesia and fears of an escalation of the region's debt crisis have beaten down the global prices of oil, metals and agricultural products.
"You can trace a lot of the problems we've seen in commodities to what's going on in Asia," said Doug Porter, senior economist at Nesbitt Burns Inc. "The setback delivered another body blow to prices."
The Goldman Sachs commodity index, heavily weighted to energy prices, hit 157.39 points Wednesday, a day after crude oil touched a 10-year low of US$12.98 a barrel on the New York Mercantile Exchange.
The Goldman Sachs index recovered slightly at the end of the week, but remains 31% below its 1997 high.
Oil prices have suffered from other factors, including oversupply and poor demand resulting from a warm winter in the northern hemisphere but the downturn in Asia is a big negative, said Teresa Courchene, senior economist at Toronto Dominion Bank. Prices have fallen about 40% in the past year and 12% in the past month alone.
The TD commodity price index, to be released next week, is expected to show a drop of about 3% in May, sending it to a five-year low. The index is weighted according to the value of commodities exported by Canada. May will show weakness "across the board," Courchene said.
Base metal prices have turned down in recent weeks, with nickel and copper off 12% and 9.5% in May. "Again, a lot of that weakness has to do with the Far East," said Patricia Mohr, economist and commodity specialist with Bank of Nova Scotia.
Mohr prepared Scotiabank's May commodity report, also due out in the coming week, and said the numbers look poor. The picture is unlikely to brighten over the summer when demand typically declines.
The weakness in prices is widespread, analysts said. The Commodity Research Bureau index of futures prices, weighted to agricultural products, hit a 4 1/2-year closing low of 219.75 Thursday and briefly dipped below 218 Friday.
The renewed slide in commodity prices has followed Asian equity markets lower. Both had managed first-quarter rallies after sharp declines beginning last fall.
The South Korean stock market, for example, is down 39% since March 1 after gaining 38% in the first two months of the year. Signs of recovery are few.
"There were expectations at the beginning of the year that prices were set to snap back," said Mohr. "Now we'll have to wait until later in the year for signs of a recovery."
Subodh Kumar, equity strategist at CIBC Wood Gundy Securities Inc., predicted it will take another six months for demand to pick up and commodity prices won't see a recovery until 1999.
Forestry and gold stocks, which are already up 22% and 9% on the year, don't look to be attractive buys. However, the oil sector, which is down more than 5% in 1998, is now "interesting for people who are willing to wait."
Nesbitt Burns's Porter sees weakness across the entire resource sector. "It's really just a matter of who'll be least weak."
Oil Price Casts Shadow Over U.S. Majors
Prolonged weakness in world crude prices may force major oil companies to trim their capital spending plans for 1998 and may imperil ambitious plans to increase production, analysts say.
So far, only Amoco Corp. (AN) has cut spending. It announced last month that it would trim by $340 million, or eight percent, its planned 1998 capital spending of $4.2 billion.
The rest of the majors said they remain confident.
Exxon Corp. (XON), the nation's largest oil company, plans a 10 percent increase in capital spending over 1997's $8.8 billion, and Mobil Corp. (MOB - news) plans around $5.9 billion, up from $5.1 billion.
Also, Chevron Corp. (CHV) has reaffirmed its commitment to a $400 million increase in capital spending to $6.3 billion, and Texaco Inc. (TX) is sticking to plans for a rise to $3.8 billion from $3.5 billion in 1997.
However, analysts say that most spending plans were formulated in the glory days of $20-per-barrel-plus oil at the end of 1997. With oil sloshing around world markets, especially in the United States, the world's largest importer, pressure on prices has lasted longer than anticipated.
After flirting with $17 per barrel in March following an agreement by OPEC and other producers to cut 1.5 million barrels from world oil output, West Texas Intermediate crude is now stuck in the $14-$15 range.
Although the majors have deep pockets and debt levels are the lowest for more than a decade, analysts say that cashflow this year will be crimped by low prices and more may be forced to follow Chicago-based Amoco's lead.
''If oil prices do not rebound, even Exxon will have to look at cutting capital spending; the only company that is safe is Royal Dutch/Shell (RD.AS)(UK & Ireland: SHEL.L),'' said Fadel Gheit, analyst at Fahenstock & Co.
Also, the Organization of the Petroleum Exporting Countries, or OPEC, and other producers who agreed to the output cuts which sparked a brief oil price rally, appear more willing to talk than act ahead of another OPEC meeting in Vienna in June, analysts say.
The majors stress they are long-term investors and note that oil has historically traded in a $18-$21 range.
The response from Mobil is typical.
''We continue to review our capital budget, but there is no plan to reduce overall spending for 1998,'' said a spokesman for Mobil.
Texaco also says it is sticking to capital spending targets, adding that its projects are tested at $15.00 oil.
Eugene Nowak, analyst at ABN AMRO Inc., says that if oil prices recover in the third and fourth quarters after the OPEC meeting, then the majors will likely ride out the short-term pain.
But if there is no agreement, Nowak said that ''even the larger companies will get a little more cautious.''
''Some companies cut from the bottom up and have delegated a lot of authority to field managers...The longer the oil price stays low, the more production will be shut in, although that primarily affects 'stripper' wells in the U.S. with 10-15 barrels per day of production,'' he said.
He notes that the majors are willing to put up with a rise in debt levels to fund share buybacks, increased dividend payments and investment if they believe that 1998 is going be a transitional year.
Some projects are also delayed for reasons outside the control of companies and production forecasts made by the big companies are close to the best-case scenario.
Nowak noted that unforeseen problems such as equipment failure could mean that output is delayed, for example, in the giant Hibernia field offshore Newfoundland, Canada. Texaco also has been hurt by equipment failure at its North Sea Captain Field.
''Many of these projects are in areas of the world which are difficult to operate...The Tengiz project in the Caspian has made great progress, but the prospects for a pipeline have slipped to the year 2000 or 2001,'' he added.
Tengiz, a Chevron-led project, aims to raise output from 160,000 barrels per day in 1997 to 250,000 bpd in less than three years, but needs a pipeline to ship crude out in large quantities.
Tengizchevroil, the operating company, said this week that it had asked shareholders Mobil and LUKArco to pitch in more cash for development as low oil prices are impairing development plans. LUKArco is a venture between Russia's LUKoil and Atlantic Richfield Co. (ARCO) (ARC).
Energy Service Companies Cast Eager Eyes South
The Financial Post
Canadian energy service companies are focusing on the U.S. oilpatch to expand operations and mitigate the slowdown in this country.
Higher margins in some cases, different business cycles and a wider client base are some reasons behind the flow of Canadian technology, people and money south of the border.
Eneterc Resource Services Inc. is the latest firm to broaden its U.S. presence. It is paying an undiclosed price for New Orleans-based Extend Seismic Processing LLC, a private firm that specializes in marine and three-dimensional seismic data processing. The deal was two months in the making. The sheer size of the U.S. market attracts Canadian firms, said Peter Ryder, Enertec's vice-president of finance and chief financial officer. "We see this as a very powerful platform to start growing our U.S. processing business by virtue of this combination."
Another factor is the U.S. moves on a slightly different cycle because gas prices are generally stronger and less volatile than in Canada. This is particularly true of the Gulf of Mexico area, which accounts for all Enertec's marine seismic activity, providing a stable base of large customers who can weather commodity dips. "There would have to be a protracted downturn for both oil and gas before they started pulling the reins in," he said.
Fracmaster Ltd. has made several acquisitions in the past six months, boosting its share of the U.S. pressure pumping market to about 10%. The company can expect returns of 25% or better before interest, taxes, depreciation and amortization, in Texas, Louisiana and New Mexico, president Les Margetak said at the recent annual meeting.
"We've seen tremendous growth from virtually very little revenue in 1996," he told shareholders.
A well testing and directional drilling firm, Computalog Ltd., is on the hunt for more U.S. purchases after making seven in the past 18 months.
President and chief executive Doug Robinson said the deals helped increase its U.S. market share to 23% from 2%. It now operates in eight states, up from three or four before the buying spree. "When we started to look at the size of the U.S. market, it was just too big to ignore and that's when we decided we just had to get a bigger presence and become a bigger player to survive."
The Achilles heel of operating in Canada is the second quarter, when the spring thaw makes moving equipment difficult and drilling activity dwindles, he said.
About 28,000 wells will be drilled this year in the 50 U.S. states, 10,350 of them in Texas, Louisiana and Arkansas, said Cameron Plewes, service firm analyst with Sprott Securities Ltd. in Calgary.
Companies targeting the U.S. are relying on internal activities or acquisitions to expand their businesses, he said. "Time will tell which provides the greater measure of success, but for the moment it appears to be equal."
Ranger Oil Turns On Oil Taps At North Sea Columba E Oil Field
Canada's Ranger Oil (RGO/TSE) will start up its new Columba E oil field in the North Sea on Monday May 25, a spokeswoman said on Friday.
The field will come on stream at 9,000 barrels per day (bpd), the spokeswoman added.
Ranger has delayed the start of its new 20,000 bpd Kyle field from November this year to early January 1999.
Nova Corp Included In Alberta Lawsuit
The Financial Post
An Alberta Court of Queen's Bench judge has ordered Nova Corp. and Nova Gas Transmission Ltd. be added as defendants in a $155-million lawsuit involving gas marketing subsidiary Pan-Alberta Gas Ltd.
A group of Canadian natural gas producers is suing Pan-Alberta, claiming that, for years, producers' gas was diverted from the sales stream to help Nova's pipeline network fulfil delivery commitments and that led to lower revenue for producers.
The producers also claim that during price spikes, their interests weren't at the top of Pan-Alberta's agenda.
Nova is selling its stake in Pan-Alberta and readying itself for a megamerger with TransCanada PipeLines Ltd.
"It has absolutely no impact on the merger," said Nova spokeswoman Lisa Neiles, adding the company wouldn't comment further on the litigation.
Nova took an $85-million write-down last year, in part based on the value of its Pan-Alberta Gas assets.
The lawsuit was originally filed by nine natural gas producers, but in a court decision last fall, Court of Queen's Bench Justice Kenneth Moore directed the lawsuit be prosecuted on behalf of all 425 natural gas producers.
The latest ruling means producers can pursue claims against Nova based on allegations it controlled the actions of Pan-Alberta, was an accessory to the alleged breaches of contract and fiduciary duty by Pan-Alberta, interfered in their relationship with Pan-Alberta and their economic interests.
IPL Sets June Pipeline Capacity Rationing
IPL Energy Inc. unit Interprovincial Pipe Line Inc. said on Friday that apportionment for heavy crude oil on its Canada-U.S. pipeline system would rise slightly in June from this month's level.
Nominationed light crude volumes were to be less constrained than in May, however.
IPL said apportionment for Line 3, which carries mostly heavy crude to Superior, Wisc., from Edmonton, Alberta, was set at 14 percent for June, compared to 13 percent in May.
Apportionment is the volume of oil IPL expects to move on its system subtracted from volumes nominated by its shippers.
Lines 2 and 13, which carry mostly light crudes to Superior, were apportioned at five percent for June, down from 10 percent in May.
As with the last several months, Line 1, the pipeline that carries natural gas liquids and refined products, required no apportionment, IPL said.
In calculating apportionment for June, IPL did not need to revert to the Historical Average Procedure (HAP) because nominations were not high enough to trigger the plan.
Under the procedure, used to combat chronic overnomination to secure space, shippers are restricted to moving crude volumes equal to historical levels if nominations exceed 115 percent of the capacity on any of the adjacent pipelines.
The low June apportionment comes as IPL is forced to reduce its throughput on some lines because of its extremely high crude inventories, especially in the U.S.
IPL spokesman Alan Roth said total system inventories are currently at about 1.9 million cubic metres (12 million barrels), which compares to a normal level of about 1.4 million cubic metres (8.8 million barrels).
To help ease the glut, IPL cut throughput this week on Line 2 by 31,450 barrels a day and Line 3 by 18,870 barrels a day, Roth said.
SPECIAL REVIEW - CHEAP OIL
ABCNEWS.
Barrel Fever
Six months of cheap oil has put more money in people's pockets.
Whether you fill up your car's gas tank, shop for your family or run a business dependent on fuel or oil products, low prices make many households and companies run more smoothly.
"Sure, it makes life a little easier," says Sheila Kujava, partner at Green Bay Floral in Wisconsin. The 65-year-old family business runs two delivery trucks regularly and four on busy holidays like Mother's Day.
Cheap fuel keeps costs are under control, Kujava says, unlike in the 1970s, when high fuel and transportation costs pushed some florists out of business.
Oil prices have declined steadily since early October, sliding from almost $23 a barrel on Oct. 3 to $13 in March-a drop of about 40 percent. Since then, they've been hovering around $15, over $4 lower than last May. Gasoline prices are down to just over an average of $1 per gallon, about 15 cents less than May1997. Global Forces Push Prices Down
The economy, stocks and consumers have been reveling in cheap fuel, energy and petroleum products. Cheap oil hasplayed a key role in bringing employment down to 4.3 percent in April (a 28-year low) and price inflation to negligible levels. It's also helped fuel economic growth to a 4.2 percent annualized rate for the first quarter.
For American consumers, the benefits of cheap oil have been felt in a variety of ways, says Charles Hatcher, assistant professor of housing and consumer economics at the University of Georgia. "Lower oil prices are good news to everyone."
Consumers can thank a variety of factors for bringing oil prices down, says Stephen Smith at Dain Rauscher Wessels. One is increased output from OPEC nations, including a boost in exports from Iraq, which has have been under United Nations sanctions that restrict output. Another was the warm winter weather caused by El Ni¤o, which weakened demand for heating fuel as supply increased.
Also significant was the drastic weakening in the economies of China and other Asian nations, Smith says, which have been accounting for half the growth in worldwide energy consumption.
Not only are some Asian economies struggling badly, which means less demand for oil products, but their weak currencies limit their purchasing power abroad.
Benefits: Obvious, Hidden
Low crude prices mean prices of staple products such as heating fuel and gas for the car are lower. Consumers feel the effect directly on their wallets.
In addition, low oil prices can cut other products' prices or keep them from rising. Oil is used in a wide range of products such as plastics, cosmetics, toothpaste, clothing and drugs. With oil products not rising in price, the final product is cheaper tomake.
Cheap oil helps businesses keep energy-a large component of industrial production costs-and transportation costs down, too. As a result, prices on anything from corn to steel have had less reason to go up.
More broadly, the low inflation environment helped along by cheap oil has contributed to steady interest rates. And a stable rate picture is a key part of America's robust economic growth and Wall Street's continuing bull market.
Keeping an Eye on Oil
It's no surprise that oil prices have a big influence on consumer habits. "Consumers are very sensitive to oil prices," says Delos Smith, senior business analyst for the Conference Board, which publishes the Consumer Confidence Index and other economic indicators.
The 1970s oil rationing is still stuck in people's heads. Highoil prices make people anxious and angry, while cheap oil prices boost consumer confidence, which continues to be remarkably strong across the country.
That's a very different picture from the energy crisis-filled 1970s and '80s.
"When we started in 1975," says Bill Thompson, owner of J&S Delivery Service in Dallas, "we had a price increase every six months just to keep up with the increase in the price of oil." Thompson says the low oil prices of the past few years have helped him keep package delivery and freight rates the same since 1991.
Oil Prices' Impact Mixed
Some consumers benefit from cheap oil more than others. Commuters feel the biggest impact, says Delos, enjoying low prices at the pump for their long trips to and from work.
Low-income households, which spend a greater portion of their income on staples, also benefit. And stockholders-a growing portion of the population-are being rewarded with profits boosted by low costs and low interest rates.
On the other hand, says Hatcher, workers in struggling segments of the oil industry face a dismal employment picture. Communities dependent on oil production, for example, may also be hurt if rigs are shut down.
Oil prices are being watched by everyone-carpooling moms, small business people, economists and investors-with a hand on their wallet and an eye on inflation.
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