MARKET ACTIVITY/ TRADING NOTES FOR DAY ENDING TUESDAY JUNE 16 1998 (2)
OIL & GAS
OPEC Faces Uphill Battle
LONDON -- OPEC is staring at the weakest oil market since the disaster year of 1986, and traders are betting the producers can't find a quick fix, if they find one at all.
OPEC's average price plunged to $10.11 per barrel early this week -- a 12-year low and less than half the official OPEC target of $21 that analysts now call a joke.
Some of the biggest players in OPEC, including Saudi Arabia and Venezuela, are promising a new round of production cutbacks -- after an earlier emergency deal failed to rescue the market. Kuwait and the United Arab Emirates pledged more cuts Tuesday night.
The Kuwaiti oil minister, Sheik Saud Nasser al-Sabah, said in Riyadh, Saudi Arabia, that he hopes petroleum exporters can come up with another 1.2 million barrels in production cuts by next week, when OPEC holds its summer meeting.
But analysts aren't sure whether OPEC and its non-OPEC allies in Mexico and Oman can slash production by even 1 million barrels a day. And even if OPEC delivers, the glutted market might not recover for months.
The cheap oil is a bargain for consumers, including gasoline-guzzling U.S. motorists, but it's devastating for the oil producers who planned their national budgets based on much higher oil revenues.
''It's pretty disastrous and there's not really anything they can do to alleviate the troubles very quickly,'' said Leo Drollas, chief economist at the Center for Global Energy Studies in London. ''They might as well write off '98.''
Ten of the 11 members of the Organization of the Petroleum Exporting Countries pledged this spring to cut production by 1.245 million barrels a day. They have delivered most but not all of those cuts, but Iraq complicated the formula by raising production under a United Nations oil-for-food deal, leaving OPEC short of its target.
News that the U.N. might be closer to ending its embargo of Iraqi crude exports, imposed after Iraq invaded fellow OPEC member Kuwait in 1990, prompted oil traders to push prices even lower.
If Iraq gets back in this year, the timing could hardly be worse for the rest of OPEC and non-OPEC producers, also including Norway, who have tried to rescue the market.
''Never dismiss Iraq,'' warned Mehdi Varzi, oil analyst at Dresdner Kleinwort Benson in London.
Oil rallied Tuesday on the futures markets, but in New York the benchmark light sweet crude contract for July wound up 42 cents higher at only $11.98 per barrel -- a depressing number for anybody in an industry that was enjoying premium oil prices of more than $20 per barrel late last year.
Even if OPEC were to announce another 1 million barrels of daily production cuts -- the target many analysts are looking for -- it could take months of adherence to those numbers to reduce the supply glut. And OPEC's members have long lacked the willpower to stick to their production agreements.
OPEC got itself into this jam by agreeing last winter to increase production, just before the economic crisis in Asia severely weakened global oil demand.
Although OPEC's stated production ceiling is 27.5 million barrels a day, too high for current demand, outside experts say output hovers above 28 million barrels.
Analysts aren't predicting a repeat of the 1986 carnage, but they say the industry is changing dramatically.
As Big Oil adapted over the past decade to an era of cheaper prices, cutting production costs and many thousands of jobs, OPEC members have become ever more dependent on high oil revenues, according to Peter Bogin, an analyst at Cambridge Energy Research Associates in Paris.
The huge oversupply, which could persist for months or years, might force OPEC members to find ways to become less dependent on a market they no longer can control, he said.
''They have to say, 'What's our role as a cartel, if we are a cartel, or can we accept $6 or $8 oil?''' Bogin said.
OPEC formally opens its meeting on June 24 in Vienna, Austria. OPEC members are Algeria, Iran, Iraq, Indonesia, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
Chronology of oil output cuts pledged this year
DUBAI, June 17 - Oil producers have cut back their production since April in an attempt to boost world oil prices which have sunk to their lowest level in real terms for 25 years.
Following is a chronology of output cuts announced by producers.
March 22 - Saudi Arabia, Venezuela and Mexico announce ''Riyadh Pact'' calling on producers inside and outside the Organisation of the Petroleum Exporting Countries ''to withdraw from the market an amount of 1.6 million bpd to two million bpd'' from April 1 until the end of the year.
March 30 - OPEC ministers, excluding Iraq, agree to cut output by 1.245 million bpd from April 1 as part of Riyadh Pact.
Largest OPEC cuts made by Saudi Arabia (300,000 bpd), Venezulea (200,000 bpd), Iran (140,000 bpd), Kuwait, UAE and Nigeria (125,000 bpd each).
Commitments by non-OPEC states Mexico, Oman, Norway, Egypt, China, Russia and Yemen take total pledged producers' cuts to some 1.5 million bpd.
June 4 - Saudi Arabia, Venezuela and Mexico announce ''Amsterdam Pact.'' Saudi Arabia says to cut output by a further 225,000 bpd, Venezuela by 125,000 bpd, Mexico 100,000 bpd.
June 7-9 - Saudi Oil Minister Ali Naimi visits UAE, Qatar, Oman, Kuwait and Iran to drum up support for additional cuts.
June 7 - Qatar says will cut output by 20,000 bpd from July 1 to support Amsterdam deal. Qatar already committed to cutting 30,000 bpd from April 1 under OPEC's March 30 deal.
June 8 - Reuters survey of OPEC output for May shows supplies from the 10 OPEC countries signed up to March 30 agreement down by about 900,000 bpd or 75 percent compliance.
June 10 - Iran says will cut 100,000 bpd from July 1.
June 12 - Senior Kuwaiti officials says OPEC needs to cut output by at least one million bpd to boost prices.
June 13 - Iran says willing to cut more on top of pledged 100,000 bpd if OPEC and non-OPEC agreed larger output cuts.
June 13-14 - Iran Oil Minister Bijan Zanganeh visits Kuwait, UAE, Qatar and Oman to discuss weak state of market.
June 15 - July NYMEX crude hits 12-year-low.
June 16 - United Arab Emirates, Kuwait and Oman pledged cuts totalling 170,000 bpd from July 1 after meeting of Gulf Cooperation Council oil ministers in Riyadh.
GCC says six members Saudi Arabia, Kuwait, United Arab Emirates, Oman, Qatar and Baharin have cut their output by a combined 1.025 million bpd since March 22 Riyadh pact.
June 16 - Kuwait Oil Minister Sheikh Saud Nasser al-Sabah says OPEC members so far pledged cuts of 800,000 to one million bpd as of July 1.
June 24 - OPEC ministers scheduled to meet in Vienna to seal further round of cuts.
Emirates, Kuwait and Oman agree to more oil cuts
RIYADH, Saudi Arabia - Kuwait, Oman and the United Arab Emirates agreed Tuesday to cut 170,000 barrels a day in oil production in an attempt to bolster sagging world oil prices.
But Saudi Arabia, the largest oil producer, did not pledge further cuts at the meeting of the Gulf Co-operation Council, a decision that analysts predicted would keep oil prices around their lowest levels in 12 years.
Crude oil prices had jumped to as high as $12.35 US in earlier trading, but were back below $12 US after the announcement.
The United Arab Emirates and Kuwait, both OPEC members, each agreed to cut their oil production by 75,000 barrels a day. Oman, which is not an OPEC member, agreed to output by 20,000 barrels a day. The cuts will take effect July 1.
Those cuts follow a pledge by Saudi Arabia, Mexico and Venezuela earlier this month to cut their oil output by 450,000 barrels a day, also starting July 1. Other OPEC producers have added around 140,000 barrels a day in cuts since that announcement.
But analysts believe more cuts are necessary to bolster prices.
The Gulf Co-operation Council brings together six states: Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates.
Production Cheating
NEW YORK, June 16 - The head of Venezuela's state oil company said on Tuesday that it appeared one of the three ''Riyadh Pact'' countries was not sticking to its commitment to restrain crude oil production, though he stopped short of naming the culprit.
''What is certain is that there are volumes of crude oil in production that we thought were not in production as there was an agreement to cut them,'' said Luis Giusti, head of Petroleos de Venezuela.
Giusti did not answer directly questions about statements in a local newspaper attributed to PDVSA senior advisor Alberto Quiros Corradi, who was one of the masterminds of the first round of cuts announced in Riyadh in March, in which he said Saudi Arabia might not be sticking with its commitment.
Leading daily El Nacional reported Tuesday that Quiros, quoting secondary market sources, said that extra cargoes of crude oil were coming out of Saudi Arabia and the Middle East gulf, and that had weakened prices.
''It would be a pity if after strict compliance with the OPEC and non-OPEC producers agreement in April and May, one producer should be disrespecting its voluntary commitment,'' Quiros was quoted as saying.
''We shall have to wait and see,'' Giusti said when asked about the reference to Saudi Arabia.
Tumbling oil prices, which touched 12-year lows Monday, have forced producers to make further output cuts after a first round failed to boost prices.
Giusti said Venezuela would go ahead with a second round of cuts agreed in May in Amsterdam, and drop production by 125,000 bpd on July 1 from current levels of 3.17 mln bpd.
But he added: ''That agreement is going ahead, wee are going to comply, but naturally I want to revise the global situation next week,'' he told reporters, referring to the meeting of Organization of Petroleum Exporting Countries on June 24 in Vienna.
Luis Giusti estimated the Riyadh pact had taken 1.5 million bpd out of circulation and that current worldwide overproduction now stood at 1.1 million bpd, the same as last year's level.
''But obviously prices are not reflecting that, so there must be something else that is still not known by everybody at the moment,'' he said.
Independent observers say the Riyadh pact has reduced daily world supplies by only 900,000 bpd and that decrease has been partly counteracted by a 300,000 bpd increase from Iraqi.
Oil prices are now running more than $6 a barrel, or a third, lower than on average last year, translating into a $15 billion shortfall in OPEC oil revenues over the first half of the year.
NYMEX Oil Prices Rise on Promises of Production Cuts
NEW YORK - Crude oil prices rose on the New York Mercantile Exchange Tuesday, posting their first gains in more than a week, after more world oil producers said they would cut daily output.
In their latest effort to shore up sagging oil prices, six members of the Gulf Cooperation Council which accounts for more than a third the world's crude reserves agreed to further cut production.
The group decided at a meeting in Riyadh, Saudi Arabia, to follow the lead of that country, Venezuela and Mexico in pushing for further cuts in production in an effort to boost crude prices, which slipped to the lowest in nearly 12 years Monday because of a world supply glut.
The new pledges initially boosted futures prices sharply as investors rushed to cover their positions, but prices later fell back as skepticism again set in about whether the cuts would be enough and whether they would be honored.
July crude rose 42 cents to $11.98 a barrel; July heating oil rose .27 cent to 36.97 cents a gallon; July unleaded gasoline rose .99 cent to 45.93 cents a gallon.
Natural gas fell 11.1 cents to $1.989 per 1,000 square feet. In London, North Sea Brent Blend crude oil for delivery in August settled at $12.72 per barrel, up 14 cents.
NYMEX crude on ACCESS rises in heavy trade
LOS ANGELES, June 16 - Crude oil futures rose in heavy trade Tuesday on the ACCESS market, driven by speculator buying ahead of the weekly supply reports released in the U.S.
July crude rebounded from 12-year lows on the NYMEX to settle at $11.98 a barrel Tuesday. Then the contract extended gains in the after hours ACCESS market, rising 38 cents a barrel to $12.36. Volume reached 3,456 lots at 1830 PDT.
''We were at these levels before the statistics came out ... we saw short-covering ahead of the numbers, then the numbers came out supportive,'' said a trader for a major Wall Street brokerage.
The American Petroleum Institute (API) late Tuesday reported that crude oil stocks in the United States dropped for the third week in a row as of June 12..
Analysts said the 1.1 million-barrel nationwide drop -- which was heaviest in the Midwest (PADD II) where the Cushing, Oklahoma delivery hub for the crude futures contract is located -- should ease the squeeze on storage there.
Stocks in the Midwest dropped by nearly 1.8 million barrels, to just above 81 million barrels. That still puts Midwest stocks nine million barrels above levels the same week last year and precariously close to estimated storage capacity.
In refined products, gasoline and heating oil futures rose on ACCESS, as well.
July gasoline was at 46.49 cents a gallon, up 0.56 from the settle, while heating oil was up 0.18 at 37.15 cents. Volume for heating oil was 408 lots traded by 1830 PDT, while gasoline saw volume of 559 lots.
NYMEX Hub naturaL gas ends down on technical selloff
NEW YORK, June 16 - NYMEX Hub natural gas futures ended lower across the board Tuesday in an active session, hit by technical selling after an early attempt to move up stalled, industry sources said.
July slumped 11.1 cents to close at $1.989 per million British thermal units after stalling at $2.129. August settled 12 cents lower at $2.021. Other deferreds ended down by 0.9 to 11.9 cents.
''Failure to meet the (higher) opening call resulted in a wave of technical long liquidation. It was a huge failure. We filled the ($2.04-2.05 July) gap and settled below $2.00, which was an important psychological level,'' said one Midwest trader.
Traders said selling accelerated this morning when expected buy stops in July above $2.10 failed to materialize.
But opinions differed on just how far prices might slide, with some expecting the scorching heat down South to limit the decline despite bloated storage and moderate weather in most other regions.
Injection estimates for Wednesday's weekly AGA storage report range from 69 bcf to 105 bcf. For the same week last year, stocks gained 94 bcf. Overall inventories are still 461 bcf, or 36 percent, above year-ago levels.
Temperatures this week in the Northeast and Mid-Atlantic are expected to average several degrees F above normal, with the Midwest forecast at normal or slightly above. Readings in Texas and Florida could break the 100 degree F mark. In the Southwest, temperatures are expected to warm to several degrees above normal through Saturday.
Chartists agreed July's close today below $2.00 turned the technical picture more bearish.
Key July support was now pegged at Wednesday's low of $1.915 and then at $1.77, a prominent spot continuation low from March, 1997.
July resistance was seen along the down trendline in the $2.15 area. Further selling was expected at the June 1 high of $2.235, then at $2.255 and at $2.33.
In the cash Monday, Gulf Coast swing quotes on average were unchanged in the $2.01-2.06 range. Midwest pipes also held steady in the high $1.90s. Chicago city gate gas was flat to up slightly in the $2.12-2.13 area, while New York was quoted two cents higher in the mid-$2.20s. In the West, El Paso Permian was pegged at $1.90-1.93, flat from Monday's levels.
The NYMEX 12-month Henry Hub strip tumbled 7.9 cents to $2.295. NYMEX said an estimated 76,813 Hub contracts traded today, down from Monday's revised tally of 49,315.
US spot natural gas prices settle little changed after rally
NEW YORK, June 16 - U.S. spot natural gas prices settled little changed Tuesday following an early rally with NYMEX, industry sources said.
NYMEX's July contract jumped to a high of $2.129 but quickly retreated to a low of $2.04. As of 1348 EDT, the contract was trading at a session low of $1.99.
Also at the Henry Hub, cash prices were quoted steady to higher at $2.06-2.11 per mmBtu, with the higher-priced deals emerging early.
South Texas prices were also talked widely at $1.95-2.04, with some downward pressure coming from the return of a Texas nuclear unit.
Houston Lighting & Power Co.'s 1,250 megawatt South Texas 1 unit was back to full power following a weekend power reduction.
In the Midcontinent, prices were also flat at $1.97-1.99, and Chicago city-gate was quoted mostly at $2.12, market sources said.
In West Texas, Permian Basin prices were quoted mostly in the low-$1.90s, while San Juan gas traded at $1.53-1.61.
In the Northeast, New York city gate prices were quoted early around $2.30 and in the low-to-mid $2.20s by late morning.
Separately, injection estimates for Wednesday's American Gas Association storage report range from 67 to 105 bcf, versus a 86 bcf gain a week ago and 94 bcf a year ago.
Forecasts are calling for above-normal temperatures in the Northeast and normal to above-normal temperatures in most of the Midwest this week. Warmer-than-normal temperatures are continuing in the South, with highs expected to reach the high-90s F in Houston.
Canadian natural gas prices firm amid tight supplies
NEW YORK, June 16 - Canadian spot natural gas prices in Alberta rallied higher Tuesday as supplies on NOVA's system remained sparse, industry sources said.
''NOVA has a huge draft on. There's still gas not showing up,'' one Calgary-based trader said, noting lingering plant outages in Alberta were keeping supplies tight.
As a result of the low linepack on NOVA's system, the pipeline changed as of 1200 MDT its tolerance level to +15/-5.
Total field receipts in Alberta stood at 11.98 billion cubic feet per day (bcfd), off from the normal level of about 12.4 bcfd and the previous day's tally of 12.3 bcfd. Linepack as of yesterday evening was at 12.2 bcfd, down from NOVA's target at 12.8 bcfd and the previous day at 12.66 bcfd.
A tighter supply also resulted in less storage injections. A total of 380 million cubic feet per day (mmcfd) was packed into storage, down from the previous 584 mmcfd.
Spot gas at the AECO storage Hub in Alberta was discussed mostly at C$1.84-1.85 per gigajoule (GJ), though a limited volume of early business was reported done as high as C$1.95. These prices compare with about C$1.69-1.70 on Monday.
July AECO was talked at C$1.72-1.76 from Monday's quotes at C$1.67, while winter business stepped up to about C$2.67 per GJ. The July-October market was talked at C$1.72, and one-year prices were around C$2.42.
Spot prices at Sumas, Wash., consistent with Alberta prices, jumped another 10 cents to US$1.40-1.45 per million British thermal units (mmBtu).
Meanwhile, the outage at the 1,158 megawatt WNP-2 nuclear unit in Washington State was expected to end Wednesday.
In the East, Niagara pricing was quoted little changed at US$2.09-2.13 per mmBtu.
Morning Update
Bruised Oil Price Cheered by U.S. Stocks Fall
LONDON, June 17 - Oil prices stricken by a deluge of supply flickered back to life on Wednesday following a fall in crude stocks in the United States, the world's biggest petroleum market.
Benchmark North Sea Brent was valued 40 cents firmer at $13.12 a barrel at 1030 GMT.
Producers bewailing shrunken revenues cheered news from the American Petroleum Institute (API) that U.S. crude oil stocks fell for the third week in a row as of June 12.
Bloated global stocks this year have helped push oil prices down $6 a barrel or a third lower than the 1997 average, slicing $15 billion off OPEC oil revenues in the first half of 1998.
U.S. petroleum inventories near five-year highs strangled a modest market recovery engineered in March by producers who cut supplies under a landmark global pact.
Analysts said the 1.1 million-barrel drop in U.S. stocks last week should ease the squeeze on storage there.
The stocks figures were released following an announcement of pledges of output cuts by Gulf producers trying to protect shrunken revenues.
OPEC members Kuwait and the United Arab Emirates said they had each agreed to cut output by 75,000 barrels per day (bpd) from July 1. In addition, Oman would cut by 20,000 bpd, said an announcement at the end of a meeting of oil ministers of the six-country Gulf Cooperation Council.
Trader reaction was mixed. ''We think they are serious this time around. The compliance is likely to be much better than after Riyadh,'' said Bob Finch, head of trading at Vitol SA in London.
But many analysts say the cuts, even if implemented, will be too small to provide a long-term solution to a glut that has been building for many months.
They say slackening Asian demand and rising Iraqi exports could continue to help swell the world's stocks of unwanted oil.
Another bearish factor will be perennial market suspicion that oil cartel OPEC will not be able to resist the temptation to overproduce.
Core Gulf producers have appealed to fellow OPEC members Nigeria, Algeria, Libya and Indonesia to make matching cuts.
But Washington's Petroleum Finance Company said it was unlikely that OPEC production would show enough restraint to trigger a global stock draw.
The latest round of reductions is expected to be approved by the Organisation of the Petroleum Exporting Countries at its meeting in Vienna next week.
Doubts over OPEC's cohesion strengthened on Tuesday when Venezuela accused an unnamed fellow producer of cheating on cuts pledged under a first round of reductions drawn up by Saudi Arabia, Venezuela and Mexico in March.
The March agreement was for 1.5 million barrels daily of cuts from OPEC and non-OPEC states, including 1.245 million from OPEC.
The second round was mapped out at a secret Amsterdam meeting earlier in June by Saudi Arabia, Venezuela and non-OPEC Mexico.
Given the size of the Saudi and Venezuelan cuts, the combined reductions at OPEC's June 24 meeting in Vienna are expected to reach about 800,000 bpd.
NYMEX Hub natural gas called slightly higher with OTC
NEW YORK, June 17 - NYMEX Hub natural gas futures were expected to open one to two cents higher Wednesday, in line with firmer trades on ACCESS and early over-the-counter (OTC) quotes, industry sources said.
July over-the-counter trade ranged from $2.01 to $2.02 per million British thermal units after settling 11.1 cents lower Tuesday at $1.989. On ACCESS, July last traded 1.6 cents higher at $2.005.
Early cash quotes at the Hub also were in the $2.01-2.02 range, down, due to the late NYMEX selloff, from Wednesday's average of $2.09.
''With more heat coming it, it's going to be hard to make money on the short side,'' said one Midwest trader, adding concerns about rising temperatures later this week and next could trigger some short covering.
But most agreed there would be good selling all the way up, adding high storage should temper any rallies.
Injection estimates for Wednesday's weekly AGA storage report range from 69 bcf to 105 bcf. For the same week last year, stocks gained 94 bcf. Overall inventories are still 461 bcf, or 36 percent, above year ago levels.
Temperatures this week in the Northeast and Mid-Atlantic are still expected to average several degrees F above normal, with the Midwest mostly forecast at normal or slightly above. Texas readings are expected to remain hot, climbing to as much as 14 degrees F above normal by the weekend. Florida will average about six degrees F above for the period. In the Southwest, temperatures are expected to warm to several degrees above normal later this week.
Technical traders pegged key July support at Wednesday's low of $1.915 and then at $1.77, a prominent spot continuation low from March, 1997.
July resistance was seen first in the $2.04-2.05 area and then along the down trendline in the $2.15 area. Further selling was expected at the June 1 high of $2.235, then at $2.255 and at $2.33.
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