MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 21, 1998 (3)
OIL & GAS
LONDON, June 19 - Embattled oil producers of OPEC gather next week in a bid to heave a wounded petroleum market back to its feet by approving fresh production cuts.
But the Organization of the Petroleum Exporting Countries' second such effort in three months risks humiliation at the hands of skeptical markets familiar with years of overproduction by member states.
"The need is for a drastic cut," said Peter Bogin of Cambridge Energy Research Associates. "The cuts they've announced so far don't look like enough."
Jaded markets are not sure OPEC can unite to drain bloated world petroleum stocks and hoist prices from 10-year lows.
Although Brent blend crude added 12 cents to $12.90 a barrel in early London trade, traders said the gains were fragile unless OPEC actually delivered substantial supply cutbacks. (Brent closed Friday at $12.78.)
Failure to cut supply could send prices tumbling again and shrivel further the multi-billion dollar revenues of the club of Middle East, Latin American, Asian and African producers.
That gloomy prognosis was precisely the outcome when OPEC failed to fully implement the first round of cuts agreed to with non-member oil powers in March.
After a short-lived recovery, oil prices slipped back to 10-year lows.
"Cuts do not imply revenue gains unless prices rise more than proportionately, which is unlikely," said London's Center for Global Energy Studies. "Prices will drift down again if the market doubts OPEC's ability to cut output as promised."
OPEC's summer meeting in Vienna on Wednesday will seek to approve an estimated 800,000 barrels per day (bpd) of cuts on top of 1.245 million chopped under the first round.
Many analysts say OPEC should go further and sacrifice a full one million bpd on its own this time, not counting an additional 120,000 bpd of reductions pledged by non-member producers.
The bad news for OPEC is that even fulfillment of the proposed new cuts will not guarantee a rapid rise in prices because of the enormous size of global stocks.
"The main problem is that it's going to take a long time to burn off what they have accumulated," said Nick Antill, analyst at Morgan Stanley in London. "If they want to have a big impact they need to make deeper cuts."
The new proposals are the product of an agreement reached this month in Amsterdam by OPEC's Venezuela and Saudi Arabia and non-OPEC member Mexico to trim their combined output by 450,000 bpd.
OPEC Gulf producers Kuwait, the United Arab Emirates, Iran and Qatar have since pledged a further 270,000 bpd and non-OPEC Oman has chipped in with 20,000 bpd.
But members have shown ominous signs of squabbling, giving ammunition to those who dismiss OPEC as a spent force.
In a harbinger of OPEC disarray, Gulf sources voiced doubts that Iran will make any meaningful cuts at all.
They suggested Iran's announcement that it would cut by 100,000 bpd had been hurt by confusion over what production level it will use as a baseline for the cut. Tehran has recently hiked estimates of its own output volumes.
Positive signs remain, however, including expressions of solidarity from non-member producers attending as observers.
These include Russian Deputy Fuel and Energy Minister Yelena Telyegina, who will head a Russian observer delegation to the meeting, and Omani and Mexican officials.
U.S. Lures Exotic Crude, Sign Of Market Disruption
NEW YORK, June 19 - Some exotic crude oil is making its way to U.S. ports, the latest indication world oil markets have been turned upside down and inside out in recent months, market participants say.
Vietnamese Bach Ho (White Tiger) crude is being delivered to the Gulf Coast for the first time, while Minas from Indonesia, Champion from Brunei and Urals from Russia's Black Sea terminals are turning up where they've rarely been seen before.
The inflow of foreign crude to the U.S. hit a record 10.54 million barrels per day for May, the American Petroleum Institute reported earlier this week. The imports, which include large amounts from traditional Saudi Arabian, Latin American, West African and North Sea sources, are being driven mainly by the twin effects of depressed demand from financially troubled Asia and rising crude exports from Iraq, where the sanctions grip has been easing.
But the impetus for new and unusual trade flows to the U.S. is being exacerbated by some strange price relationships, traders said.
''It's all because (U.S. benchmark crude) West Texas Intermediate is way out of whack,'' said a trader of foreign crude oil in New York. ''WTI is very strange and very depressed. It's completely divorced from what is happening in the real world,'' the trader added.
WTI has recently been trading below $12 a barrel, the lowest level since the 1986 price crash. Furthermore, the price for prompt-delivery WTI is at its biggest discount to forward-month delivery since 1990, just before the Gulf War.
This prompt discount, known in the market as a ''contango,'' has been getting deeper and deeper since February and gives a strong incentive for traders to buy oil, park it in storage tanks and sell it for future delivery. The inevitable result has been for storage to fill up to capacity at the delivery hub in Cushing, Oklahoma, where about a quarter of the nation's commercial crude is stored.
Traders see no quick end to the situation. Indeed, the discount for prompt July-delivery compared to August WTI is nearly as deep as it has been, sitting at between $1.30 and $1.40. A discount of 40 to 50 cents would have been considered high early this year.
''The Gulf Coast is looking sloppy right now,'' one trader said, adding that oversupply in the Gulf Coast typically foreshadowed oversupply in Cushing. ''I don't see a lot of impetus for WTI to improve,'' he said.
Meanwhile, Asian demand is not yet showing firm signs of recovering, a fact underlined by another very unusual price relationship.
Typically, Asian refiners would suck in crude from other regions when the price of world benchmark ''dated'' North Sea Brent slipped below a premium of $1 a barrel to Asian benchmark Dubai. However, Dubai has stayed relatively firm while Brent has plummeted in the past few weeks, to the point where dated Brent is now at a discount to Dubai.
Traders said the relatively high Dubai price is ''artificial'' and reflects the slowness of Asian buyers to react to big price moves. Also, according to a trader for a Japanese trading company, the lack of interest in relatively cheap crude from outside the region is a reflection of the depressed demand among Asian refiners.
Indonesia, Nigeria Cheated On Oil Cuts - Mexico
MEXICO CITY, June 19 - Mexico's Energy Minister Luis Tellez on Friday said Indonesia, Nigeria and probably Iran had not complied with their pledged oil production cuts in March's Riyadh pact.
Oil producers agreed in a pact from Riyadh spearheaded by Mexico, Saudi Arabia and Venezuela, to cut 1.5 million barrels per day (bpd) from world supply as of April, but official figures show cuts weighed in at about 900,000 bpd.
''We know that Indonesia has not fulfilled the production cuts it committed to, but it is a more complicated situation. Nigeria has not complied, but it is in the midst of a civil war,'' Tellez told reporters.
Indonesia pledged to cut 70,000 bpd from output, and Nigeria committed to 125,000 bpd. Neither country has said how much they may cut in a second round of cuts, which is expected to be ratified by the Organization of Petroleum Exporting Countries (OPEC) at its meeting that begins on Wednesday.
Tellez added that he had heard Iran may not have complied, but said he could not be sure. Iran has agreed to trim a total 240,000 bpd in the two rounds of cutbacks.
While Tellez reiterated that Venezuela and Saudi Arabia had followed through with their pledged cuts from Riyadh, he did not explain his proof.
''Saudi Arabia, Venezuela and Mexico, which were the countries promoting the agreements, are completing their reductions rigorously,'' he said.
Venezuela's oil monopoly chief Luis Giusti said earlier this week that not all producers had followed through with their promised cuts.
Non-OPEC Mexico committed to cut 100,000 bpd from its exports in the Riyadh pact, and in a second agreement in Amsterdam, pledged to cut another 100,000 bpd. After the cuts, Mexico would export an average 1.64 million bpd from July 1 through the end of the year.
Venezuela Expects Little Change in Oil Prices by OPEC
CARACAS (June 19) - The meeting of the Organization of Petroleum Exporting Countries (OPEC) scheduled for next week in Vienna will not change in any major way the oil prices performance, a leading Venezuelan petrol businessman said.
Luis Guisti, president of Petroleos de Venezuela, told the "El Nacional" newspaper that the market would not necessarily react to the OPEC meeting, but would be effected by seasonal changes in the the third and fourth quarters of this year."
"We are entering a different season of the year and this will affect the prices," he predicted.
Guisti said the benchmark West Texas Intermediate (WTI) crude, now over 15.40 U.S. dollars per barrel, would have to reach 17 dollars achieve the provisions stated in Venezuela's national budget.
"If the WTI price reaches that level, we will easily achieve the 13 dollars for the Venezuelan basket," he noted.
Guisti said he expected the long-awaited recovery to come after mid-year. The second quarter of the year, which historically was the worst, was about to finish. Venezuela had large stocks of oil, and that makes it necessary to wait for later in the year year," he explained.
He said factors deciding oil prices included Germany's purchases to supply its strategic reserves, and the suspension of production for maintenance in the North Sea in August.
IPE Brent Closes Under $13 After Iraq Approval
LONDON, June 19 - World oil prices advanced early on Friday but the gains lacked conviction amid market caution ahead of a key OPEC meeting next week.
Meanwhile, traders said the effect of the United Nations' approval of $300 million in spare parts for Iraq's oil industry was "slightly bearish." "That means they are closer to getting to their export target," a Houston-based trader said. The spare parts will allow Iraq to repair its oil infrastructure to meet a higher target under the latest phase of its "oil-for-food" deal with the United Nations. Under the deal, which is an exemption from sanctions stemming from Iraq's invasion of Kuwait in 1990, the U.N. raised to $5.25 billion the amount of oil that Iraq can export in six-months, from $2 billion previously.
Upon release of the Iraq approval news, IPE Brent quickly fell to close at $12.78.
Dealers said hefty oversupply and enormous global stocks of crude continued to make a tempting meal for market bears.
OPEC's second stab at supply cuts in three months risks a mauling from sceptical dealers inured to years of overproduction by the club that accounts for 40 percent of world output.
Dealers say North Sea Brent is expected to remain bound in a range between $12.50 and $13.50 ahead of the Vienna meeting of the 11-member cartel.
Some support for prices came from United Nations chief weapons inspector Richard Butler, who dampened hopes that sanctions on Baghdad could be lifted as early as this October.
He said in Australia that any progress on sanctions depended squarely on Iraqi cooperation and suggested any forecasts of a definite lifting of sanctions that month remained premature.
The Australian diplomat, head of the U.N. Special Commission on Iraq (UNSCOM) weapons inspectors, said: "There is not unalloyed optimism."
Butler will report to the U.N. Security Council in October on whether Iraq has complied with U.N. disarmament demands -- raising the possibility that Gulf War sanctions on Baghdad could be lifted by the end of the year.
But Butler said he had been misunderstood. "This whole notion that I said that it will all be over in October is just grossly misreported," he told reporters.
Further Iraq-related assistance came from news that Baghdad has refused to include nerve gas production and arms concealment in a new work programme with U.N. weapons inspectors.
OPEC's summer meeting will seek to approve an estimated 800,000 barrels per day of cuts on top of 1.245 million withdrawn under a first round agreed in March.
Many analysts say OPEC on its own should go further and make a full one million barrels daily of sacrifices this time, not counting an additional 120,000 bpd of reductions pledged by non-member producers.
Analysts say actual reductions so far have reached only about 900,000 bpd.
Nymex Crude Ends Below $12, Awaiting OPEC Meeting
NEW YORK, June 19 - NYMEX front month crude ended below $12 a barrel Friday, slightly up on the day, after trading slowed towards the close, following flurries of shortcovering earlier in the day, traders said.
"The front month ended on the quiet side," said a Cargill trader, on volume that he described as moderate.
"There was shortcovering and selling throughout the day, but not anywhere near Thursday's," he said.
"The market is being pulled in two different directions," said Chris Schachti, an analyst for Atlanta-based GSC Energy.
"The expectation that OPEC will move to ratify additional cuts in output is pulling the market up, but the fundamental fact -- the current oversupply is pretty dramatic -- is keeping it down."
NYMEX traders said some buyers were hesitant to commit, but were keeping some positions outstanding ahead of the June 24 OPEC meeting in Vienna.
Traders said the market's interest has turned to August crude, as the July contract expires on Monday. Ahead of the event, speculators sold off positions on Thursday.
July crude settled at $11.84 cents as trading narrowed to between $11.70-11.90 in the last 1-1/2 hours of trade. The contract hit a high of $12, but later sank to $11.51, lower than Monday's $11.54 settlement that was a 12-year low.
The August contract gained four cents to settle at $13.17, down from the session high of $13.40.
July heating oil, helped by local and commission house buying, settled at 37.40 cents a gallon, up 0.49 cent.
July gasoline ended down 0.60 cent at 45.78 cents a gallon.
Market watchers expect the OPEC meeting to put the seal on an estimated 800,000 barrels per day (bpd) of fresh output reductions -- and that means some work still has to be done. As of Tuesday, commitments spurred by an agreement between Saudi Arabia, Venezuela and Mexico on June 4 totalled 740,000 bpd.
But analysts insist that any cuts below 1.0 million would not be enough to lift low oil prices.
The latest to echo that feeling is is Robert Priddle, chairman of the Paris-based International Energy Agency, who said Friday that withdrawing another 800,000 bpd from the world oil markets would not remove the current glut.
"Taken together with what has been done before it does seem to me that the figures which are being discussed are not enough to remove the surplus from the marked," Priddel told Reuters Television in an interview to be broadcast on Monday.
"Stocks are building. There are now difficulties in finding storage for new stocks. And in that situtation, one must increasingly say that unless some further step is taken, it does loook as though there is a surplus which means a depressing effect on prices," Priddle said.
In March, OPEC and non-OPEC producers agreed to cut production by 1.5 milliom barrels, but the actual reductions have come to only 900,000 bpd and the price of oil has remained low. That generated fresh calls for additional cuts to try to revive oil prices again.
Meanwhile, traders said the effect of the United Nations' approval of $300 million in spare parts for Iraq's oil industry was "slightly bearish."
"That means they are closer to getting to their export target," a Houston-based trader said.
The spare parts will allow Iraq to repair its oil infrastructure to meet a higher target under the latest phase of its "oil-for-food" deal with the United Nations.
Under the deal, which is an exemption from sanctions stemming from Iraq's invasion of Kuwait in 1990, the U.N. raised to $5.25 billion the amount of oil that Iraq can export in six-months, from $2 billion previously.
Iraq has said it can only export about $4 billion under the latest phase, but it can only reach that target with needed repairs of its facilities.
Earlier in the week, the market rose on Tuesday amid moves by Kuwait, the United Arab Emirates and Oman -- all members of the Gulf Cooperation Council -- to cut a collective 170,000 bpd from their production effective July 1.
The market further rose on Wednesday on bullish draws on U.S. crude stocks -- the third in as many weeks -- reported by the industry group American Petroleum Institute and the U.S. Department of Energy. A push to boost crude to $13 ahead of the expiration on the day of July crude options further lifted the market, which hit a high of $13.10 before easing off.
The two-day advance was cut short Thursday when speculators solf off positions ahead of the July crude contract's expiry on Monday.
NYMEX Natural Gas Ends Up Sharply
NEW YORK, June 19 - NYMEX natural gas futures ended up sharply Friday in another active session, boosted by a torrent of short covering after firm cash reports and warmer weather forecasts drove July through key resistance, sources said.
July jumped 14 cents, or 6.5 percent, to close at $2.284 per million British thermal units after trading today between $2.145 and $2.295. August settled 15.1 cents higher at $2.315. Other deferreds ended up by one to 13.8 cents.
"We got some bullish technical signals, but there are also a lot of fundamental reasons to move up. We've got forecasts calling for the warmest temps we've seen (this season)," said one Midwest trader, noting the market has embraced predictions for a hot, dry summer despite high storage and weak crude.
Eastern temperatures through Tuesday are forecast to average up to 10 degrees F above normal, with the Midwest expected to climb to as much as eight degrees F above. Readings in Texas are expected to remain hot, rising to as much as 12 degrees F above normal. Florida will average four to eight degrees above for the period. In the Southwest, temperatures are expected to warm to several degrees above for the period.
Most agreed record heat in the Gulf and warmer forecasts next week for other regions helped trigger the recent rally.
But technical traders said the buying accelerated today as July early in the session blew through key resistance at $2.235. In addition, they said today's strong close puts July firmly above the 40-day moving average and the perpetual chart down trendline that began with highs hit last October, factors that might lead to more upside follow through Monday.
Resistance in July was seen at $2.33, which is a prominent high from mid-May and the 50 percent retracement of the recent leg down from the $2.75 April high. Next resistance was pegged at $2.38 and then at the $2.65 double top from April. Support was seen first at $2.09, with psychological buying likely at $2.00. Further support should emerge at $1.97 and then at last Wednesday's low of $1.915. The prominent spot continuation low of $1.77 from March, 1997, should provide more buying.
Record or near-record cooling demand in the Gulf today and warmer forecasts also helped firm the physical market.
Gulf Coast weekend quotes gained almost a dime to the mid-to-high teens. Midwest pipes firmed more than a nickel to $2.09-2.14. Chicago city gate gas was almost 10 cents higher in the mid-to-high $2.20s, while New York was up about five cents to the mid-$2.30s. In the West, El Paso Permian gained several cents to the low-$2s.
The NYMEX 12-month Henry Hub strip jumped 7.7 cents to $2.455. NYMEX said an estimated 99,631 Hub contracts traded today, up from Thursday's revised tally of 93,439.
U.S. Spot Natural Gas Prices For Weekend Gain On Heat
NEW YORK, June 19 - U.S. spot natural gas prices for the weekend again moved higher Friday, driven by some record heat in the Gulf and warmer forecasts next week for much of the rest of the nation, industry sources said.
While lingering concerns about bloated storage could temper enthusiasm later, traders said the near-term focus has shifted to the heat wave down South that has stirred near-record cooling loads, particularly with forecasts for warmer weather next week in other regions.
''Power is screaming, and we've seen some huge utility buying today,'' said one Midwest trader, noting prices were up five to 10 cents in most regions today.
Weekend gas at Henry Hub traded between $2.17 and $2.24 per mmBtu, with most deals reported in the $2.20 area, up more than five cents from Thursday's levels and almost 20 cents over the June index.
South Texas prices gained a similar amount to $2.11-2.16, again helped by near record temperatures in the area and forecasts for more heat next week.
In the Midwest, pipes like Panhandle firmed about six cents to the $2.09-2.14 area, 15 cents over June 1 levels. Gas at the Chicago city gate was quoted almost a dime higher in the mid-to-high $2.20s.
In West Texas, Permian Basin quotes edged up a few cents to the low-$2s, while San Juan was up a similar amount at about $1.80.
Prices at the Southern California border stayed little changed near the $2.10 area.
In the Northeast, New York city gate prices were talked five cents higher in the mid-$2.30s, helped by forecasts for above-normal temperatures coupled with some high humidity.
Eastern temperatures through Tuesday are forecast to average up to 10 degrees F above normal, with the Midwest expected to climb to as much as eight degrees F above. Readings in Texas are expected to remain hot, rising to as much as 12 degrees F above normal. The mercury in Florida will average four to eight degrees above for the period. In the Southwest, temperatures are expected to warm to several degrees above.
Canadian Spot Gas Prices Gain Again On Plant Work
NEW YORK, June 19 - Canadian spot natural gas prices in Alberta climbed again Friday in moderate trade, still underpinned by plant maintenance outages and some industrial load that have helped tighten supply in the province.
''There's still a significant amount of gas off the NOVA system due to plant turnarounds, so that's tightened things up, and it's going to continue for most of the month,'' said one cash trader, adding some industrial demand also helped prop up the market.
Spot gas at Alberta's AECO-C hub firmed about eight cents to about the C$1.95 per gigajoule range, up more than 20 cents from the June index.
July AECO was talked in the low-C$1.80s, up from Thursday's quotes in the mid-C$1.70s, while one-year packages at AECO were pegged in the mid-C$2.50s.
Traders said firmer NYMEX futures and U.S. physical prices helped drive Canadian export markets higher.
Spot gas in British Columbia at Huntingdon/Sumas was up more than a nickel to the low-US $1.50s per million British thermal units, about 15 cents over June 1 levels.
In the east, Niagara was talked in the mid-US $2.20s per mmBtu, up seven cents on the day and 10 cents over index.
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