MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY JUNE 23, 1998 (4)
Iran's Kharrazi Returns From Oil Talks In Saudi
TEHRAN, June 24 - Iran's Foreign Minister Kamal Kharrazi returned home on Wednesday after a one-day visit to Jeddah where he discussed oil policy cooperation with Saudi Arabia's King Fahd, Iran's official news agency IRNA said.
The talks with the Saudi monarch were aimed at finding a way to improve flagging world oil prices ahead of an OPEC meeting in Vienna on Wednesday, IRNA said.
''King Fahd expressed the hope that...Tehran-Riyadh cooperation within the Organisation of Petroleum Exporting Countries will help bring oil prices to a desirable level,'' IRNA said.
Kharrazi also met his Saudi counterpart Prince Saud al-Faisal and Crown Prince Abdullah for talks on the oil market.
''(Prince Abdullah), welcoming the earlier accords reached in the meeting between the Irano-Saudi Arabian foreign ministers for checking the recent oil crisis, expressed hope that the accords would soon be able to influence the oil market,'' IRNA said on Tuesday, without giving any details of the accords.
The OPEC talks in Vienna will seek to approve an output cut from member states of at least 800,000 barrels per day (bpd) in a bid to shore up weak crude prices and it looked likely that a bigger cut was now on the cards.
OPEC promised in March to chop 1.245 million bpd of oil from the international markets.
An OPEC delegate said Iran had circulated among fellow OPEC members in Vienna a proposal for the group to extend its cuts in production to a full 10 percent from a benchmark of production earlier this year.
The proposal, if adopted, would extend the full range of cuts dating back to April 1 to about 2.7 million bpd on the basis of February output for 10 OPEC members of 27 million bpd.
Kharrazi's visit also came on the heels of a call by Khatami for a meeting of the 55-member Organisation of the Islamic Conference (OIC) to discuss Israel's decision to extend the municipal boundaries of Jerusalem.
Khatami, current chairman of the Jeddah-based OIC, issued a statement on Tuesday calling for OIC foreign ministers to hold an extraordinary meeting to discuss the Israeli move.
Iran-Saudi relations -- strained since Iran's 1979 Islamic revolution -- have warmed since Khatami's election last year. Both are powerful members of the OIC.
King Fahd expressed hope that ties between the two countries would grow stronger, IRNA said.
MORNING UPDATE
Today, An Agreement
VIENNA, Austria - OPEC oil powers agreed Wednesday to make big cuts in their output to try to boost weak prices, delegates said.
The cartel agreed to slash crude oil flows by 1.38 million barrels per day, more than doubling earlier output reductions agreed on in March, a delegate said.
The move, agreed in two hours of informal talks, was expected to be approved at a formal plenary session of the Organization of Petroleum Exporting Countries later on Wednesday.
Months of low prices due to oversupply have chopped OPEC oil revenues by a third, putting pressure on national budgets that have already been cut to the bone.
Dominant OPEC producer Saudi Arabia confirmed the group agreed on fresh cuts, but the kingdom's oil minister, Ali al-Naimi, would add only that he was extremely pleased by the accord.
"Give us a couple of hours and we will make a formal announcement," he said after the talks.
But one delegate said the kingdom and fellow heavyweight Venezuela had both agreed to make cuts of another 200,000 bpd on top of sacrifices proposed in talks with non-member Mexico earlier this month in Amsterdam.
The group's combined cuts, including those agreed in the previous round in March, come to 2.625 million bpd, an OPEC delegate said.
Iran confirmed it had agreed to reductions, a step that appeared to satisfy cartel kingpin Saudi Arabia, which had signaled its doubts about Iran's willingness to sacrifice output for the common good.
The Iranian decision followed oil talks in Riyadh on Tuesday between King Fahd of Saudi Arabia and Iranian Foreign Minister Kamal Kharrazi.
Iran had been a source of concern to fellow OPEC members because it recently reported hefty output in a move widely seen as a bid to minimize its future supply sacrifices.
Delegates said OPEC had considered cuts extending up to 2.5 million bpd, including 1.245 million bpd of cuts already pledged in March.
Oil prices had rallied on Tuesday in anticipation of production cuts. On Wednesday, Brent crude rose 18 cents to $14.10 a barrel in London, but in New York, oil was off 25 cents at $14.27 on the New York Mercantile Exchange.
Oil prices have been hit by weak demand in Asia and rising Iraqi exports.
Insiders said the success of any output cuts had rested largely on the willingness of Saudi Arabia to lower its output toward the prized eight million barrels per day level it held for six years after the 1990-91 Gulf crisis.
That would send a strong signal of the kingdom's intent to reverse a decline in prices set in motion when it led a 10 percent rise in the group's output limits late last year.
Wednesday's meeting was not attended by non-OPEC producers such as Russia, Oman and Mexico, whose representatives were in Vienna as observers.
But Russian Fuel and Energy Minister Minister Sergei Generalov said his country would make cuts in exports from July 1, although he gave no details of volumes.
Mexico has said that it will not cut exports by more than the 100,000 bpd pledged in the Amsterdam agreement.
Oil In Surprise Slide After Deep OPEC Cuts
LONDON, June 24 - World oil prices fell sharply on Wednesday in a surprise slide after OPEC clinched a deal cutting deeper into supply than expected.
The cartel agreed to cut 1.38 million barrels per day (bpd) in addition to cuts of 1.245 million bpd made in March, an OPEC delegate said.
Many oil traders had been expecting cuts of anywhere between a million and 1.3 million bpd to emerge from the cartel's meeting in Vienna.
But despite the deep cut world benchmark, Brent blend crude was down 36 cents at $13.56 at 1447 GMT having hit a high earlier in the day of $14.39.
"The deal is better than expected. Prices will eventually probably push higher," said Nigel Saperia, managing director, of Bankers Trust International in London.
"It's a pretty constructive deal," said Bob Finch, head of trading at Vitol SA in London.
"But weakness from the United States is probably the reason for the pressure this afternoon," he added.
The price slide may also reflect "scepticism about compliance," said Chris Bellew of brokers Prudential Bache in London.
Jeremy Hudson, oil analyst, at Salomon Smith Barney in London said "the market is in a 'show-me' mood."
Oil prices are floundering well below last year's average of over $19 and petrodollar revenues have collapsed.
Prices were on an upward trend until last November when OPEC raised output just as Asian demand was fading, oil storage tanks were swelling and the West basked in unusually warm winter weather.
One pointer to the urgency of the cuts was the priority given to oil in Riyadh talks between Iranian Foreign Minister Kamal Kharrazi and Saudi Arabia's King Fahd this week.
Despite help from non-OPEC oil producers, some traders believe the cuts may not be enough to turn the market around, given slowing global oil demand growth.
OPEC's problem is that while world demand is still rising, the rate of demand growth has slowed sharply this year.
Asia's financial crisis means producers can no longer rely on any incremental demand from the region which in recent years has accounted for about 50 percent of the world's extra oil consumption.
Meanwhile, rising Iraqi exports is also bound to work against efforts by OPEC to soak up excess supply.
The U.N. Security Council voted last week to approve $300 million in equipment to upgrade Iraq's dilapidated oil industry.
This will eventually lead to higher oil exports but the supplies are not expected to reach Baghdad for several months.
WORLD OIL
Oil Prices Surge As OPEC Raises Expectations
LONDON, June 23 - World oil prices surged on Tuesday as OPEC signalled a readiness to tackle the market glut by taking out more crude oil than already pledged.
But analysts said recent price gains could still be wiped out if the oil producing cartel failed to deliver a satisfactory deal after raising the possibility of deeper cuts.
''Talk is easy,'' said Gundi Royle, oil analyst at Deutsche Morgan Grenfell in London.
Raising market expectations about the size of any cuts risked backfiring, she said. ''The market needs cuts of over a million bpd. They are talking the market up.''
World benchmark Brent blend crude settled up 68 cents at $13.92 a barrel at 1930 GMT, having hit a low of $12.15 last week.
But ''the price for next year hasn't really moved,'' said Nigel Saperia, managing director of the oil trading desk at Bankers Trust International in London.
OPEC is trying to further reduce the flow of oil to soggy markets having already cut 1.245 million barrels per day (bpd) from April.
Pledges of 800,000 bpd cuts are already on the table in Vienna but analysts and traders are doubtful that is enough.
''A million is on the cards and 1.3 million would be mildly impressive,'' said Saperia.
Gulf sources said OPEC kingpin Saudi Arabia would consider further output reductions beyond those to which it had already committed provided other petroleum powers adhered to their own promised cuts.
Saudi Arabia was taking the initiative in securing the extra reductions on Wednesday, a senior non-Saudi delegate said.
The delegate said that given market fundamentals, 800,000 bpd was not enough and OPEC should be aiming for a cut of 1.0-1.3 million bpd. Libya said OPEC needed to take a ''very drastic decision'' at Wednesday's meeting.
Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah said he expected fresh OPEC production cuts to match the 1.245 million bpd the club earlier pledged to withdraw from the market. Qatari oil minister Abdullah al-Attiyah told Reuters his country was willing to cut more than it had already pledged.
A bout of arm-twisting was in prospect as delegates seek to persuade fellow producers suspected of failing to meet reduction targets to turn down the taps.
''It's probably correct to make the assumption that OPEC cannot do much more than two-thirds of what is pledged,'' said a delegate taking pre-conference soundings in hotel lobbies.
Non-members Mexico and Oman have backed the new proposed cuts by offering 120,000 bpd as their contribution to the cuts.
But some believe that may not be enough to turn the tide in OPEC's favour given slowing global oil demand growth.
''The market has excess of 2.5 million barrels a day. It has to be drained out to achieve a reasonable and fair prices,'' said Attiyah.
Iran has circulated among some fellow OPEC members a proposal that the group extend its cuts in production to a full 10 percent from a benchmark of production earlier this year, an OPEC delegate said. He was unable to say if the idea had drawn any measure of support.
The proposal, if adopted, would extend the full range of cuts dating back to April 1 to about 2.7 million barrels per day (bpd) on the basis of February output for 10 OPEC members of 27 million bpd.
There has been no public comment on any such proposal from Iranian officials since they arrived in Vienna for the OPEC meeting.
OPEC's problem is that while world demand is still rising, the rate of demand growth has slowed sharply this year.
''All they can really do is make the right noises and not ruin things,'' said Saperia, who added that only rigid adherence to tough quotas over a prolonged period would rescue prices.
Twelve months' overproduction was not going to disappear overnight, he said.
Asia's financial crisis means producers can no longer rely on any incremental demand from the region which in recent years has accounted for about 50 percent of the globe's extra oil consumption.
Traders have been scouring the world for places to store unwanted oil, some of which has been rejected by cash-strapped Asian buyers.
Some have hired oil tankers for stop-gap storage as the head of the West's oil ''watchdog'' confirmed this week that ''there are now difficulties in finding storage for new stocks.''
Meanwhile, rising Iraqi exports will work against efforts by OPEC to soak up excess supply.
The U.N. Security Council voted last week to approve $300 million in equipment to upgrade Iraq's dilapidated oil industry.
This will eventually lead to higher oil exports but the supplies are not expected to reach Baghdad for several months.
More than 200 million barrels of Iraqi crude has been approved by the United Nations for sale under the fourth phase of its ''oil-for-food'' deal with Baghdad, oil industry sources said on Monday. Prices in dollars per barrel:
Closing Prices:
IPE August Brent..........................Jun23 = $13.92.....Jun22 = $13.24
NYMEX August light crude...........Jun23 + $14.52.....Jun22 = $13.65
Oil Price In Asia Buoyant Ahead Of OPEC Meeting
SINGAPORE, June 24 - Crude oil prices in Asia were buoyant on Wednesday ahead of the first official session of OPEC with optimism growing that the oil cartel will move to tackle over supply, traders said.
Comments from OPEC on Tuesday showed a belief that the Organisation of Petroleum Exporting Countries (OPEC) needed to cut more than one million barrels per day (bpd) of production to get prices moving higher, traders said.
In Asian trading on Wednesday, the August contract of the New York Mercantile Exchange (NYMEX) last traded at $14.64 per barrel at 0600 GMT, up 12 cents from the close of open outcry trading in New York overnight.
Traders said stock data from the American Petroleum Institute, which often influences the market, did not shake traders from their OPEC focus.
"People are standing on the sidelines waiting for OPEC," one broker said.
NYMEX August crude rallied 87 cents to $14.52 in New York after OPEC signalled it was ready to slow down supplies to drain bulging storage tanks.
Traders said expectations OPEC would reduce output by at least one million bpd was now factored into prices.
"As always, it remains to be seen what they do after making all the right noises," said Matt Sims, a broker with ED&F Man in New York.
"If they cut more than one million barrels per day it would push up the price. If they come out with something below, or right on one million, I don't think we will see much more advance in the price," he
said.
On Tuesday at the meeting venue in Vienna, Gulf sources said OPEC's dominant force, Saudi Arabia, would consider output cuts beyond those it had already pledged, provided others made promised sacrifices.
Any significant extra cuts would take Saudi Arabia close to the eight million bpd level it held for six years after the 1990-1991 Gulf crisis, compared with its OPEC quota of 8.7 million bpd.
A non-Saudi delegate said on Tuesday that the pledged "800,000 barrels per day is short -- if you look at the market fundamentals you should probably be aiming at 1.0-1.3 million barrels per day."
Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah said he expected fresh OPEC production cuts to match the 1.245-million bpd the cartel pledged to siphon from the market from April 1.
Libyan oil minister Abdullah al-Badri said OPEC needed to cut more than one million bpd.
Iran has circulated among some fellow OPEC members a proposal that the group extend its output cuts to a full 10 percent from a benchmark of production earlier in the year, a Venezuelan delegate said.
Saudi Arabia is likely to strongly resist Iran's idea because it would take Riyadh 130,000 bpd below its cherished eight million bpd supply.
NYMEX CRUDE OIL
NYMEX Crude Rises Sharply Again
Crude oil futures rose sharply a second day Tuesday on the New York Mercantile Exchange amid optimism world oil producers will reach agreement at a meeting this week in Austria to slash output to end a supply glut.
Crude for August delivery rose 87 cents to $14.52 a barrel.
Members of the Organization of Petroleum Exporting Countries were set to meet on Wednesday in Vienna to consider cuts aimed at lifting prices from recent 12-year lows.
Oil ministers arriving on Tuesday for the meeting noted that drastic measures must be taken to boost prices, and market participants were hoping that would lead to a consensus to slash at least 1 million barrels of crude from daily production.
Non-OPEC producers Mexico, Norway, Oman and Russia have sent observers to the gathering. Mexico joined recently with Saudi Arabia, Venezuela and several Gulf region countries in pledging to cut 823,000 barrels daily from the market, but its oil minister said Tuesday that further reductions were unlikely.
Many of the major producers banded together in March to cut 1.72 million barrels of crude from daily production. But analysts have insisted a total of about 3 million barrels must be cut to have any effect on prices. With an additional 500,000 barrels in cuts needed, market participants say this meeting may be the make-or-break point for oil prices this year.
Even if further cuts do come, it may take some time for crude prices to rise; market participants and analysts have been skeptical that producers have accomplished the goals of the first round of cuts and say they will believe they are being made only when flush U.S. inventories record sustained declines.
Oil prices have tumbled this year because of sharply lower demand from economically depressed Asia and unexpectedly weak demand for crude products heating oil and unleaded gasoline in the United States after a warm winter.
July unleaded gasoline rose 1.37 cents to 48.27 cents a gallon; July heating oil rose 1.66 cents to 39.98 cents a gallon
NYMEX NATURAL GAS
NYMEX Hub Natural Gas Ends Up On Late Technical Buying
NEW YORK, June 23 - NYMEX Hub natural gas futures ended higher across the board Tuesday in another active session, with a late wave of technical buying and an ongoing heat wave again boosting the complex, industry sources said.
July climbed 2.9 cents to close at $2.391 per million British thermal units after trading today between $2.324 and $2.41. August settled 4.5 cents higher at $2.438. Other deferreds ended up by 0.8 to 4.2 cents.
"I think we saw the funds rolling length out of July and into August and September. Heat has been a big factor, but it's not supposed to be as hot next week," said one Midwest trader, adding he expected some pressure tomorrow as speculative longs take profits ahead of weekly inventory data.
Early injection estimates for Wednesday's weekly AGA storage report range from 69 bcf to 95 bcf. For the same week last year, stocks gained 97 bcf.
Eastern temperatures through Saturday are expected to average six to 12 degrees F above normal, with similar levels forecast for the Midwest. Readings in Texas are expected to continue to test record levels this week, averaging as much as 12 degrees F above normal. Florida will average two to six degrees above normal for the period. In the Southwest, the mercury will drift on either side of normal.
Forecasts next week call for more seasonal weather in the upper Midwest, Northeast and Mid-Atlantic, with Texas and the Southeast expected to remain fairly hot.
While chart traders agreed the technicals remained bullish, some said the market was overbought and due for a pullback, particularly with weekly inventory data due out tomorrow.
July resistance was seen first at today's $2.41 high, with further selling expected in the low-$2.42-2.43 area. A break above that level could set up a test of next resistance at $2.585 and then at the $2.65 double top from April. Support was pegged at Monday's gap at $2.295-2.32 and then at at $2.09, Psychological buying was likely at $2.00, with further support expected at $1.97 and then at the $1.915 low from June 10.
The NYMEX 12-month Henry Hub strip gained 2.9 cents to $2.534.
NYMEX total estimated Hub volumes were not available at 1655 EDT but 77,394 Hub contracts had traded as of 1500 EDT versus Monday's revised tally of 98,235.
NYMEX July natgas futures expire Friday, June 26.
U.S. SPOT NATURAL GAS
Not Available
CANADIAN SPOT NATURAL GAS
Canadian spot gas prices ease as supplies return
NEW YORK, June 23 - Canadian spot natural gas prices in Alberta slipped several cents Tuesday in moderate trade, as supplies, cut by plant maintenance, gradually returned to the system as work wound down, sources said.
"The outages are starting to phase down now. The quantities (cut from plant maintenance) are quite a bit less now," said one cash trader, noting about 250 mmcfd was still cut from the NOVA system, down from more than 800 mmcfd earlier this month.
But traders said the downside may be limited near-term, citing a strong U.S. market and lagging receipts from the field. They said total field receipts in Alberta stood at 11.84 bcfd, down from a normal level of about 12.4 bcfd.
Most gas is expected back by early next month as maintenance projects are completed.
Spot gas at Alberta's AECO-C hub slipped five cents today to the low-C$1.90s per gigajoule range, still up 20 cents from the June index.
July AECO was talked steady to down slightly at about C$1.90, while one-year packages at AECO were pegged little changed in the mid-C$2.50s.
Canadian export markets also lost some ground.
Spot gas in British Columbia at Huntingdon/Sumas was down more than five cents to about the US$1.50 per million British thermal units level, almost 15 cents over June 1 levels.
In the east, Niagara was talked two cents lower at about $2.40, still about 25 cents over index.
ENERGY COMMENTARY
For June 24, 1998
By John Moore
Energy prices moved higher on Tuesday amidst growing optimism on the outcome of OPEC's meeting today. Most agree that if production cuts are less than 1 million bpd, most of the recent gains will be erased quickly.
There was a lot of rumors on Tuesday that cuts would come in between 1.2 million and 1.5 million. There was also talk that the idea of pledged cuts be scrapped and a straight 10% cut across the board be considered. This would be about 2.8million bpd from OPEC alone. News releases yesterday all suggested nothing concrete will be released until Thursday. I think if there is no news today, the longs had better take cover.
API data released after the close had crude stocks down 3.8 million barrels. Gasoline inventories were up 3.7 million barrels, and distillates were down 92,000 barrels. Refinery runs were down 0.6% at 98.8% for the week.
For today, markets will nervously be awaiting news from Vienna. If no news surfaces today expect prices to drift lower throughout the day. Positive news could send prices sharply higher.
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