MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 12 1998 (10)
WEEK'S TOP STORIES
Asian Crisis Hits Commodities Markets Many Nations Hurt As Prices Decline, But U.S., European Consumers Reaping Benefits
The Dallas Morning News
Brace yourself. It's time for the Asian aftershocks.
When Eastern Asia was hit by its economic earthquake a year ago, the shock waves quickly reverberated around the globe through the world's hair-trigger stock and currency markets.
But the more powerful impact is working through a slower-moving and less visible force: the markets for basic commodities such as oil, metals and timber. And that helps explain why the ripples from the Asian financial collapse are continuing to hit hard in countries as far-flung as Canada, Chile, New Zealand and Mexico while the effect has remained unexpectedly benign in the United States and Europe.
For nations that depend heavily on selling raw materials and basic goods globally to generate growth and to support their government budgets, the pain has been sharp, contributing to job cutbacks, lower currency values, shortfalls in government revenue and ballooning trade deficits.
Overall, commodity prices are down almost 10 percent since February.
"There is no question that the weakness in certain commodities is reverberating in markets around the world," said Desmond Lachman, managing director of emerging markets economic research at Salomon Smith Barney.
Drops in the prices for copper have hit Zambia and Chile, while New Zealand has felt the impact of lower timber prices. Australia is suffering from a decline in wool prices; Canada bears the pain of lower coal and timber prices.
But the United States and Europe are in significantly different positions. Even though exports from Europe and America to Asia have dropped sharply and the United States exports many of its own commodities, it is far less dependent on them. In addition, generally affluent consumers in the world's two biggest economic entities have received a big boost - similar to the effects of a substantial tax cut - because of the decline in commodity prices. This has largely cushioned the Asian fallout so far here and in much of Europe.
Consider the impact of lower oil prices, which have fallen from a high of $22 a barrel in the last year to a low of $11.56 a barrel last month. While not all of this is a result of the crisis in Asia, a major portion is because the Asian economic engine has stopped racing ahead - and has gone into reverse.
That has translated into about $14 billion in lost income this year to major oil producers such as Russia, Mexico, Venezuela and the Middle East and a nearly equivalent bonus for energy consumers. For the United States, which produced 6.4 million barrels a day in April but also imported 10.4 million barrels daily, the gain for consumers has far outweighed the negative impact on oil drillers.
Allen Sinai, chief global economist at Primark Decision Economics, is forecasting that lost growth from U.S. exports and the substitution of cheaper Asian imports for products made here could cut as much as a full percentage point off the increase in the gross domestic product this year.
But, at the same time, he estimates that the overall decline in oil prices, by putting more money into the pockets of U.S. consumers, will add back much, though probably not all, of the growth lost through worsening foreign trade.
And this is not the only stimulus from Asia. The flight of foreign investors from Asia's problems and into the haven of Treasury bonds has bolstered the dollar and pushed U.S. long-term interest rates to 30-year lows. The near absence of inflation has been helped by lower commodity prices and cheaper import prices. All that has allowed growth to perk along without the inflationary pressures that would have normally forced the Federal Reserve to put on the brakes.
Both low rates and low inflation have helped keep the stock market rally alive, adding to the"wealth effect" from the market rally that Federal Reserve Chairman Alan Greenspan, among others, believes has kept the economy strong by stimulating spending.
For the United States, Mr. Sinai said,"It is possible that the positive byproducts could be more than enough to offset the negatives."
Heavy Oil Producers Enjoy Rising Fortunes
Price differential between heavy, light crude shrinks
Calgary Herald
After enduring months of punishing market conditions, Canada's heavy oil producers have begun to see their load lightened.
The so-called "price differential'' between heavy and light oil -- the discount heavy crude trades at compared with light oil -- has begun to narrow, slowly improving economics for producers.
No one predicts a rapid about-face for a sector squeezed by high costs and low prices, but any relief is welcome.
"Six months ago, the mood was optimistic -- (good times) would never end. Three months ago, it seemed the world ended,'' says Brian Kientz of Universal Industries Corp., a Lloydminster metal fabricating business that services heavy oil companies.
"Now, it's a gotten a little more optimistic.''
Universal, which builds oilfield battery sites and other equipment for petroleum companies, cut about 75 employees this year after business dropped 40 per cent.
In early January, the price spread between Bow River-Hardisty grade heavy oil and Edmonton light crude stood at an imposing $9 Cdn a barrel, but shrunk to $5.56 earlier this week.
"In the heavy oil business, a couple of bucks (improvement) is significant -- maybe the difference between shutting wells in,'' says Roger Thomas, president of Wascana Energy Inc., a subsidiary of Canadian Occidental Petroleum Inc.
"But I don't think you'll see a great rush to bring stuff back on for $1 or $2 a barrel.''
Wascana shut in about 5,000 barrels earlier this year. Other major producers, including Husky Oil Ltd., PanCanadian Petroleum Ltd., and Ranger Oil Ltd. have also shut in production.
Just last summer, heavy oil was in vogue.
A new discovery of tar-like bitumen at Pelican Lake near Fort McMurray drew investment from senior producers such as Amber Energy Inc., Canadian Natural Resources Ltd., Amoco Canada Petroleum Co. Ltd. and CS Resources Ltd.
On financial markets, larger petroleum producers took over heavy oil specialists such as Wascana, CS Resources Ltd., Stampeder Exploration Ltd. and Elan Energy Inc.
With conventional light oil reserves expected to decline in the next century, companies were lured by huge established reserves of heavy oil, estimated at 967 million barrels.
But the Asian Flu triggered falling oil prices across the board, taking the wind out of high-cost ventures for heavy oil, which must be upgraded into lighter crude before being refined.
A barrel of Bow River heavy oil sold for $12.64 in June, compared with $21.95 last October.
In fact, improving differentials this summer have come about due to falling conventional light oil prices, seasonal factors and easing of the heavy crude glut.
"What we've done is not repair wells that have servicing problems. The price doesn't justify it,'' says John Zahary, a vice-president at PanCanadian Petroleum, which has shut in about 4,000 barrels a day. "This is such a thin-margin business that if two factors go the wrong way, it can be severe.''
Prices for condensate -- a byproduct needed to ship heavier oil through pipelines -- were at a premium at the start of the year, but have dropped.
Access to pipeline space and upgrading capacity have also been difficult to secure at times.
"Most heavy oil projects are put on the back burner right now," says Gord Currie, an analyst with Canaccord Capital Corp. "It's a margin squeeze. You get the lowest price for heavy oil and it's the highest cost to produce.''
Operating costs for conventional heavy oil average about $7 a barrel, and some crude is simply unprofitable to produce in this environment, he said.
Another reason for the recent improvement in the price differential is the cyclical demand for heavier crude, used to make asphalt during summer's road-paving season.
It's estimated up to 80,000 barrels of uneconomic heavy oil has been shut in this year. Canadian heavy oil production dropped five per cent to 587,514 barrels a day between December and February.
Less economic heavy oil has also been among the first production to be cut by OPEC nations this year.
"The market is getting closer to equilibrium,'' says Steven Kelly, an oil market consultant with Purvin & Gertz in Calgary. "A lot of these factors have come off as quickly as they came on.''
Another bright light is Husky's plan to spend $500 million to expand its Lloydminster heavy oil refinery.
The project will double the plant's output capacity to 150,000 barrels a day.
Preliminary design work will be done in August and construction should be finished by late 2001, says Husky vice-president Doug Stout.
It's expected 60-80 per cent of the feedstock required for the upgrader will come from Husky, which now produces 45,000 to 50,000 barrels a day of heavy oil.
The remainder of the upgrader's feedstock will come from other companies.
Other large producers such as Shell Canada Ltd. and Mobil Oil Canada Ltd. are also looking at getting into the upgrading business, which turns heavier grades of oil into low sulphur, synthetic crude.
"There is a lot of optimism this (Husky) announcement and others .will solidify the industry in Western Canada,'' Kelly says.
A thinner price spread between light and heavy oil is encouraging, but many observers say absolute oil prices must recover. A barrel of oil on the New York Mercantile Exchange closed Friday at $13.87 US, down 30 per cent since last November.
"It's an improving picture, but still not a rosy picture,'' says Hart Searle of Imperial Oil Ltd., which produces 158,000 barrels a day of bitumen from Cold Lake, northeast of Edmonton. "The fundamentals aren't quite where we'd like to see them.''
Companies aren't keen to gamble on higher differentials just yet, although some additional heavy production is expected in late 1998.
PanCanadian will ramp up its production at Pelican Lake later this year to 10,000 barrels per day from 6,000, Zahary says.
And higher differentials have let Wascana bring its Plover heavy oil property on stream with a profit, Thomas says.
"You can't over-react to low prices,'' he says. "The fundamental question is: How long do you think this is going to last?''
Deep in the heart of heavy oil country, Brian Kientz wonders the same thing. But having seen the bottom of the economic cycle before, he believes the only way left to go is up.
"We're sitting on a pile of heavy oil in this country, from Kindersley to Fort McMurray. With the amount of heavy oil that there is here, there's light at the end of the tunnel.''
Quick Facts
Price spread between Bow River-Hardisty heavy oil and Edmonton par light oil ($US/Bbl)
Jan. 97 4.62
Feb. 97 4.64
Mar. 97 4.56
Apr. 97 4.73
May 97 5.06
Jun. 97 4.75
Jul. 97 4.43
Aug. 97 4.11
Sep. 97 4.22
Oct. 97 4.88
Nov. 97 5.89
Dec. 97 6.38
Jan. 98 5.97
Feb. 98 5.86
Mar. 98 5.30
Apr. 98 5.24
May 98 5.26
Jun. 98 4.54 *
* estimate
Source: Purvin & Gertz Inc.
Total Canadian Heavy Oil Production -- thousands of barrels/day
1993 524
1994 552
1995 613
1996 678
1997 796
Petro-Canada To Weld The British Way, Wells Says
St. Jonn's Evening Telegram
The battle between St. John's Mayor Andy Wells and the Terra Nova oil project is expected to flare up again next week when the Canadian Bureau of Welders comes to St. John's to address a second charge that Petro-Canada wants to do things the British way.
The Terra Nova consortium, led by Calgary-based Petro-Canada, is proposing using British welding procedures on platform modules to be built at Bull Arm, Wells charged in an open letter to the Canada Newfoundland Offshore Petroleum Board this week.
"(The bureau of welders) are going to be in town next week, I have been advised, and they're very interested in the this issue," Wells said Thursday.
The bureau will be sending its top people to discuss the issue with the CNOPB, a spokesman for the welders bureau confirmed, but refused further comment.
Last month, Wells sent another letter to the CNOPB, criticizing the board for backing off on a requirement that Terra-Nova engineers be relocated to St. John's. The company said it was too expensive to adhere to such a requirement.
Keeping the engineering and procurement teams in England put Newfoundland supply companies at a competitive disadvantage, Wells said.
If British welding procedures are used, Canadian companies will again be at a disadvantage when it came to bidding on contracts, Wells said.
"One difference would be that your engineering and welding specialists, and the staff involved in inspections and stuff, would have to be trained to British as opposed to Canadian standards," he said. "I've been talking to members of the local engineering community and they're concerned."
A spokeswoman for Petro-Canada said Wells' comments were not accurate, but would not consent to an interview.
Welding on Canadian projects such as Hibernia is typically performed under a standard referred to as CSA-S473, which basically sets out the way welding work is inspected and approved, a source in the welding industry said.
Operators in the North Sea operate under European specifications, which are not standards, but are said to be less rigorous than the Canadian system, the source said, asking not to be named.
"This puts our welders and workers at a disadvantage," the source said.
Wells said he was not surprised no one in the industry is willing to go on the record with comments that might be interpreted as critical to oil companies.
"What's interesting about this is this climate of fear," Wells said. "People say `yes b'y Andy, what you're saying is right on the mark, you're right but we're afraid to speak out we'll be black-listed by the oil companies or we'll upset the politicians in power.'
"There's a real pervasive climate of fear here and it's really shocking," he said.
Wells is also not ready to admit defeat on the Terra Nova engineering issue.
He criticized the province for washing its hands of the issue and slammed the CNOPB for doing nothing.
"What annoys me about this whole exercise is the CNOPB is supposed to be there to protect our interests, as far as I can see they're a bunch of pansies," Wells said "They're not doing their jobs."
Wells also criticized the CNOPB for failing to reply to a letter he sent June 19.
"I don't care personally but I think as mayor, I deserve some sort of response," Wells said.
Weather A Boost To Pipeline Project
Fort McMurray Today
The hot, dry conditions have the backers of the $475-million Wild Rose Pipe Line grinning.
Spokesman Doug Ford said the warm weather makes constructing the 547-kilometre crude oil pipeline south o Suncor Energy to Hardisty in central Alberta much easier. "What would really slow down construction is any period of heavy rain because then what happens is that the ground conditions become very sloppy," said Ford. "You can't use heavy equipment."
Ford said Wild Rose currently is very active in the main line construction from Hardisty north and the work is proceeding on schedule.
He said the contractor, BFC Pipeline, has experienced a few isolated incidents of vandalism on the pipeline right of way but other than that things have been going OK. In Fort McMurray, the clearing for the pipeline route began in May.
Approximately one month later work began in Abasand Heights. A temporary bridge was constructed so equipment could cross the Horse River and access the Athabasca River where a directional drill will tunnel a pipeline path underneath the water.
BFC has accessed the site using the existing former Abasand bitumen plant road. The road was upgraded to allow equipment passage, said Ford, adding he's been advised that rain makes the road "fairly slick" so people who use the route need to be aware heavy pipeline equipment is also using the area.
"We have spotters and we have followed safety guidelines very closely, but we are encouraging the public to be extra careful and cautious around any equipment that is moving, not only with our site but other sites as well." The pipeline is expected to become operational in April 1999.
With a capacity of 570,000 barrels per day of oilsands product, the line will accommodate increased oilsands production. It's the largest crude oil pipeline system running exclusively in Alberta.
Wild Rose Pipe Line Inc. is a wholly-owned subsidiary of Calgary-based IPL Energy. Suncor Energy will initially operate the line from its existing pipeline control centre located in Sherwood Park.
CMHC Analyst Blames Fewer Housing Starts On Oil Price
Fort McMurray Today
Lower oil prices seem to have jabbed Fort McMurray's new housing starts below the belt.
Statistics from Canada Mortgage and Housing Corporation show the oilsands capital had 12 per cent fewer new homes constructed during the first six months of 1998, compared to the previous year.
News of the depressed oil prices has affected the house buying public, especially those living in an oil-driven economy, said CHMC senior market analyst Richard Goatcher.
"Even though people feel confident that the local economy is going to remain strong, there's a certain amount of uncertainty that has been injected into the system," said Goatcher. "And that will cause some people to maybe delay their decision."
Year-to-date statistics have recorded 173 single family housing starts, lower than the 197 recorded last year. Single family starts for the month of June totalled 65, making it 20 fewer homes being built in McMurray than last year. Fewer multi-family homes were also built during June: 67 versus the 87 recorded in 1997.
The total of multiple starts totalled 181, only down slightly from last year's year-to-date total of 199. "Last year was a pretty banner year," explained Goatcher. "This time last year starts were up over 800 per cent so it was a very strong year."
What's happened over the past several years in McMurray, said Goatcher, is homeowners have upgraded and bought new homes. Given the atmosphere of lower oil prices, people thinking about upgrading today are putting that action on hold. McMurrayites remember when oil prices collapsed before, he added.
Fort McMurray isn't the only community to see lower housing starts. The heavy oil community of Cold Lake has experienced declines in their housing starts, too.
Cities who continue to show strong housing starts include Calgary, Red Deer and Grande Prairie. Goatcher said Grande Prairie's housing starts for the first six months of 1998 have jumped 48 per cent with 297 new housing started recorded thus far. Compared to last year, Red Deer's housing starts increased nearly 59 per cent.
Across Alberta, CHMC reports housing starts in urban areas increased by eight per cent over June 1997 to 1,923 units. Single-detached starts rose by 13 per cent to 1,548 while multiples fell by 10 per cent to 375 units.
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