OIL AND NATURAL GAS PRICING SCENE - PART 1 THURSDAY 10/15/98
Can history repeat itself as U.S. faces 25th anniversary of OPEC oil
-- Thu, 15 Oct 1998 10:33 EST
Alliance to Save Energy Notes Ominous Similarities
"The United States seems to have forgotten the lessons it learned 25 years ago when the Organization of Petroleum Exporting Countries (OPEC) strangled the U.S. economy with an oil embargo," notes Alliance to Save Energy President David M. Nemtzow, who points out ominous similarities between the current conditions and those that surrounded the oil embargo 25 years ago.
These similarities include:
* Artificially low energy prices
* Growing fleet of gas guzzling vehicles
* Increasing dependence on foreign oil imports
* International economic instability
* Complacency about the need for reducing energy use
"Americans are acting like an energy crisis could never happen again," Nemtzow says. "We are backsliding in our attitude toward energy at the same time utility companies have decimated efficiency programs and education, which could lead to the rug being pulled out from under our feet once again.
"Today there's no need to put on a cardigan, reduce the temperature, or be uncomfortable," Nemtzow continues. "Today's smart, energy efficient technologies and products save consumers money, increase their comfort, and decrease pollution -- without sacrifice and deprivation."
More importantly, energy efficiency provides painless, cost-effective insurance against the sort of unforeseeable events that shocked and crippled the United States 25 years ago. Energy efficiency can cut home utility bills by 30 percent while also reducing energy use, air pollution, and greenhouse gas emissions.
Closer Look at the Similarities
* Artificially low energy prices -- In 1973, oil prices were stable and low. The oil embargo sent prices skyrocketing and sent the U.S. economy into shock. Looking at constant dollars, today's oil prices are even lower than they were in 1973. These low prices are inaccurately sending a signal to Americans that energy is plentiful and that the need for reducing energy use is a thing of the past.
* Growing fleet of gas guzzling vehicles -- In 1973, gas mileage was the last thing on a car-buyer's mind. Soaring gasoline prices changed that, and for nearly 20 years, the average fuel efficiency of American cars steadily increased. Low gasoline prices and the surging popularity of low-fuel-mileage sport utility vehicles (SUVs) and light trucks have wiped out those gains. The automobile industry has remained stagnant since 1992 -- making few energy- efficiency improvements, when it could easily have been producing more efficient.
* Increasing dependence on oil imports -- In response to the energy crisis of the 1970s, the United States reduced its oil imports to 32.2 percent of the oil it consumed. However, imports are on the rise again and today we import more oil than we produce. Our oil import bill in 1997 was $71.2 billion -- and climbing every year.
* International political instability -- Economic instability breeds political instability, as can be seen in Russia and some Asian countries. Political unrest can play havoc with energy supplies.
* Complacency about the need for reducing energy use and/or energy efficiency -- In 1973, Americans were oblivious to the repercussions of excessive energy use. However, since the energy crisis, the United States has saved 419.6 quads of energy -- enough energy to power the entire U.S. economy for almost five years. In addition, investments in energy efficiency and renewable energy have avoided the emission of approximately 8 billion tons of carbon alone.
"Without further development of energy-efficiency technologies and products, the United States will miss an opportunity to increase its energy productivity and to give itself a cushion should events take an unexpected turn -- just as they did 25 years ago," Nemtzow concludes.
The Alliance to Save Energy is a coalition of prominent business, government, environmental, and consumer leaders who promote the efficient and clean use of energy worldwide to benefit the environment, economy, and national security.
Market mixed on crude build, gasoline draw
..............................................REUTER POLL.........................
......................FORECAST FOR WEEK...ACTUAL FOR WEEK...............
.........................ENDING 10/09/98..............ENDED 10/09/98............... ----------------------------------------------------------------------------------
CRUDE............... UP 4.875 MLN ............... 327.351 ............. UP 8.220 MLN DISTILLATE....... UP 0.666 MLN ............... 149.492 ............. DN 1.707 MLN GASOLINE......... UP 0.687 MLN ............... 197.962 ............. DN 7.023 MLN UTILIZATION.... UP 2.25 (PCT PT) ............. 87.5 PCT ........ DN 0.5 PCT PT
*NB - The forecast is derived by polling at least six market analysts / traders, omitting the high and low forecast and averaging.
The American Petroleum Institute (API) said on Wednesday that U.S. inventories of crude oil saw a large build of 8.22 million barrels, while U.S. stocks of gasoline fell by an unusually large draw of 7.023 million barrelslast week.
The weekly inventory report is usually released every Tuesday, but was delayed this week because of Monday's federal Columbus Day holiday in the U.S. Traders and analysts discounted much of the bearish effect of the large build in crude oil inventories because 3.7 million barrels were added in PADD 5. West Coast markets have only a limited effect on futures trading on the New York Mercantile Exchange.
"The market was expecting a bearish report, and despite the large build in crude, it is not that bearish," one trader said.
The report pushed up products' prices on ACCESS, the overnight energy market. Front-month November gasoline futures moved up to 44.35 cents per gallon, or 0.83 cent higher than Wednesday's settle after the report was released, but then slipped back to 44.20 cents or 0.68 cent stronger than the close.
"It is supportive because of the unexpected gasoline draw," said Tom Bentz, an analyst at Cresvale International.
An average of economists' expectations for last week's gasoline figures had predicted a small build of around 0.687 million barrels.
In addition to the large draw in gasoline stocks, the API also revised gasoline stocks for the week ending Oct. 2, lowering the figures by another 3 million barrels.
"If there wasn't a revision to gasoline numbers, there would have been a draw of over 10 million," one trader said, pointing to the revision's overall bullish effect.
Some traders said had expected the revision, since last week's data had not fully accounted for the production disruptions caused by Hurricane Georges, which cut refinery runs by 1.1 million barrels per day (bpd).
Implied demand for gasoline was 8.92 million bpd, stronger than the previous week's 8.6 million bpd, analysts said.
Distillate implied demand was also higher, at 3.57 million bpd, compared with the previous week's 3.4 million bpd. But some traders were still disappointed that demand for heating oil before the approach of winter, the seasonal peak in its demand cycle, was not enough to support the market.
"I just can't see this as a change to a bullish market," one trader said, pointing to stocks of crude oil, which are about 22.71 million barrels over last year's levels.
"Overall, the fact that we are still showing crude stocks significantly higher than their year ago levels probably shows that we may be heading down," the trader added.
The API's latest report also shows that refinery utilization declined again, although not by as much as for the previous week.
US Crude Outlook - Oversupply turns market bearish
The U.S. crude oil market will feel the pressure of several ships of foreign oil heading to the U.S., particularly since U.S. demand for crude is not very strong, traders and analysts said on Wednesday, after the release of the latest U.S. inventory data.
"I think we are heading down. There is a significant upswing in (crude) imports," Ritterbusch said, pointing to a fleet of ships carrying Brent towards the U.S. market.
One U.S. trader is said to be bringing four Ultra Large Crude Carriers (ULCCs) of the light sweet European crude towards the Gulf Coast, while other traders are also said to be showing November Brent in the U.S. Gulf at discounts around 75 cents under December West Texas Intermediate. Each ULCC carries more than 300,000 tons, or more than two million barrels of crude.
While imports are said to be streaming in, few companies are keen to build stocks any higher given the relatively narrow "roll" between November and December prices of U.S. benchmark WTI.
"The roll is coming off at the moment, but you're not going to see anyone rushing to build stocks with this contango," said one Gulf Coast crude trader. November crude is now trading between 20-18 cents a barrel lower than December crude, not enough incentive to store barrels.
News of production disruptions in Nigeria is not proving especially supportive of crude markets, traders said, noting that there were still ample early November barrels and still some October barrels of West African crudes as yet unsold. A series of community disturbances in Nigeria have stopped one fifth of the country's production, but traders said they were still monitoring the situation.
The latest U.S. inventory figures released earlier this week are not much help either, and traders dismissed the odd figures, saying they reflected short-term disruptions caused by hurricane Georges. While the American Petroleum Institute (API) figures showed a sharp drawdown of 3.8 million barrels, the U.S. Department of Energy report showed a build of 2.7 million barrels in U.S. stocks of crude oil.
"The statistics were neutral to bearish," said Nizam Sharief of Hornsby & Co., adding that the the disparity in the weekly reports reflected the disruptions caused by hurricane Georges, the fourth storm to pound the Gulf of Mexico in as many weeks.
"In the very near term, we are going to drop below $15," Sharief predicted. The front-month November contract on the New York Mercantile Exchange settled 44 cents lower at $15.06 on Wednesday, and touched a low of $15.02 in intraday trading.
Analysts pointed bearishly to the relatively high product inventories, especially in distillate stocks, which include stocks of heating oil. While U.S. stocks of gasoline are 9.75 million barrels higher than last year's levels, those of distillates are 16.86 million barrels higher than last year.
On the demand side, the picture is also bearish in the short-term, since Sun's cuts of 177,000 barrel per day (bpd) at its two-refinery complex in Philadelphia, Pennsylvania are expected to continue until the end of the month. Similarly, Tosco's 110,000 bpd refinery in Bayway, New Jersey is not expected back up until the second half of October.
Also, the crude unit at British Petroleum's 250,000 bpd Belle Chase refinery in Louisiana still hasn't been brought back on stream after a fire broke out in the unit last week. The crude unit is expected to remain shut for another week or so, according to a company statement.
Expectations are that Chevron's Pascagoula refinery in Mississippi will be shut even longer after it suffered flooding when Hurricane Georges pounded the area late last month.
U.S. Product Outlook-firm on extended outages
Extensive unplanned refinery shutdowns due to Hurricane Georges last week boosted U.S. Gulf Coast gasoline prices, and the rally is expected to continue as two major plants were affected, traders said on Monday. "Looking at the fundamentals as far as refining is concerned, the shutdowns will put more buyers in the market than anticipated,"a Gulf Coast trader said.
The hurricane which hit the Gulf Coast a week ago took down at least seven refineries in Louisiana and Mississippi. Five of them escaped any damage but the precautionary shutdowns took out around a week's worth of 928,000 barrel-per-day of production, traders said.
But what sent buyers into the market and prices soaring in "refining row", was the longer lasting mayhem the hurricane brought at Chevron Corp's <CHV.N> and BP's <BP.L> plant.
Hit by floods, Chevron's 295,000 bpd refinery at Pascagoula, Miss. had some five feet of silt and would take at least a month to begin its start up process, traders said.
More pessimistic sources said the plant will be shut until the end of the year but the company declined to comment on the duration of the shutdown.
Although largely unscathed by the hurricane, a fire broke out at BP's 250,000 bpd Alliance refinery at Belle Chasse, LA. during its start up process on Wednesday. It restarted its 100,000 bpd catalytic cracker and 37,800 bpd reformer and other secondary units on Sunday but its crude unit will remain shut for another seven to ten days.
"Chevron is quite a large producer on the Gulf Coast and I think it will keep the market supported," a trader said. "Gasoline will and can climb even higher...I wouldn't be surprised if the conventional gasoline will go into a premium...it is near enough."
Gasoline outright prices on the Gulf Coast rose nearly 3.00 cents per gallon last week to around 45.00 cents. Its differential to the NYMEX rose from a 3.75 cent discount to the NYMEX before the hurricane hit, to 0.25 cent premium on Monday.
With the cut in output, traders expected another drawdown in gasoline stocks which fell 1.8 million barrels to 21 million in the week ending Sept. 25 according to the American Petroleum Institute (API).
Both BP and Chevron were amongst the aggressive buyers seeking mainly the gasoline, jet fuel and low sulphur diesel.
But high stocks of heating oil capped any rallies in both the Gulf and the northeast, and prices in both hubs slipped by around 1.5 cents per gallon to around 40 cents per gallon.
The API reported weekly stocks grew 2.5 million barrels to 15.3 million, around 16.7 million higher than last year's build.
While an influx of Russian gas oil was also putting a lid on New York Harbor heating oil prices, gasoline arbitrage cargoes were also going to depress Harbor prices.
"Give it five to six days...then prices will be slaughtered," a trader said on the expected arrival of cargoes.
But other traders were more skeptical.
"There is a lot of talk of incoming cargoes but until I see them will I believe it. You won't be seeing these sort of premiums if the market wasn't tight," a trader said.
Harbor outright gasoline prices have actually fallen a quarter cent to around 45.60 cents per gallon, but reformulated grades differentials have risen by nearly 1.75 cents, climbing into a premium of around 1.25 cent to the NYMEX on Monday.
Conventional differentials on Monday also flipped to 0.25 cent over the NYMEX from a discount as low as 0.50 cent.
Brent Nov supply expected up at 610,000 bpd-Shell
Britain's North Sea Brent blend crude is expected to flow at an average rate of 609,728 barrels per day (bpd) in November, well up from a provisional estimate of 552,970 bpd in October, system operator Shell Expro said on Thursday.
November Brent would be even with the daily average throughput for the year until the end of September, which stood at 610,473 bpd, Shell added.
Brent blend comprises co-mingled crude delivered through the Brent and Ninian system pipelines from fields in the northern North Sea.
Shell Expro operates in the North Sea on behalf of Royal Dutch Shell <RD.AS><SHEL.L> and Exxon Corp <XON.N>.
Diary Of Energy Market Events For Thursday 10/15/98
MADRID - The Spanish association of petroleum products' operators AOP to hold news conference on a new hydrocarbons law 0900 GMT.
CARACAS - National Electoral Council board members to give news conference at Caracas Press Club 1600 GMT.
CAPE TOWN - Fifth annual indaba (summit) Africa Upstream, international exploration and production business strategy and oil and gas opportunities (Second day).
BUDVA, Montenegro - International seminar on natural gas and production technology (Third day).
ABU DHABI - Middle East Gas Summit '98 (Final day).
LONDON - Preparing for the Development of Emissions Trading and Permit Allocation conference (Final day).
BRUSSELS - Intertanko Brussels Tanker Event (Final day).
World oil sinks as producer misery mounts
Oil prices dropped deeper into producers' danger zone on Wednesday, bedevilled by a global glut that shows few signs of clearing.
International marker Brent crude slid back below $13 a barrel to close at $12.69, down 34 cents.
Prices have fallen nearly two dollars this month as a rally triggered by hurricanes threatening U.S. and Caribbean oil refineries tailed off. Brent is nearly eight dollars, or 40 percent, below last October's average.
The sustained slide is piling pressure back on producers to take action as a conference between key suppliers and consumers nears in Cape Town at the end of October.
While three million barrels per day of pledged producer cuts hauled prices up from their August nadir near $11.50, analysts say the threat of worldwide economic slowdown means more sacrifices are needed.
OPEC member Kuwait on Tuesday indicated it would push for the producer club to increase oil output cuts beyond the present 2.6 million bpd. Algerian Energy Minister Youssef Yousfi also this week raised the prospect of further cuts.
But OPEC big guns Saudi Arabia and Venezuela, at the helm of this year's producer deals, have said they do not want to make further reductions.
And an Iranian official told Reuters on Wednesday that Tehran would prefer to defer any decision on further cuts until it becomes clear how much support the market draws from winter demand.
The official suggested it could be too early to form an accurate assessment of the strength of winter demand by OPEC's next ministerial conference on November 25.
Oil traders are now watching closely to see if the vast U.S. market -- which devours around a quarter of all world oil supply -- can make further dents in its inventory overhang.
Hurricane Georges, flanked by other tropical storms, helped drain some of stock surplus in recent weeks by forcing the refiners and producers in the U.S. Gulf into temporary shutdowns.
Yet U.S product stocks are still well above year-ago levels, despite slowing refinery runs. Monthly U.S. statistics released on Wednesday showed that distillate stocks were at their highest for 11 years in September.
Prices in dollars per barrel:.......Oct 14.......Oct 13
....................................(close)......(close)
IPE November Brent..................$12.68.......$13.03
NYMEX November light crude..........$14.05.......$14.23
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