CRUDE OIL / Closing Review Friday 11/27/98
11/27 08:28 FOCUS-Oil ministers flee wreckage of OPEC meeting
OPEC ministers on Friday hurried away after a disastrous Vienna meeting that looks like inflicting even more punishment on their oil-dependent economies.
The careworn oil cartel's breakdown in cooperation will ensure that this year's crushing price slump gets worse before it gets any better, analysts said.
"In my gut I think we are going to see oil prices in single digits," said Mehdi Varzi of Dresdner Kleinwort Benson bank. International benchmark Brent crude's average this year is already its lowest for over two decades, at just $13.65 a barrel. OPEC's biggest producer, Saudi Arabia, is getting less than $8 for its crude sales to Europe and the United States.
In a stormy two-day meeting OPEC could not even agree to extend its 2.6 million barrels per day (bpd) output cuts package as suffering producers proved unable to find common ground.
A Saudi Arabian proposal for a six month extension to existing measures fell victim to a coalition of Iran, Kuwait, Libya and Algeria urging deeper cuts.
Venezuelan reluctance to make any further promises ahead of December's presidential elections ensured that the organisation, once famous for crisis management, could only agree to disagree.
"The body language when delegations came out was as bad as almost any OPEC meeting I can remember," said Varzi.
Not one minister was prepared to brief journalists as they quickly turned tail from Vienna. There was no sign of OPEC Secretary-General Rilwanu Lukman's traditional post-meeting press breakfast.
All OPEC could manage by the end of meeting on Thursday was a promise to reconvene again in March, when they will know whether northern hemisphere winter weather has rejuvenated demand enough to provide some price relief.
Otherwise the OPEC stalemate guarantees another bumper build in already swollen oil inventories and more of the same price misery, analysts say.
Global stocks could balloon by as much as 800,000 bpd next year on top of this year's one million bpd rise, according to Washington's Petroleum Finance Company.
Strong signs that the price crisis has unearthed deep-seated rivalries between OPEC big guns Saudi Arabia, Venezuela and Iran do little to encourage observers that the group will do any better when it meets again in four months.
"OPEC came to solve its troubles but troubles followed it away," said Peter Gignoux, head of the energy desk at Salomon Smith Barney in London.
11/27 09:36 ANALYSIS-Old OPEC rivals beat oil market wardrums
Guerrilla warfare in OPEC? That was the fear in oil industry circles on Friday after the crumbling cartel left Vienna with nothing to show from two days of bad-tempered talks.
Bitter rivalries between Organisation of the Petroleum Exporting Countries members have been exposed again just as the group, and the oil industry in general, can least afford it.
Abandoning plans even to extend existing output curbs, OPEC on Thursday left oil prices, already at 22-year lows, perilously exposed to even heavier losses.
"It looks like a disaster. Everyone is hunkering down and planning for the worst," said financier Robert Maguire of Morgan Stanley Dean Witter.
"There is bad blood in OPEC. Oil producers may be in for a lot more pain. This looks like guerrilla warfare," said old OPEC hand Mehdi Varzi of Dresdner Kleinwort Benson.
Oil's slump this year has sent the petroleum industry worldwide running for cover in a spate of company cost-cutting and mergers.
Now the battle lines have been drawn again between OPEC's three biggest producers -- Saudi Arabia, Venezuela and Iran -- together responsible for more than half the group's 27 million barrels daily of output.
Venezuela and Iran fear that Saudi Arabia, easily the world's biggest producer, is keeping prices low to spoil the opening to foreign finances of their upstream industries.
"Iran fears that the Saudis want to keep oil prices low for some time," said one senior delegate after OPEC ended on Thursday with agreement only for another meeting in March.
"Unless the Saudi-Iranian differences are resolved they have serious implications for March and implications for Iran's opening up and Gulf politics in general," said Sharif Ghalib, a director at credit ratings agency Standard and Poors.
For its part, Saudi Arabia sees its two rivals going back on the supply curbs agreed earlier this year, and stealing Saudi market share.
Riyadh has become particularly concerned that Venezuela's fast-growing oil capacity, fuelled by foreign company investment, was forcing it out of the giant United States market.
But is Saudi Arabia, holder of the cheapest and largest oil reserves in the world, prepared to play the long game or will a common interest in higher prices quickly prevail again?
"What remains unclear is whether Saudi policy is guided by short-term tactical considerations or longer-term strategic goals," said the Petroleum Finance Company in a note to clients.
Saudi reluctance for further supply cuts could merely signal the failure of Riyadh's summer tactics of limited and collective cuts to keep a floor under prices.
"On the other hand it may be the beginning of a new strategy of letting prices fall further to limit high-cost production in the medium term," said Petroleum Finance.
With plenty of spare capacity and unrivalled reserves, Saudi Arabia certainly has the muscle to outflank its competitors. Whether it has the political will is another matter.
Reliant on oil to fund state bureaucracy and welfare handouts, Saudi, like others in OPEC, would find it difficult to contemplate the social pressures that a lengthy period of low prices might bring.
"We would die in the process. We have to be responsible," said a senior Saudi source recently.
Nevertheless, the uneasy truce forged earlier this year by OPEC with outside producers to manage world oil supplies is now under threat. And the further supply curbs which most in OPEC agree are necessary to lift prices look hard to achieve.
"We require a realignment of strategy and interests that at the moment in OPEC we've foregone," said a senior Gulf Arab OPEC official. "This situation needs swift efforts behind the scenes."
For that to happen before OPEC meets in March, tough issues must be resolved.
Iran's firm stance in Vienna this week that the benchmark for OPEC's summer agreement to cut output was unfair is a bad omen.
A simmering row over output quotas allocated in the wake of the 1990-1991 Gulf crisis also reemerged as a bone of contention for Iran, which wants Saudi Arabia to reverse some of the production gains it made then.
And December Venezuelan elections mean Caracas may rethink its oil policy, torn now between capacity growth and short-term OPEC supply limits which it has failed to meet in full.
Many oil analysts think oil prices, now at just $11 a barrel for North Sea Brent, will test single digits -- providing a further shock to OPEC economies.
That might prove the producer group's best hope. "OPEC tends to work best when cornered," said oil analyst Geoff Pyne of Warburg Dillon Read. "OPEC is crisis management club rather than a market managing organisation."
11/27 09:56 Saudi newspapers call for adherence to oil cuts
Two Saudi Arabian newspapers, in commentaries after a Vienna OPEC meeting failed to rescue sliding prices, on Friday urged oil producers to adhere to production cuts agreed upon earlier this year.
The Arabic-language Al-Jazeera also said that the slump in oil prices was threatening many oil producers with "social, political and economic catastrophes".
"The (production) cut agreed upon by OPEC requires strict adherence from all," The London-based Asharq al-Awsat said in an editorial.
"Failure to adhere to the cuts or any other forms of cheating may appear, on the surface, as a clever strategy. But it is a gamble with no profits," it said.
OPEC ministers failed at a stormy two-day meeting to extend their 2.6 million barrels per day (bpd) output cut and instead postponed a decision on production policy until next March.
A Saudi Arabian proposal for a six month extension to existing measures fell victim to a coalition of Iran, Kuwait, Libya and Algeria urging deeper cuts.
International benchmark Brent crude's average this year is already its lowest for over two decades, at just $13.65 a barrel. OPEC's biggest producer, Saudi Arabia, is getting less than $8 for its crude sales to Europe and the United States.
Asharq al-Awsat acknowledged that the Organisation of Petroleum Exporting Countries had been weakened over the years, but said OPEC was still "a force to rely on, a force with a constructive role."
Under the headline "restraining the loose ones of the oil producing states," Jazeera daily said that the drop in oil prices was hurting all producers with some states being forced to shelf development projects and others almost unable to pay civil servants employees.
"What is the solution? Simply to adhere strictly to the production quotas and to the latest agreements between producers from within OPEC and from outside, especially what was agreed upon in June requiring a cut of 2.6 million bpd," Jazeera said.
It also called for "adhering to what was agreed upon at the latest OPEC oil ministers meeting which was announced yesterday on Thursday." The newspaper did not elaborate.
Jazeera also called on OPEC's Ministerial Monitoring Committee to make public the names of countries exceeding their production ceilings and "to take a tough stand to restore credibility to the decisions of oil producers from inside and outside OPEC."
11/27 13:49 World Oil teeters on the brink, OPEC bickers
World oil prices recovered slightly on Friday but still clung precariously near a precipice after a Vienna OPEC meeting aimed at rescuing depressed markets failed to take any action.
Oil analysts and dealers were quick to downgrade price forecasts after the fractious oil cartel left a failed two-day Vienna meeting marred by bitter squabbling.
OPEC ministers shied away from extending existing output cuts and instead postponed any decision on production policy until next March. "In March we will decide what to do," said OPEC Secretary-General Rilwanu Lukman after the meeting ended.
"If they hadn't met it might have been better," said Christopher Bellew of Prudential Bache International in London.
"This has knocked the bottom out of the market. I have this horrible feeling we could be getting into single digit prices for a while," said Mehdi Varzi of Dresdner Kleinwort Benson.
World benchmark Brent crude oil futures had clawed back 14 cents at the end of trade on Friday to stand at $11.14 a barrel.
On Wednesday prices fell to $10.65 a barrel, the lowest level since 1986. Adjusted for inflation, prices are at 25-year lows.
Brent crude oil has averaged less than $13.70 a barrel so far this year, its lowest average level since 1976. And the price of Brent on world futures markets averages out to around $12.70 for 1999.
The $1 drop already priced into the market is probably "on the high side", said Nigel Saperia of Bankers Trust International.
OPEC members have suffered a drop in revenue of about a third this year compared to 1997 and have been struggling to maintain cohesion and compliance with output quotas as oil prices dropped.
Oil analysts say OPEC's decision to put off tough decisions on output until March may backfire on the cartel.
Geoff Pyne, oil analyst at Warburg Dillon Reed said it would be "a difficult period between now and then."
He said OPEC would need to cut another 1.5 million barrels per day (bpd) in March to lift prices above current levels.
The group pledged to trim 2.6 million bpd or some 10 percent of output earlier this year but several countries desperate for cash have been cheating, according to independent monitors.
But Pyne said the decision to postpone any new decision until March might turn out for the better for the producers' group, which he said tended to work better when cornered.
"OPEC is a crisis management club rather than a market managing organisation," he added.
A cold winter in Western consumer nations might help OPEC bridge a price precipice until March, but oil traders see strong downward pressure building up next spring due to bloated oil storage tanks.
Oil price contango, where prompt oil costs less than forward deliveries, has encouraged stock building. Sluggish demand due to a faltering global economy has also kept oil tanks brimming.
Jeremy Hudson of Salomon Smith Barney sees the possibility of prices "flirting with $7 or $8 a barrel".
Oil stocks next summer may hit 500 million barrels more than a low point in 1997 when "just-in-time" stock management and price backwardation prevailed, he said.
Separately, Iraq said this week it had reluctantly agreed to a fifth round of an "oil-for-food" deal with the United Nations.
This made an extended gap in oil exports from Baghdad this winter unlikely. Some oil traders had been expecting a gap of several weeks.
The low prices have also taken their toll on the industry's major corporations, with a rash of mergers and possible acquisitions done or in the offing.
Latest to go into a huddle about a possible joint future are oil giants Exxon Corp <XON.N> and Mobil Corp <MOB.N>, which said on Friday they were considering a potential combination.
A merged company would perch atop the oil industry, pushing it well ahead of traditional industry leader Royal Dutch/Shell Group <RD.AS><SHEL.L> in market capitalization and annual revenues.
11/28 04:33 U.S. Products Outlook-Overhang dampens fire-outage
News of a refinery fire on Monday failed to rally the U.S. oil products, setting the bearish tone for the week, traders said.
Instead, the growing stocks on the Gulf Coast refining hub, which has caused a bottleneck on gasoline and distillate shipments to the northeast, were expected to remain the dominant factor.
"I don't see a rally coming," said one Gulf Coast source.
New York traders said differentials, as gasoline did on Monday,would follow the Gulf. "Gasoline is in the dumps, and all eyes are on the Gulf," said a Midwest trader who works the Harbor.
But with the trading week cut short by U.S. holidays on Thursday and Friday, some traders said shortcovering may be supportive, as well as any bullish announcements from this week's OPEC meet in Vienna or any bullish news on margin-related refinery cuts.
"Everybody knows about it (the fire), but numbers are all the same," said a Houston trader, adding there were enough stocks to quash any rally.
Lyondell-Citgo Refining Co., a joint venture between Lyondell Petrochemical Co <LYO.N> and Citgo Petroleum Corp, which is owned by PDV America Inc, a subsidiary of state-owned Petroleos de Venezuela S.A., said a fire broke out early Monday morning fire at its 265,000 barrel per day (bpd) Houston, Texas refinery.
As a result, it cut its operating rates and shut down some units, including a 92,000 bpd fluid catalytic cracker (FCC) and 95,000 bpd hydrotreater.
"Prices should go lightly lower...there are plenty of barrels," a trader with a major oil company said.
U.S. gasoline inventories have been rising fast in the last three weeks, and were at 21 million barrels in the latest week, up 9 million barrels from a year ago, the American Petroleum Institute (API) said for the week ending Nov. 13.
Distillate stocks, include heating oil, were even more bearish, rising in November to one of the highest levels for the month for at least 11 years, one analyst said.
The API said U.S. distillate stocks rose 1.2 million barrels to 14.8 million barrels, or around 13 million barrels higher than a year ago and just half a million barrels away from its 11-year record set this September.
The surplus of product prompted the Colonial Pipeline last week to extend freezing shippers' nominations on the arterial 1.2 million bpd gasoline line and 888,000 bpd distillates line from mid-November to December shipments. Shippers will instead be allocated or prorationed the volume they can move up from the Gulf Coast to the northeast.
The initial news of the freeze and panic selling saw Gulf Coast differentials dive to fresh lows -- to gasoline's March low of a 8.00 cent discount to the New York Mercantile basis contract, and to heating oil's January low of around a 3.75 cent discount.
Although differentials have pared some of their losses as the market factored in the freeze, outright prices last week ended lower.
Gasoline on both hubs lost around 2.30 cents per gallon to 31.90 cents on the Gulf, and 34.50 in New York Harbor.
Gulf Coast heating oil at 31.60 cents per gallon, ended the week with bigger losses of around 3.20 cents compared to the Harbor's 2.70 cents loss.
Traders said heating oil, along with diesel and jet fuel were supported by independent refiner Sunoco Inc's <SUN.N> unusual buying presence in the northeast, spurring rumors of cuts in output due to weak refining margins.
Sunoco, whose bulk of its production coming from the 307,000 bpd two-refineries complex in Philadelphia and the 175,000 bpd Marcus Hook refinery, both in Pennsylvania, declined to comment on its daily operations.
Traders said news of any cuts were supportive but did not expect to see a huge onslaught of cuts yet.
Refinery margins saw a slight recovery with losses for processing benchmark West Texas Intermediate crude in the Gulf Coast hub, shave off six cents per barrel to 85 cents for the week with a late rally to a 53 cents loss on Friday.
"People are going to be very cautious...they will only cut as a last resort," said a trader with major oil company. |
