Will OPEC call an emergency meeting in the next several weeks to salvage oil prices?
Just the hint of that prospect sparked a slight rally in oil prices last week. Nymex light sweet crude for February delivery closed Jan. 3 at $14.56/bbl, up 39 from the previous trading day on press reports quoting anonymous OPEC officials as saying members are considering meeting in late January or early February instead of the scheduled Mar. 25. Other reports had OPEC officials hinting of a group cut of 1 million b/d if accompanied by a cut by non OPEC exporters of 500,000 1 million h/d. The Nymex crude price rose further the next 2 days, closing at $15.34/bbl Jan. 5, on the strength of higher gasoline and heating oil futures responding to expectations of API reporting tighter inventories. Another factor was a report Saudi Aramco is hiking the price of oil to contract customers 10 25/bbl in Europe and 20-80/bbl in the U.S. effective Feb. 1, possibly a sign of a firming market.
But signals on the outlook for an emergency meeting are mixed. Salomon Bros. says there won't be an emergency meeting soon because the OPEC secretariat let its Vienna employees off for a month's vacation and OPEC's Arab members begin observing the month long Ramadan holiday Feb. 12. The analyst contends. OPEC will stay on the sidelines as market fundamentals take over, with the result being flat oil prices the next few months.
However, Purvin & Gertz contends OPEC will cave in to market conditions and hold an emergence meeting in January to discuss production cuts and a lower quota. It sees spot WTI at $16.06/bbl and Dubai at $13/bbl in February once OPEC cuts output by 500,000 b/d.
Because crude prices have fallen so low despite a relatively sound market balance, East West Center's Fereidun Fesharaki thinks industry should look at the market in a different way than it has. He contends the depoliticization of oil prices and the fading "fear factor" mean oil prices now tend toward the replacement cost of oil, or about $10/bbl for Arab light in the absence of political crisis. OPEC production, inventory changes, and weather are thus far less important than the market assumes. If this theory is correct, warns Fesharaki, "...we are looking at low prices for several years."
Perhaps in recognition of that scenario, governments of several key crude exporting countries are slashing budgets, joining Saudi Arabia's 19% budget cut (see story, p. 27).
Kuwaiti Oil Minister Ali al Baghli praised the Saudi budget cut and said his country will cut its budget by 20% from 1993 spending levels.
Oman pared its 1994 budget from 1993 levels by 10% to $5.28 billion. Omani production reached a record 800,000 b/d in 1993.
Oman reportedly cut output by 5% as of Jan. 2 in a bid to help shore up world oil prices. Oil provides 76% of Oman's income.
Malaysia's treasury estimates its oil export earnings could fall by 6.7% in 1994 after dropping 14.2% in 1993 and 10.3% in 1992. Malaysian oil output dropped 2.9% to 642,000 b/d in 1993.
Iran projects a 26% slide in its oil income to $11.84 billion in fiscal 1994 starting Mar. 21. Iran estimates fiscal 1993 oil income at $12 billion vs. an early projection of $16 18 billion with oil at $17/bbl. Tehran plans to hike domestic prices for refined products, gas, water, and electricity, and other commodities next fiscal year to help offset the shortfall.
The oil price skid is not a universal benefit for oil importers. Japan lost about 200 billion yen on government and private crude stocks at the end of November 1993 vs. November 1992, which rose about 31.45 million bbl to 584.98 million bbl in the period. Japanese oil firms want to establish an oil futures market to hedge against such losses.
Sagging oil prices are expected to chew away at petroleum company 1993 fourth quarter earnings after a surge in third quarter 1993.
Kidder Peabody estimates fourth quarter results will fall 12% from the same 1992 period to $4.4 billion for the 22 integrated companies it tracks, owing to oil price weakness and seasonal softness in refining margins. That follows an 8% rise in third quarter group income vs. the prior year, buoyed by higher gas prices, stronger refining/marketing margins, and cost cutting.
An early sign of fourth quarter sagging profits is Mobil's disclosure last week its fourth quarter results will include a special noncash after tax charge of about $250 million for the gap in inventory book values vs. current market values, reflecting the decline in crude and product prices.
On a cautiously optimistic note, Salomon Bros. projects a modest uptick in world E&P spending in 1994.
The analyst found 280 companies plan global E&P outlays of $54.84 billion, up 4.1% from estimated 1993 spending, with strong gas prices the driver. Independents in the survey plan to hike U.S. E&P spending 18% to $5.52 billion, majors 4% to $10.75 billion. Projections are for upstream outlays to jump 20.6% to $6.01 billion in Canada but slip 0.4% to $32.57 billion outside the U.S. and Canada. Among 1994 trends the survey tracked are:
- An expected average crude price of $17.72/bbl, down 13%, and an average U.S. gas price of $2.14/Mcf, up from $1.74 projected a year ago.
- A significant shift to natural gas drilling, reversing a 3 year trend.
- A continued notable shift to offshore spending as an increasing share of E&P budgets.
- An increasing swing toward more exploration spending, led by U.S. independents and Canadian companies, after an unexpected shift to increased development outlays in 1993.
Salomon Bros. notes that while it found some trimming of budgets in late November to mid December, "most companies have not assumed that the current weakness in oil prices will persist for long or that it will mean significantly lower natural gas prices."
At least one U.S. company starts 1994 on a triumphant note.
Chevron, which met its 5 year goal of achieving the highest total return to stockholders among its competitors, is giving about 42,000 of its employees a one time cash bonus equal to 5% of base pay, plus commemorative watches, to recognize their contributions to its tough restructuring, cost cutting moves, and efficiency campaigns. It cut operating costs by more than $1/bbl of production in 1989 93. Chevron's stock rose $411/8/share in that period, and its total return to stockholders jumped to 18.9%/year vs. an average of 13.2% for Amoco, ARCO, Exxon, Mobil, and Texaco. Chevron will take a charge against fourth quarter earnings of about $70 million after tax related to the bonuses.
A worrisome note for U.S. gasoline marketers: The Federal Trade Commission has reached a settlement with Unocal Corp., parent Union Oil Co. of California, and Leo Burnett Co. advertising agency to resolve FTC charges they made unfounded advertising claims for Unocal's 89 and 92 octane gasolines. Under the deal, the companies agreed not to make claims about the attributes or performance of gasolines without supporting scientific evidence. Unocal also will inform its customers in five states that most cars don't need high octane gasoline to operate properly.
British Gas and U.K. gas industry regulator Ofgas have agreed BG will release a further 20 trillion BTU of gas to competitors from its contracted supplies beginning October 1994. This marks the third tranche of gas to be offered to independent gas suppliers. Ofgas will invite the independents to apply for the gas in first quarter 1994.
The new release is in addition to 30 trillion BTU earmarked for release to independents beginning this October. It is part of a program set up to encourage competition in the industrial and commercial gas markets.
"Already nearly 70% of the firm contract market is being supplied by competitors to BG, and there is evidence now of some loss of interruptible customers to competitors," BG said.
Russia's oil output will continue to fall in 1994 but at a slower rate than in 1993. The Russian economics ministry expects oil and condensate production to average 6.54 million b/d this year vs. 7.08 million b/d in 1993. Russian GDP is expect to fall 5% this year after a 12% drop last year, and industrial production is expected to decline by 6% vs. 16% in 1993.
Indonesia is offering a new package of incentives to revive deepwater and frontier exploration, including changes to existing standard production sharing contracts. Most notable is a more favorable Pertamina PSC holder split on production sharing at 65:35 in frontier and deepwater areas vs. previous terms of 80:20 and 75:25, respectively, and new terms of 85:15 in other areas, effective Jan. 1. In addition, PSC contractors can hike price of crude sold to Pertamina under the 25% domestic setaside rule to 25% of export price from 15% for the deepwater/frontier regions. And the government trimmed its royalty to 15% of gross oil and gas production from 20%.
