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After ending 1994 on a weak note. are oil and gas markets about to take a bullish turn?
World oil demand will register surprisingly strong growth in 1995, rising by at least 1.5 million b/d, predicts Salomon Bros.
It cites eventual bottoming of the demand slide in the former Soviet Union, economic recovery in Europe and Japan, and continued strong demand growth in Southeast Asia, China, North America, and Latin America. That will spark an increase in the call on OPEC oil this year by 800,000 b/d or more. Given OPEC's decision to roll over its quota for all of 1995-and figuring a little cheating will nudge output to 25.1 million b/d vs. a 24.52 million b/d quota-the stock draw required to meet anticipated demand likely will be enough to boost oil prices from current levels, notably in the fourth quarter. So Salomon Bros. sees spot WTI at an average $19.50/bbl for 1995, jumping to $21/bbl in 1996.
The analyst contends Iraqi oil exports won't figure into the market until 1996, when tightening supply/demand and rising prices give the Clinton administration political justification to agree to lift the embargo on Iraqi exports.
Purvin & Gertz, Houston, sees the call on OPEC crude at 25-25.5 million b/d for first half 1995, with WTI hovering above $18/bbl the next couple of months. The main factor depressing markets has been exceptionally weak products markets, especially in the U.S. The collapse of U.S. gasoline prices since November mainly reflects the sharp rise in refinery output and glitches in the reformulated gasoline (RFG) program, both of which are transitory, PG contends. The analyst thinks gasoline fundamentals will improve early in the new year and fuel oil won't top 500/gal vs. current levels slightly above 460, barring an unusually cold winter.
Gasoline price strength might have gotten a nudge last week from EPA, which gave the nod to eight New York counties to opt out of the RFG program but told states they must decide before this week whether they want to withdraw counties from the program. The agency, whose earlier approval of requests by 28 counties in Pennsylvania and one in New York to opt out of the program has roiled oil markets and scrambled the logistics of gasoline supply/demand in the U.S. Northeast, said it would not accept temporary opt-outs. New York and Maine had asked EPA to delay enforcing the program indefinitely for several other counties.
While environmental officials tout low prices seen for RFG, notably in the U.S. Northeast. there remains a significant disparity in prices for conventional and reformulated gasoline in a depressed products market.
Jeanne Fox, EPA regional administrator for New York and New Jersey, claims gasoline prices have not gone up because of the RFG program. She pointed to a New Jersey survey that found gasoline prices dropping in December. The survey showed average gasoline prices in New Jersey in October at $1.111/gal, in November at $1.136/gal, and in December at $1.134/gal. Similar weakness was seen in New York gasoline price surveys.
However, American Automobile Association's weekly gasoline price survey paints a different picture. AAA found the average price of gasoline fell more than three times as fast in cities selling only conventional gasoline as in those switching to RFG. The survey last week showed self-serve regular averaging $1.232/gal in 11 cities that will sell RFG beginning Jan. 1, down 0.20 from the prior week. The price in 11 cities selling only conventional gasoline averaged $1.113/gal, down 0.70. For the last 3 weeks of December, the average gasoline price declined 20 in cities selling only conventional fuel vs. just a 0.60 drop in cities switching to RFG, AAA found.
Merrill Lynch thinks the current extreme weakness in refining is temporary and continuing strength in marketing indicates conditions in the downstream business may be stronger than they appear to be. It notes refinery utilization rates are likely to remain high, with only a slight change in products supply or demand capable of significantly reversing current weakness. Moreover, says Merrill Lynch, several factors depressing refining margins this year are expected to abate. Chief among those are high products stocks in Europe and increasing supply of light sweet crudes at competitive prices. The latter has weakened markets by hiking supply of high value added products while eroding economics of refining conversion-thus hitting generally more complex U.S. refineries especially hard. Merrill Lynch expects the economics of product upgrading to begin to recover as 1995 unfolds with rising volumes of heavy/low quality crudes from OPEC offsetting the recent increase in light, sweet crude supplies. That will bolster complex refinery profits beginning in the second half.
Nymex natural gas futures rallied strongly last week on the strength of cold weather forecasts. Nymex gas for February delivery jumped 12.30 on the day to close at $1.694/Mcf Dec. 27. Heating oil followed suit, adding 1.230 on the day to close at 49.250/gal. Nymex February crude closed 290 higher on the day at $17.64 bbl, and Gulf Coast spot WTI rose 250 to $17.60/bbl. Even beleaguered gasoline prices enjoyed some relief, rising 2.070 to 48.940/gal for New York Harbor spot gasoline Dec. 27.
Canadian natural gas producers are facing bargain basement prices and a supply glut as mild winter temperatures continue across most of North America. Spot prices at the Price-Waterhouse AECO-C Hub fell to about 950 (Canadian)/Mcf Dec. 22, translating to a wellhead price of about 850. Peter Linder, energy analyst with BZW Canada Ltd., Calgary, last week expected 1994 prices to average $1.36-1.47/Mcf if mild weather continued and about 100 higher with a yearend cold snap. Prices averaged $2/Mcf in the contract year ended Oct. 31 and dropped to $1.66 in November. Alberta is forecasting an average price of about $1.89/Mcf for the 1994-95 contract year. Analysts blame high storage volumes and warm weather in most of North America for the price slide.
Nova Scotia is considering sale in 1995 of its provincially owned oil company. Nova Scotia Resources Ltd. (NSR) is a partner with a unit of Lasmo Canada in Panuke-Cohasset oil field off Nova Scotia. At 12,000 b/d, it is Canada's first offshore field on commercial production. Natural Resources Minister Don Downe expects a decision early in 1995 on NSR's future. The company's board last fall recommended it he sold, wound down, or partly privatized. NSR Pres. James Livingstone said the oil field operation is making a profit of $30-40 million (Canadian)/year, but the company must service a debt load of $435 million. He said NSR can service the debt but does not have capital needed for reinvestment. NSR also has interests in gas fields off Sable Island and a 100% interest in the undeveloped Penobscot oil field, 15 miles north of Panuke-Cohasset.
Chevron expects production from its concession off the Angolan enclave of Cabinda to jump to 390,000 b/d in 1995 from 320,000 b/d in 1994 as development of deeper water areas continues under a $1.6 billion, 5 year program.
Chevron discovered four fields on the concession in 1994 with combined reserves of 300 million bbl. Start-up of Kokongo field late last year (OGJ, Dec. 19, 1994, p. 146) marked first production from the deeper water fields that are expected to yield as much as I billion bbl. Overall, Chevron and partners Sonangol, Elf, and Agip will spend about $2.8 billion the next 5 years for oil field development off Cabinda (see map, OGJ, May 30, 1994, p. 38).
The Australian-Indonesian joint authority governing exploration rights in the Timor Gap Zone of Cooperation in the Timor Sea will offer another three blocks in the area that have not been previously awarded. Deadline for proposals on production sharing contracts is Feb. 1, 1995. Exploratory interest in the Timor Gap is heating on the heels of a string of hefty oil discovery and appraisal well flow rates (see related story, p. 21).
Interest in the Indian subcontinent's energy sector is picking up.
Pakistan is targeting private sector investment of $32 billion in its energy sector by 2000, especially focusing on energy infrastructure development such as pipelines and downstream activity.
Occidental will conduct exploration in Northeast Bangladesh. Oxy signed a memorandum of understanding with state petroleum company Petrobangla covering a production sharing contract in the Netrokona and Sylhet districts. Bangladesh recently started a push to invite more foreign participation in its upstream and downstream petroleum sectors (OGJ, Nov. 1, 1993, p. 31).
Saudi Arabia's petrochemical sector continues to boom. State owned Sabic has let contract through Ibn Rushd (Arabian Industrial Fibers Co.) to Bechtel Ltd. to manage construction of two related petrochemical projects at Yanbu. Construction has begun on the first, a 350,000 metric ton/year purified terephthalic acid (PTA) plant that is to go on stream in mid-1995. The second plant is an aromatics unit designed to produce 300,000 tons/year of paraxylene, 350,000 tons/year of benzene, 45,000 tons/year of orthoxylene, and 35,000 tons/year of metaxylene. The aromatics will provide feedstock for the PTA plant. Ibn Rushd is a venture of Saudi and Bahraini firms and Sabic.
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