OGJ NEWSLETTER

Once again, conventional wisdom about oil and gas prices is wrong.

At a time when oil and gas demand is typically down due to seasonal factors, supplies of both are more than ample, and a lackluster OPEC meeting fails to result in quota cuts, the expectation would be for downward pressure on oil and gas prices.

To the contrary, both have been on the rise lately.

Nymex crude futures and IPE Brent last week touched 5 month highs last week, closing Apr. 29 at $20.77/bbl and $19.47/bbl, respectively.

Surprising no one, OPEC agreed to hold the course and keep production levels steady at 22.98 million b/d through spring. Iranian Oil Minister Gholamreza Agazadeh pushed for steep cuts to boost prices at last month's ministerial meeting but was rebuffed by other cartel members. Most analysts put March production at 400,000 b/d above OPEC's second quarter ceiling. OPEC will meet again May 21 to review quotas for the summer.

Prices have been stronger of late on continued speculation Libya's 1.4 million b/d production may be embargoed, which points to the continuing irony that the most effective user of the oil weapon in recent years has been the U.N., not OPEC.

Labor actions also figured in oil price firmness. A strike by Norwegian tug and rescue boat officers Apr. 27 halted product exports from Norway's 125,000 b/d Mongstad refinery. At stake is 50,000 b/d of gas oil and gasoline. There was speculation at presstime last week that if the strike lasts much longer, the refinery could be shut down and production from the 325,000 b/d Gullfaks field, main supplier to Mongstad, could be curtailed.

A strike by public workers in Germany last week shut down a sizable amount of mass transit operations, with the resulting exodus to private cars spiking refined products demand.

Oil prices are likely to continue firming through the second quarter, with WTI at $20.30-20.90/bbl, says Purvin & Gertz.

The analyst points to a soft international market balance with first quarter demand averaging lower than projected at 67.5 million b/d and a modest stockbuild of less than 1 million b/d through the end of the second quarter. P&G predicts OPEC production will be near 23 million b/d in early second quarter, with Libya likely to be the prime source of excess supply, given signs it's building external stocks in expectation of a possible embargo.

P&G also sees spot gasoline prices peaking near the end of the quarter, with Gulf Coast spot unleaded regular settling near 640/gal.

But County NatWest disagrees.

Citing an IEA cut in its world oil demand forecast for 1992, it thinks prices likely will weaken because world oil demand will remain soft until global economic recovery is fully under way. It sees WTI at $18.50 in the second quarter, $19.50 in the third, and $19 in the fourth.

U.S. natural gas futures late last month were hovering near their highest level since late December, and May spot gas prices jumped 150 from April's level to an average $1.48/MMBTU, according to Natural Gas Clearinghouse's survey. Some spot gas prices for May were up as much as 300 from a year ago.

NGC cites increased demand for storage injection, the coattail effect of the futures market, and mounting concerns about the effects of recent and proposed prorationing measures in key producing states (see story, p. 27).

Early earnings reports are fulfilling prophecies of dismal results for petroleum companies.

Looking at 14 majors, Smith Barney predicts first quarter earnings from operations will fall 54% from a year ago and 16% from weak fourth quarter 1991 levels. It said all business segments will show declines.

Phillips reported a first quarter loss of $114 million vs. net income

of $107 million last year, and Sun posted a loss of $21 million vs. a $41 million profit the same time last year.

Among other companies reporting first quarter earnings declines: Exxon down 41% to $1.3 billion, Chevron down 45% to $304 million, Texaco down 52% to $200 million, Mobil down 82% to $127 million, Kerr-McGee down 71 % to $8.6 million, and Oxy down 28% to $98 million.

Across the board, blame falls on weak refining margins and low oil and gas prices.

Baker Hughes' U.S. active rig tally found a new post-1942 low last week at 623. That's down 24% from a year ago and down 16 rigs from the week earlier when the count matched the previous low set Mar. 27. Using different criteria, Smith International's rig count rose eight to 698.

Commodity Futures Trading Commission has authorized Chicago Board of Trade to establish a market in government granted air pollution rights. Companies reducing their air pollution will be able to sell excess emissions allowances in the market to companies that are over the limit.

Trading could start later this year, although the applicable air pollution standards do not have to be met until 1995.

Japan's MITI wants 2,000 of the country's 59,000 service stations to be equipped to recharge or refuel cars that run on electricity, natural gas, or methanol by 2000, a move that will cost about $2.23 billion. Details are not worked out, but MITI will help pay to equip 100 service stations in, Tokyo and Osaka by 1995. MITI wants to increase the number of alternate fueled cars in Japan to about 100,000 by 1995 and to 2 million by 2000. Currently about 1,000 cars in Japan run on electricity, 200 methanol, and 50 CNG.

Sluggish demand is shutting down Japanese petrochemical capacity. Mitsui plans to shut down its 92,000 metric ton/year ethylene plant in Iwakuni, Yamaguchi prefecture, for 3 months, and Ukishima Petrochemicals, Mitsui's joint venture with Nippon Petrochemicals, will cut production at two ethylene plants by as much as 20% beginning in May. Idemitsu plans to cut output of polypropylene 10-15% and polystyrene 20-30% in May and June.

A Royal Dutch/Shell unit has signed an exploration contract with Viet Nam's Petrovietnam covering an undisclosed offshore area, reports Associated Press. Shell will contribute E&P outlays, and profits will be shared, but terms were not disclosed.

A shortage of petroleum engineers is crimping Kuwait's effort to get production back to 1.5 million b/d. Middle East News Network (MENN) reports Kuwait has an expatriate ceiling of 35% of the workforce, and requests are in to increase that to 50%. Plans call for drilling 24 wells in Burgan field to achieve prewar production levels.

Iraq does not recognize the U.N.'s redrawing of its boundary with Kuwait, MENN reports. Kuwait would gain a larger share of Rumaila field under the recommendations (OGJ, Apr. 27, Newsletter).

Meantime, MENN reports Kuwait's compensation claims against Iraq are expected to total $145 billion, $45 billion related to the oil sector.

Russia's government has granted huge price increases to oil producers to stimulate production. The increases could triple the price producers charge distributors, and products prices could increase by 150%, Itar-Tass News Agency reports. With a previous increase, it costs the average Muscovite a week's salary to fill up the gasoline tank. The government will allow oil and gas prices to move within a set range. If oil or gas is sold at prices higher than the ceiling, all added revenues will be confiscated.

Will Mexicans' outrage over Pemex's alleged role in the Guadalajara tragedy translate into a weakening of support for the state oil company's monopoly powers?

That in turn could affect the tone of negotiations for the North American free trade agreement (Nafta), in which a sticking point has been Mexico's refusal to include oil and gas in Nafta. Demands are mounting for Pemex to close storage and transportation facilities or provide comprehensive safety and maintenance reviews in the wake of the Apr. 22 explosions that killed at least 191 people in Guadalajara.

Pemex first denied responsibility but later didn't dispute a report by Mexico's attorney general that said the accident could be traced to a gasoline pipeline that may have been leaking into a sewer for more than a week.

Last week, 200 residents in Nuevo Laredo were evacuated after a gasoline leak was detected at a Pemex service station, and 800 Pemex workers fled their jobs at a marine terminal near Coatzacoalcos after a gasoline pipeline leak was found. Protests also have cropped up against Pemex facilities deemed unsafe in Veracruz and Acapulco. Four Pemex officials were among seven officials jailed last week on charges of negligent homicide.