Petroleum
Industry Commentary
By Steven King, editor PetroDispatch
and registered principal
at Brookstreet Securities Corp.
The
index of oil-service shares closed sharply higher for a second
day Friday, after trading at a 10-week high as natural gas prices
above $3 per MMcf. Traders see a more positive outlook for the
sector ahead. The Philadelphia Oil Service Index (OSX) reached
a high at 87.67, its highest level since August 16. It closed
at 86.67, up 4.7 percent after rising nearly 8 percent Thursday.
But the U.S. natural
gas rig count is down by 15 percent from its high and moving
lower. Capital expense plans for 2002 are expected to be down
20 percent, and gas production capacity should diminish up to
3 percent. The number of rigs searching for oil and gas in the
United States fell by 37 to at 1,063 during the week ending Oct.
26, according to oil services firm Baker Hughes (NYSE:BHI). A
year ago there were 1084.
What's causing this
apparent contradiction is the strength of natural gas. On Friday,
November natural gas futures rose to an intraday high at $3.09
per million British thermal units, and closed at $3.041 per million
British thermal units, up 10.3 cents. PeakTradingGroup.com analyst
Kevin Kerr said prices could spike closer to $4 "if economic
conditions improve markedly and winter demand is high."
Investors are betting
that a downturn in North American natural gas drilling could
carry the seeds of its own recovery. The perception is that the
sooner the producing companies quit drilling, the sooner production
drops and then the sooner gas prices go up, the sooner drilling
increases.
Hopes for a rebound
in natural gas prices and a corresponding increase in drilling
activity have been fueled by news such as Thursday's announcement
by Anadarko Petroleum Corp. (NYSE:APC) that it is dropping some
gas projects in favor of oil exploration. Anadarko said it currently
has 74 drilling rigs working in North America, compared with
a peak of 94 in July.
The producers are also
moving up. The Amex Natural Gas Index ($XNG) rose by 1.4 percent
to 199.83. The integrated oils also climbed. The CBOE Oil Index
($OIX), rose to 305.76, up 2.1 percent. Until the end of summer
these stock prices had fallen sharply as investors anticipated
a deterioration in earnings.
Now despite no current
earnings change, these stocks to be moving sharply higher and
that the gains appeared to be driven by investors speculatively
seeking out names that have been among the sector's biggest losers
this year.
The naysayers to the
natural gas story essentially believed that high drilling activity
rates and new technologies would add new supplies at comparable
rates to prior price cycles, but they didn't factor in production
decline curves. Third-quarter U.S. natural gas production is
down 2.4 percent compared with a year earlier.
As a result of concerns
over gas supply and demand, oil drillers became the best performers
this week, with the industry's top stocks up an average of nearly
16 percent.
Shares
of Baker Hughes rose $1.74 to $36.76. Also providing support
Friday was a report of better-than-expected earnings from Baker
Hughes. Early Friday, the company (BHI) reported third-quarter
net income of $137.1 million, or 41 cents a share, more than
double the $65.2 million, or 20 cents a share recorded in the
year-earlier period. Shares of Noble Drilling (NE) rose by $1.75
to $33.11, a day after the oil and gas services company reported
third-quarter earnings that surpassed analysts' average estimates.
Shares of Apache (APA)
tacked on $2.09 to $52.95 and those of Anadarko (APC) added $2.23
to $60. Both companies reported third-quarter results Thursday
that beat Wall Street's expectations, but were down year over
year.
Shares of ChevronTexaco
(CVX) was up $1.03 to $88.93. On Thursday, the newly merged company
reported a drop in third-quarter earnings for the former Chevron
and Texaco, though both beat Wall Street estimates. ExxonMobil
(XOM), the world's largest oil and gas company, said Tuesday
that its third-quarter income declined close to $1 billion on
lower commodity prices and a weak economy. Shares rose 50 cents
to $41.06.
Commodity Corner
On
Wednesday, the American Gas Association reported a 25 billion
cubic foot rise in natural gas inventories as of the week ended
Oct. 19, contrary to market expectations for a rise of as much
as 65 billion cubic feet. Total storage is now at 3.067 Tcf,
425 Bcf above a year ago. Although storage levels are at record
high levels, last week's 25 Bcf injection was much less than
predicted and an indication that demand has increased more than
expected. Early indications for this week's storage data range
from 20 - 40 Bcf.
Natural gas futures
for November delivery on the NYMEX finished $0.103 higher yesterday
at 3.041 per MMBtu on forecasts for a cold weekend across the
eastern half of the nation. The December contract gained $0.08
to $3.183 per MMBtu. With the latest forecast calling for a warming
trend next week, traders are likely to take some profits today
and wait for Wednesday's AGA report for further market direction.
Natural gas for next
day delivery across the US and Canada slipped somewhat Friday
as it tracked the Thursday's futures market, dipping $0.10 -
$0.20 lower. Natural gas for next day delivery at the Henry hub
lost $0.10 to $3.05 per MMBtu.
Last Tuesday, the American
Petroleum Institute posted a 4.9 million-barrel rise in crude
inventories as of the week ended Oct. 19, above many analysts'
expectations. Early Wednesday, the Energy Department said supplies
rose by 2.8 million barrels.
The Organization of
Petroleum Exporting Countries may be preparing to seize control
of world oil markets by slashing another 1 million b/d of production
within the next few weeks and as a result oil prices gained.
Crude futures prices closed slightly above $22 a barrel. Analysts
also point out there was an actual production cut in October
through greater compliance by members with current production
quotas. Further promised cut in November could be fairly potent.
OPEC's next meeting
is on Nov. 14 in Vienna. The price for OPEC's basket of seven
types of crude oils is well below the cartel's minimum price
target of $22 a barrel, and has remained there for more than
10 consecutive trading days.
Based on supply and
demand data published by the International Energy Agency, there
apparently is greater demand for oil and less supply at present
than during the fourth quarter of 2000 when benchmark US crude
averaged $31.90/bbl. The only real difference between the two
periods is the prevalent perception among traders now that world
demand for oil will soon decline.
Also clouding the picture
is a UN report that states for the first time they have hard
evidence that Iraq tried to smuggle $10 million worth of oil
into the world market in violation of UN sanctions. UN and US
officials long have suspected that Iraq was smuggling as much
as $2 billion of oil annually. The current phase of the UN oil-for-aide
program expires at the end of November. Often in the past, Iraq
has temporarily halted oil shipments at that time and threatened
longer shutdowns in an effort to get UN officials to ease restrictions.
PetroDispatch, October
29, 2001. Copyright © 2001 by PetroInvest, Ltd. is written
by Steven D. King, registered principal at Brookstreet Securities
Corporation, 2361 Campus Drive, #210, Irvine, CA 92612, 800-268-2578,
Member NASD and SIPC. Visit the Web site at www.petroinvest.com.
Steven is a Securities Broker and Petroleum Research Analyst,
and has 21 years petroleum industry experience. He has worked
for Tenneco Oil Co. a division of Tenneco, Inc. (NYSE:TEN), was
a founding member of Newfield Exploration Company (NYSE:NFX),
and has consulted for many domestic and international oil companies.
He holds degrees in geology and business.
Additional information
on securities discussed herein available upon request. The above
information is taken from sources that we deem reliable; we do
not represent that it is accurate or complete, and should not
be relied upon as such. Such information is furnished as a matter
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of any offer to buy a security mentioned herein. This report
may contain a forward-looking statement, and actual results may
vary from those presented. Opinions expressed are our current
opinions as of the date appearing on this report. We have no
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material events occur that may cause our opinions to change.
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