Saturday, August 30, 2008

Spot Life of Oct 08 CL (wk 1)

AP Satellite Photo of Gustav, 6:55 am EST, 8/30/08, at which time it was category 3, it has apparently just strengthened to category 4.

Well, the life of CL Oct 08 so far has been at the mercy, mostly, of Gustav. It appears to have trumped all other news. Or did it? Prices haven't moved that much since Gustav formed on Monday. And, outside of Gustav, most of the data shows larger and larger declines in demand, reductions in economic growth, increases in supply, increases in capacity, and reduction--Georgia notwithstanding--of political risk. So my guess is that going forward the price is going to fall. (Of course, predicting oil prices is a fools' game, were there ever one. So caveat emptor.)

Oil prices still don't appear to be following the Euro, but, if anything, the reverse.

CL Oct '08 spent the entire 7 days of trading covered in contango, and not just any contango, but the spot month was cheaper than every single forward contract all the way through December 2016! (You can see this via the graph below very clearly as the CL Oct '08 line is far below all the other contract price lines.) This is very very unusual--and I have no idea as to why. It may be that the market believes that in the distant future the situation is such as oil prices must go up ... I believe that at least part of this is due to political risk worries, but I would be hard pressed to say just why. In any case, there is now, hypothetically, good economic reasons for stocks to build, we will see when the EIA report comes out next Wednesday.

Daily Sources 8/30

I am not going to do this every weekend, but given that I have the time (and inclination.)

1. Gustav swells to dangerous Cat 3 storm off Cuba by Will Weissert at the Associated Press. Although the site usually takes the worst case scenario prediction as a given, there is a lot of useful data, discussion, and links about the possible direction and consequences of Gustav at To put this in context, the prediction highlighted on the site for Eduard was dire and did not, in any way, come to fruition. Still, very worthwhile data, links and analysis ... just take with a grain of salt.

2. Thomas Erdbrink at the Washington Post writes that the Iranian Depty For Min Ali Reza Sheikh Attar stated in an Iranian television interview that Iran is using 4,000 centrifuges to enrich uranium, which is in the ballpark of the IAEA estimate. Not news, especially, but I guess the Post was looking to fill some space. The article does not note that the IAEA does not concluse that Iran is aiming to use this enriched uranium for the purpose of making nuclear weapons. At the end, the article mentions Putin's interview with CNN Thursday where he says that if the West refuses to take into consideration Russia's interests that the West should then resolve its issues with Iran without Russia's help. Reasonable enough. Sanctions don't have much chance of having the intended effect without being multilateral. Russia is a critical player with respect to Iran, not least because the nuclear power plant under construction in Iran is being built by a Russian consortium.

3. Ellen Knickmayer at the Washington Post gives an analysis of the general response in the Middle East to the Russia-Georgia conflict. Although it is burdened by the paradigm that most of the press has been approaching the conflict with, there are some decent data points. The most interesting bit is on how Turkey may be reappraising to what extent they can rely upon the US in the future. This process has been underway for some time, but I suspect it is mostly a tempest in a teapot. The primary issue is that populist Islam in Turkey--which is conservative, perhaps even revanchist--is growing in political significance. The US seems, at least from the open sources, to have ignored many of Turkey's interests in handling the conflict there, most especially the question of the Kurds. But the conflict in Georgia is likely to remind Turkey of one of the key reasons for its decision to join NATO in the first place--a long history of Russian aggression, nearly always framed as the liberation of oppressed ethnic groups in the Ottoman Empire. It is not lost on Turkey that Russia's most important ally in the Caucasus is Armenia. Still, I think that Turkey would support efforts to maintain Armenia's independence should Russia decide they wanted to reincorporate it--and I imagine that they would do so enthusiastically. What has been missing from the discussion overall is a definition of the parties' interests. Interests are always mentioned, as in Condoleeza Rice says "the reason Russia supports our efforts with Iran is because it is in their interests" ... but no one ever actually describes what they think those interests are. In any case, I think that the way most of the information is presented here is alarmist (minus the very last paragraphs) but that there is some good info, nonetheless.

4. Andrew E. Cramer at the New York Times writes that on Friday Georgia officially cut diplomatic relations with Russia and Russia responded in kind.

5. Robert Kagan has an op-ed in the weekend Wall Street Journal arguing that the realists have been proven wrong by events in Georgia, attributing to the realists the notion that economic integration will necessarily bring harmony. This piece is so wrong-headed and deliberately misleading that it is worth linking just to say this is total nonsense. "Realists," who, by the way, count Kissinger among their ranks, do not think that economics trump other considerations. They simply believe that Russia's economic interests are very intertwined with the West, which means that there is a strong disincentive to engage in a serious conflict with the West, as that will undermine their own position. They are in a debate with neocons--like Robert Kagan--who believe that use of force to export American morality to the rest of the world is not only ethically incumbent upon us, but strategically good sense. The problem is that the real reason the neocons are so successful in the public arena is because they agree, with the Idealists, that America should have a moral foreign policy. Realists certainly agree that morality is an important consideration in determining foreign policy, but, cold as this sounds, they think that it is mostly important in determining the staying-power of any given course of action. If it is clear to all that it is a moral course of action, most will stick with it. Otherwise, it is not likely to remain popular for long.

Realists argue, correctly in my opinion, that just because Americans think something is morally correct, does not mean that foreigners agree, and that American foreign policy should be based upon a careful consideration of American interests as well as careful consideration of how local histories will interact with contemporary actions in very foreign places. Certainly, the use of military force is on the table for realists, but they are reluctant to use it in complex situations unless the gains are very clear. They are reluctant to use force in situations on the basis of sentimental attachment to some supposed similarity with ourselves--a sort of narcissistic self-defense, which strings its way through the press. The problem with NATO expansion is not that it is provocative, it is: what American interests were served by such actions when it communicated to Russia--rightly or wrongly--the American understanding that they were still hostiles?!

Friday, August 29, 2008

Daily Sources 8/29

1. Saskia Scholtes and James Politi report in the Financial Times that China's largest commercial bank--the Bank of China (3988:HKG)--has cut its holdings of government sponsored enterprise (GSE) like Fannie Mae and Mac debt by $4.6 billion, or about 25%. Analysts are reporting that Asian investors have become net sellers of GSE debt. Yves Smith at Naked Capitalism points out that although Bank of China went public in 2006, the PRC government still holds a majority stake--so this may be a harbinger of future Chinese government thinking on holding US govt-backed assets. The Group of Twenty is meeting this weekend and there is speculation that US Treasury officials will use the meeting as an opportunity to encourage foreign GSE creditors not to cut their holdings.

2. Yves Smith at Naked Capitalism says that yesterday's GDP growth revision upward is pure nonsense.

3. Felicity Barringer of The New York Times reports that a measure to encourage housing close to job sites and public transportation infrastructure has passed the California State Assembly in Sacramento and looks like it just might be passed in the State Senate. Very encouraging. Gov. Schwartzeneggar has not indicated whether or not he would sign the bill. Not so encouraging.

4. Marcin Grajewski at Reuters reports that a survey conducted by TNS Opinion for Friends of Earth show that 87% of Europeans surveyed in Britain, France, Germany, Italy and Spain support measures currently being debated in Brussels which would cut the legal fuel consumption of new cars by a quarter. A committee is set to vote on the proposal this coming Monday.

5. Madeline Chambers and Vera Eckert at Reuters write that Germany is considering establishing a 90 day national natural gas reserve analogous to their strategic petroleum reserve to guard against potential disruptions. Redundancies always make a lot of sense in strategic commodities, IMO.

6. Denis Dyomkin and Tanya Mosolova of Reuters write that Russian officials have publicly stated that they will not cut off energy supplies to Europe in response to sanctions Europe is currently considering.

7. ConocoPhillips and Lukoil announce that production at the Yuzhno Khylchuyu (YK) field has begun. The field holds light and sweet crude with an API of 35.5 and sulfur content of at 0.71%wt. The field production level is designed to reach 150kb/d by 2009.

8. Clifford Levy reports for The New York Times that Prime Minister Vladimir Putin in a CNN interview suggested that the US orchestrated Saakashvili's attack in South Ossetia in order to shore up Sen. McCain's chances of being elected come December.

9. Dan Senor reminds us in the Wall Street Journal's op-ed page about Sen. Joe Biden's old plan to partition Iraq into an Iraqi Sunnistan, Shiastan, and Kurdistan. The plan, with which Biden went so public in 2006, has been quietly dropped.

10. Praful Bidwai of the Inter Press Service writes in the Asia Times that the dissenters in the Nuclear Suppliers Group look ready to put the kibosh on the US-negotiated nuclear deal with India which would include the country--a non-signatory to the non-proliferation treaty--in the global nucler supply system. Evidently Indian diplomats figured on bluster getting it through.

11. The BBC reports that Iran has entered a nuclear technology sharing agreement with Nigeria.

12. Emma Amaize of the Nigerian Vanguard reports that the former Commonwealth Secretary-General, Chief Emeka Anyaoku, said in a speech on Wednesday that the situation in the Niger Delta constituted a national crisis for the country. He urged the establishment of two anti-insurgency military units as part of the solution.

13. Stephanie McCrummen of The Washington Post writes a very interesting piece of analysis on Western investors being lured to Sub-Saharan Africa by high returns, government reforms, and Chinese, Indian, and Middle Eastern interest in the region.

14. Cary O'Reilly at Bloomberg reports that a US Judge has denied a motion by ExxonMobil to dismiss a case brought before him by Indonesian villagers which argues that the company contributed to human rights violations by government security forces. The US Supreme Court has refused to take on the case, leaving it to the lower court. Next month Chevron faces a trial in a San Francisco court for similar charges brought by Nigerians of the Delta region.

15. Michiyo Nakamoto reports in the Financial Times that the Japanese government has unveiled a economic stimulus package of $105.8 billion (¥11.5 trillion) which includes fuel subsidies, as well as income tax cuts and monies for new medium and small business loans. h/t to Free Exchange.

16. Nick Snow at the Oil & Gas Journal reports that a Senate Bill which would open more of the Outer Continental Shelf to drilling has garnered six more co-sponsors, bringing the total to 16. Apparently Kent Conrad (D-ND) and Saxby Chambliss (R-GA) are optimistic that it will get the 60 co-sponsors needed to make it fillibuster-proof soon.

Thursday, August 28, 2008

Daily Sources 8/28

1. As per Yves Smith at Naked Capitalism, Credit Suisse recently released a report on the Chinese slowdown concluding that it is mostly not due to the Olympics. (Which is the big question in the oil markets, too.)

2. Kunda Dixit of the Nepali Times writes in the Wall Street Journal that the new Mao-ist government of Nepal is looking to Beijing for ideas on how to approach their economy. Interesting. Likely somewhat troubling to New Delhi.

3. The Wall Street Journal Editorial Board says that the government offensive against Tamil Tiger held areas in Sri Lanka appears to be succeeding, but that the Tamils will likely just fade into the jungle. It offers some good advice as to how the government might proceed with the hopes of bringing the 25 year conflict to an end.

4. Emily Wax at the Washington Post writes that heavy handed responses to peaceful protests in Kashmir is creating more problems than it is solving, and that the independence movement there is gaining substantial momentum.

5. AFP reports that Muqtada al Sadr has suspended the activities of the 60,000 strong militia, the Mahdi Army, in a statement from Najaf. Sadr has set a cultural agenda for the members of the militia and promises that those who don't abide by its precepts will be expelled from the organization.

6. CNPC and the Iraqi Government have renewed their deal on developing the Ahdab oil field, reportedly at $3 billion, as per Elaine Kurtenbach of the AP.

7. Blaine Harden at the Washington Post writes that North Korea is threatening to resume its nuclear program after not being removed from the state sponsor of terrorism list.

8. David Pallister at the Guardian reports that following the withdrawal of the Muslim League from the government coalition, lawyers have renewed their protests calling for the reinstatement of Supreme Court Justice Chaudhry and the conflict in the northern region with extremists continues to spin out of control. The Muslim League withdrew from the coalition because, they argue, the Pakistan People's Party is dragging its feet on the reinstatement of Chaudhry because its leader, Nawaz Sharif, is afraid that charges against him will be resurrected should he do so.

9. Mansoor Ahmad of Pakistan's The International News reports that power generation outages have increased this year, mostly due to inefficiency and lack of fuel. The Pakistan Electric Power Company cannot pass through increased feedstock costs to its customers--its thermal generators run on furnace oil and natural gas.

10. Jim Lobe, of the IPS, in the Asia Times gives a better analysis of how Iran might react to the Georgia crisis than most of what I've seen. However, I think Lobe understates, by a long shot, Iran's view of Russia in its backyard, especially as a supporter of secessionist regions. To begin with, Iran has a long history of trying to push back Russian aggression ... indeed, many of the countries in the Caucasus were part of Persia prior to Russian interference. Iran's biggest oil producing region--Khuzestan--is majority Arab, not Persian aka Aryan, the main ethnic group of Iran. A very large portion of north-western Iran by the Caspian is majority Azeri--indeed two neighboring provinces are known as East Azarbaijan and West Azarbaijan. And there are a large number of Kurds in the western portion of the country. For Iran to lend legitimacy to self-determination efforts by secessionist-minded minorities is a difficult choice for them to make. Farideh Farhi, who Lobe quotes, is especially interesting/useful/credible, on Iranian parliamentary politics.

11. Silly intro analysis from Judy Dempsey at the International Herald Tribune regarding the prospects of the so-called Nabucco pipeline--a proposed gas pipeline which would deliver gas from Azerbaijan and / or Iran to the heart of Europe via Turkey. Russia's move in Georgia hardly kills the project, but has the likely effect of making it more attractive. Iranian gas becomes a more attractive feedstock choice, but the real problem with Iranian gas for Europe has always been that Iran itself can't quite seem to figure out what it wants to do with its gas. (Pipe it to India and Pakistan? Pipe it to Turkey and Europe? Reinject it into oil fields? Ship it as LNG? Use it to fuel fleet of CNG cars? Power generation? So much gas ... so expensive to develop ... so difficult to figure out how to maximize the bang for your buck. Of course, if Iran made a solid commitment to Europe on the gas then it would have a lot of clout in terms of the IAEA/NPT negotiations. But then Russia is building their nuclear plants, and that would surely upset Moscow.) If Georgia enters NATO, which it might have a better chance of doing now, then Nabucco would surely be pushed, and pushed hard, by the US ... even though this would obviously be extremely provocative from the Russian perspective. (This last assumes that old Sovietologist thinking will remain par for course in the US.)

12. NATO Ships in Black Sea Raise Alarms in Russia by Andrew E. Kramer at the New York Times.

13. Reuters FACTBOX: Russian oil and gas export interruptions. In 2006 a Swedish Defense Agency put together a report on Russian oil and gas export interruptions. This factbox lists a few of them (selectively, I would add.) It noted, at the end, that there have been half as many interruptions under Putin than there were under Yeltsin.

14. Yesterday Fabiola Sanchez of the Associated Press reported that Venezuelan lawmakers were ready that day to put a bill through their legislature which would give private fuel retailers 60 days to negotiate the sale of their businesses or face nationalization. PdVSA controls 51% of the retail market. BP has a 9% share; Exxon: 5%; Chevron 3%. I don't imagine that this is an especially lucrative business given that gasoline sells for $.15/gallon in Venezuela, but imagine it is distressing to the IOCs nonetheless.

15. Andrew Downie at the New York Times writes that Brazil has responded to high food prices internationally by providing a subsidy for further planting, while Argentina--the other major agricultural powerhouse in South America--has placed large tariffs on exports, thus ensuring cheap food at home.

16. Todd Benson at Reuters writes that Brazil is in the midst of a difficult political debate over how to approach the exploitation of the new find in the Santos Basin, which may have as much as 80 billion barrels of commercially extractable crude. The government has already suggested creating a new national oil company to handle the new find, which has been nicknamed Petrosal--or Petro Salt--as the oil lies under underwater salt beds.

17. Sam Fletcher of the Oil & Gas Journal writes that Guy Caruso predicted that crude prices will fall to below $100/b in the next 18 months. Caruso also reiterates that drawing from the Strategic Petroleum Reserve would be unproductive--which is counter to the, rather rudely put, advice given by Philip Verleger to the US Senate last December.

18. US GDP grew at 3.3% in the 2nd quarter according to the Commerce Department, rather more than the 1.9% original estimate, as per Michael M. Grynbaum at the New York Times.

19. Jenny Anderson at the New York Times writes that cities are beginning to accept private financing for various infrastructure projects. This financing is coming from large investment banks like Credit Suisse, Carlyle Group, Goldman Sachs and Morgan Stanley. I agree that infrastructure needs to be invested in. I agree that the government has done a poor job of this (outside of the fact that it built it in the first place--private industry thought it too expensive with too low a return.) But, my gut reaction to someone attached to the industry responsible for the current credit and housing crisis saying that infrastructure in ten to twenty years is gonna be bigger than real estate is ... do what we need to, but keep those guys the hell away from anything that strategically important to America.

20. Sabine Vollmer at the News Observer reports that Bayer in under increasing pressure from German authorities for putting a new type of insecticide--known as clothianidin--on the market. The EPA approved clothianidin in 2003 on the condition that Bayer provide additional data on the product, but the EPA has not made any further public statement on the insecticide, and it is not clear if Bayer even submitted the extra data. European environmental regulators suspect that insecticides like clothianidin are responsible for the colony collapse disorder that bee populations worldwide have seen in recent years. Over a third of the bee population in the United States has died off. Bees pollinate about a third of our foods. From a geopolitical standpoint, of course, mass starvation is not good.

21. A report by Konstantinos Giannakouris at EUROSTAT was just released with a set of population predictions for Europe through 2060 which surprisingly give a slight increase in population over that time. Nearly all the population growth will take place in the richer countries in Europe, with Cyprus, Ireland, and Luxembourg showing the most growth, percentage-wise. However, in 2060, for EU27 as a whole, there will be 50 million less people of working age than there are now in 2008. The report projects that, taken as a whole, births will not outnumber deaths from 2015 on, meaning that all population growth will come from immigration--and it looks like from 2035 on immigration will not be able to make up the difference either. Obviously, many things will change between now and then, but useful data nonetheless.

Wednesday, August 27, 2008

Spot Life of CL Sep '08

I've been keeping close track of the oil markets for some time now and thought that the blog might be a good way to record the history of its movements and any market analysis that might come along the way. So here is the spot life of the September 2008 contract for CL (sweet light crude) on NYMEX. In order to make this task more manageable, I might decide to post these on a 7 days-trading basis instead of for the entire spot month.

September 2008 was an interesting contract insofar as it saw the price of crude come down about $10/b and included the lowest spot price seen in quite a few months, though it moved up a bit from that since. The following table tried to tabulate the daily reported reasons for changes in price (as well as some other public information I noticed that was important) and to categorize it, so that it's movement will be somewhat easier to follow. The file is way too large to show in this format, but I'm hoping you can click on it and you will see it in a readable size ... and perhaps print it out ... I will work on ways to make this easier to read in the future.

You will note that a popular explanation of the rise and fall of the price of oil has been to look at the Euro-Dollar exchange rates. Obviously, these must have some effect on the valuation of oil, but I suspect that oil has it's own influence upon both currencies and, from my observations, it looks as if the Euro has been following crude down, not leading it.

Below you'll see a chart for the CL NYMEX futures contract prices for spot and then various forward months. Generally speaking, the oil market is in backwardation, which means that the price that people will pay for oil further away from the present is less than the spot, or closest delivery contract date. Theoretically, backwardation should encourage producers and those who have product in storage to sell now, because why pay for storage in expectation of a future price that is less than the current one? (But it doesn't really necessarily work that way in practice.)

However, recently, CL has been in contango, which means that the price people will pay today for futures contracts for months beyond the spot month is higher than for spot. Theoretically, this should mean that there is incentive to store production and sell later, in expectation of a higher price then. Futures allow one to lock in the price, of course. But it doesn't really work that way in practice.

Still, it is an anomaly, which industry folks tend to talk about. Note that the Sep 08 contract goes into backwardation for the period of a single day--on August 7th--and then moves back into contango. On August 7th, BP announced it would take about two weeks for repairs of the BTC pipeline to be completed. Also, Shell announced that repairs on a major Nigerian pipeline were still underway.

Right now the current spot contract--for October--is in deep contango, meaning that the future prices are much higher than spot price, and that this is true of every single contract through December 2016. This is partially because of Gustav heading that way. Also probably because of increasing nervousness with respect to the Georgia / Russia conflict. I would point out that these are all political / meterological risks to supply, not directional supply and demand numbers.

Daily Sources

In an attempt to make more effective use of this blogging thing, I am now going to try to post more often. Since I still do not think that I can make serious analytical contributions on a daily basis, analysis will remain more staggered. But this way, I can keep track of events and keep the sources on file.
1. There are reports that Pakistan is now preparing for :an all-out confrontation on militants," as per Jihadica.

2. Candace Rondeaux of the Washington Post writes that the push in tribal areas under Musharraf has created a refugee crisis in Pakistan.

3. Pankaj Mishra argues in the New York Times Op-Ed page that the continuing conflict in Kashmir is likely to attract more radical elements, including Al Qaeda, and, if left to fester by the West, eventually come back to haunt us.

4. ONGC of India agreed to pay $2.6 billion for British upstream E&P outfit Imperial, which operates in Russian Siberia on Tuesday, according to Heather Timmons of the New York Times. A Chinese NOC may end up putting out a competing bid.

5. Chinese authorities are suggesting that the country import more coal, given domestic shortages in production and its share of power generation, as per Reuters.

6. Yesterday, Russian Deputy Prime Minister Sergei Ivanov told Russian coal exporters to prioritize domestic supply, given the current shortage of the feedstock for winter power generation and the lowest hydro reserves in decades, as per Reuters.

7. Dmitry Medvedev meeting with Chinese counterpart today, apparently to ask for diplomatic support from China for Russia's decision to recognize South Ossetia and Abkhazia as independent regions, as per Lyubov Pronina and Alex Nicholson of Bloomberg.

8. Dmitry Medvedev gives in the Financial Times his reasons for recognizing South Ossetia and Abkhazia.

9. Stocks Tumble in Moscow After Russia Recognizes Separatist Regions in Georgia, by Andrew Kramer, New York Times.

10. The Republican President of the CFR, Richard Haass, has penned for the 9/1/08 issue of Newsweek a mostly reasonable opinion piece on how the US ought to approach relations with Russia. More reasonable than most of the drivel written on the subject, anyways.

11. David Ignatius of the Washington Post writes of French-backed peace initiative between Syria and Israel.

12. Iran again warns Israel of consequences should Israel attack it, as per The Earth Times.

13. Iraqi Central Government forces are engaged in crackdown in the Kurdish oil rich town of Diyala--which sits on the border of Iran--upsetting Kurdish officials there, as per Basil Adas of

14. Juan Cole, in his blog Informed Comment, wrote Monday that an aide to Grand Ayatolla Sistani was assassinated in Basra on Sunday. The link doesn't lead to an article providing further confirmation of the assertion, but Dr. Cole is pretty good at this kind of data.

15. Assad al-Jihad evidently sees Palestine and specifically Gaza as the best weak spot for it to target--"the primary front for terrorists graduating from Afghanistan and Iraq"-- as per Jihadica, a blog devoted to tracking sentiment of jihadists worldwide.

16. An Israeli expatriate was kidnapped in Port Harcourt Tuesday, as per Reuters.

17. Saudis likely to face pressure, especially from Iran and Venezuela, to cut output in OPEC at September 6th meeting, as per Alex Lawler at Reuters.

18. A potentially influential, and perhaps useful for thinking on a variety of geopolitical issues, analysis at VOX regarding what will happen should the world's current account imbalances be balanced.

19. The EIA's August 27 "This Week In Petroleum," which gives analysis and oil data for the previous week, states that gasoline demand began declining in the US in late 2007 and projects that US gasoline demand will continue to decline through the end of 2009. Crude oil stocks were down 100 kb from the week previous and down 27.8 mb from the year previous, but in the middle range of the average year over year. Gasoline stocks were down 1.2 mb from the week previous and up 2.8 mb from a year ago--but it looks like stocks are at the bottom of the average year over year. Distillate stocks were flat week over week and down 2.2mb year over year. Propane stocks were up 1.2 mb wow, down 2.2mb yoy. Looks like refineries ran approx an extra 200 kb/d last week.