Daily Sources 9/22

1. Salman Masood at the New York Times gives a short analysis of the political situation the new Pakistani government faces after the hotel bombing Saturday, described elsewhere as "Pakistan's 9/11." Evidently, many believe that the instigators were from the Federally administered tribal areas in the north, where there is plenty of sympathy for the Taliban and Osama bin Ladin. Some in the street think the US must be behind it. American help in the ongoing investigation has been rejected.

2. Mary Anastasia O'Grady has an editorial in the Wall Street Journal regarding the Cuban relief effort imbroglio that Daily Sources noted on 9/16. Rejecting outright aid relief, Raul Castro proposes that the US relax the embargo on Cuba to permit purchases with credit by Havana for reconstruction efforts after the hurricanes. O'Grady notes that "Cuba can already buy from U.S. producers all the food and medicine it can pay cash for." I would point out that this particular relaxation in the embargo--allowing sales of food and medicine to Cuba--is less than 10 years old and that it doesn't, in fact, address the issue of reconstruction. Still, if American citizens cannot get credit for buying homes or building small businesses in the US, I could see why the US government might be a tad leery of extending it to Cuba. O'Grady argues that Cuba has been forced by its credit history with European financiers to turn to the US. OK. Well, what do we have to fear? If Cuba's credit history is so bad, then surely US banks won't take Castro up on his offers. Unless the real fear is that the US bankers would ...

3. Itar-Tass reports that the Russian First Deputy Prime Minister, Igor Sechin, said today that Russian energy companies may form a consortium with PdVSA to explore and produce in Latin and South America. This followed his return from a working trip that took him to Cuba, Nicaragua, and Venezuela. Also today a Russian naval squadron of four--including one capital ship (a nuclear powered cruiser)--left Severomorsk for Caracas for maneuvers in November, as per the AP.

4. RIA Novosti reports that in a press conference with President Medvedev in Kazakhstan, the Kazakh President, Nursultan Nazarbayev, said that it was "very important that Kazakh oil should pass through Russia." He stated that Kazakh crude production should increase by 12 million tonnes (87.6 mb or 240 kb/d) in 2009.

5. Doris LeBlond at the Oil & Gas Journal had an interesting story today about the establishment, on September 8, of an Africa-EU energy "partnership" by the African Union Commission and the European Commission. The partnership has revived the idea of the trans-Saharan gas pipeline project--a 4,300 km (2,672 mile) pipeline with a 20 billion cubic meter/ year capacity linking Nigeria to Algeria at a cost of about €7 billion (~ $10.1 billion). (Currently Nigeria flares most of its gas.) An informal joint experts group on energy has been put together and will meet for the first time in October.

6. Ibanga Isine, Sola Adebayo and Mudiaga Affe at Punch report that MEND has unilaterally called a ceasefire, suspending Operation Barbarossa Hurricane, in the Niger Delta. Operation "Tropical Storm Vigilant" will replace Hurricane, with only International Red Cross staffers allowed into the region to collect the dead. The spokesman for the Nigerian military's Joint Task Force told reporters that the ceasefire was good for the militants, the region, and the country. MEND states that the oil war was ignited by an unprovoked attack by the military on one of their positions as well as indiscriminate attacks on civilian communities. Emma Amaize & Jimitota Onoyume at the Vanguard report that leaders of the various Niger Delta militant movements are sending separate delegations to Abuja for negotiations with the government.

7. Richard Holbrooke, R. James Woolsey, Dennis B. Ross and Mark D. Wallace have an op ed in today's Wall Street Journal entitled "Everyone Needs to Worry
About Iran." A pretty well-regarded and experienced bunch. Bipartisan, too. But the notion that Iran has no economic argument for nuclear power, whatever the merit of the charge that Tehran seeks nuclear weapons, is dead wrong.

8. Ramin Mostaghim and Borzou Daragahi at the Los Angeles Times had the story Friday that the Iranian Leader of the Revolution aka "Supreme Leader" Ayatollah Ali Khamenei said that Iran and Israel were on a "collision course," which would seem to negate the story in the New York Times that day where I argued that it was beginning to look like holocaust recognition had become official Iranian policy. In his remarks he explicitly contradicted Ahmadinejad, saying that Iran was an enemy of the "Israeli people," and not just their government.

9. Reuters reports that the head of the International Atomic Energy Agency, Mohamed El Baradei, said today that IAEA agents have been asked by North Korean officials to remove seals and surveillance equipment from the Yongbyon plant.

10. Blaine Harden at the Washington Posts reports that Japan's ruling Liberal Democratic Party has selected Taro Aso, a former foreign minister, to be the next Prime Minister. Aso's younger sister is married to a cousin of the Emperor and his family's cement business used slave labor during WWII. Aso competed in the 1976 Olympics in Montreal (as a marksman) and is a Roman Catholic. About 0.5% of Japanese are Catholics. He is also a nationalist that has repeatedly upset Japan's neighbors by allegedly whitewashing Japan's imperial past. Jesper Koll, the President of Tokyo-based investment firm TRJ KK, has an interesting op ed essentially endorsing Aso in Wall Street Journal Asia.

11. Samuel Sockol and Griff Witte at the Washington Post report that Israeli Prime Minister Ehud Olmert also resigned on Sunday. His term was marred by corruption probes. The current US-backed peace talks with Palestine were initiated by Olmert and may be kaput due to his exit.

12. Karin Brulliard at the Washington Post reports that in a television address Sunday South African President Thabo Mbeki announced his resignation. The ANC had voted to oust him the day prior.

13. Jad Mouawad at the New York Times has a story on the $16.37/b rise in the spot price for oil today. Of course, that's only part of the story ... tomorrow's spot contract "only" went up $6.62/b, or to $109.37/b as opposed to $120.92/b. Although the House passed the "anti-speculation" bill on Friday, the Senate has yet to take up the bill, and so traders are saying that the general rise is due to investors looking for a safe place to invest in.

Key "fundamentals" arguing for a higher price for crude include:

- the news from the EIA Wednesday that stocks were down the week previous and the unusual step it took of telegraphing Friday the likely stats report this Wednesday of a draw on gasoline of over 8 mb;
- the odd news, given the overall situation, that the US would not ask the IEA to supply emergency gasoline to American markets;
- the "oil war" in Nigeria, though a cease fire was unilaterally declared by MEND today;
- slight reduction in oil supplied to the market by Saudi Arabia in keeping with the September OPEC meeting's decision,
- Angola set to cut exports by 10% come November,
- a dollar possibly about to be "crushed" due to the worsening news on the financial front and worldwide government attempts to calm the markets
- two more months left in the hurricane season
- increase in tensions with Russia

Key "fundamentals" arguing for the drop in the price of oil include:

- the length and number of refineries in the US which remain shut down due to Hurricanes Ike and Gustav, amounting to around 20% of American refining capacity, thus to about 2 mb/d of imports, or about 2.4% of world demand;
- on top of this, demand appears to be sinking in the US as the price of gasoline becomes too expensive for many to afford. department of transportation data each month shows a decline, year over year, in vehicle miles driven;
- OECD demand down by 1 mb/d, or 1.1% of world demand;
- demand down in emerging markets which have been the main source of demand growth over the last five years, including the story from Jim Bai of Reuters that Sinopec will import 1 million tonnes less crude per month from September through December, or about 239 kb/d--around 3% of Chinese implied demand, or 0.3% of world consumption. demand should fall in both China and India as subsidies have been reduced substantially;
- Russia cut their export tariff substantially in response to the fall in the price of crude;
- Apparent increase in security in Iraq / apparent (overall) reduction in tensions between Iran and the US
- it is beginning to appear as if the world's economies are not structured to profit at $100/b, especially export-based economies where transport costs would be significantly affected
- a "crushed" dollar would presumably have the same effect as high transportation costs on export-based economies, especially those founded on exporting primarily to the United States

Although the above is just a sampler, it is my sense that the reduction in open interest in NYMEX, which in part is due to the anti-speculation legislation, will mean for more volatility over time. But, I suspect that even with investor money entering the contract for oil (and other commodities) in order to hedge against the fall in the dollar, that the price of oil as expressed in the futures market, will have to fall as worldwide demand appears to be faltering, and, should a worldwide recession be under way, likely to fall even further.