Daily Sources 10/16

1. Yves Smith at Naked Capitalism has a series of links to articles investigating the effect the inability of cargo shippers to secure letters of credit is having on the shipping industry and, by extension, international trade. Evidently yesterday Tom Albanese, Rio Tinto’s CEO, provided more anecdotal evidence that China's demand for commodities is slowing down.

Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young shipbrokers, said: “You face continued freezing of activity because of the problems with credit in particular.”

Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

This is resulting in US cargos of grain sitting in buyers' ports waiting to offload because importers are unable to obtain letters of credit with which to purchase the cargoes. It seems to me that if this becomes a real problem, where people are facing hunger as a result, the banks will see various governments getting involved in this business. I can't imagine this would be the financiers' goal, given that this is an especially low risk--as I understand it--part of their business operations. It doesn't make a hell of a lot of sense.

2. Michael Steen at the Financial Times reports that the Unico Banking Group, which represents eight banks with 21% of Europe's retail banking market, said Wednesday that they will resume unsecured lending of up to three months at LIBOR. Evidently calls for the private sector to begin making good on the efforts of the central banks to provide security are having an effect.

3. Shobhana Chandra at Bloomberg reports that US industrial production fell 2.8% in September.
This was the biggest decline since 1974. For the third quarter, industrial production fell 6%, which is the most seen since 1991. However, analysts basically think the data represents a decline in production brought on by Hurricanes Ike and Gustav. Further mitigating news is that consumer price inflation was flat last month.

4. Nelson D. Schwartz at the New York Times reports that the Swiss National Bank extended a $60 billion lifeline to UBS.

"$31 billion in American assets will be taken over by the Swiss National Bank, much of it in the form of debt linked to subprime and Alt-A mortgages, in addition to securities linked to commercial real estate and student loans. An additional $18 billion worth of non-American assets will also be transferred.

The Swiss government will also provide UBS with 6 billion francs in exchange for bonds convertible into a nonvoting 9 percent equity stake."

Credit Suisse turned down the offer of government help, preferring to raise capital via private funding sources. Credit Suisse plans to raise $8.75 billion and potential creditors include the Qatari Investment Authority. The government also announced that it plans to increase its maximum deposit insurance shortly.

5. Anthony Faiola and Karen DeYoung at the Washington Post report that Pakistani President Asif Ali Zardari arrived in Beijing Tuesday for a four day visit. The President is there partially to see if it can secure a loan to cover upcoming purchases of food and oil to the country, given that it only has enough reserves left for a month's worth. A request for forebearance on petroleum import payments from Saudi Arabia made in July have so far gone unanswered. Zadari has said he needs $100 billion in credit and, as I have pointed out in an earlier post, he is known in his home country as Mr. 10% for the corruption charges levied against him. Given the propinquity of Pakistan to China, Beijing may feel more obliged to do something to shore up the situation in Pakistan. However, the fact that President Zadari feels the situation is secure enough to allow international travel suggests a level of stability inconsistent with imminent state collapse.

6. Xinhua reports that the two-day EU summit has produced draft conclusions which include a commitment to strengthening energy supply security. More specifically, the draft endorses efforts to speed up energy infrastructure connections in the Baltic. The Union will seek to further develop its ties to producer and transit nations. A meeting of Caspian Sea producers and transit countries will be organized by the Czech Presidency of the Union next spring. Platts reports that the European Biodiesel industry today asked the EU to require the detailed registration of all biodiesel imports from the United States. The industry claims that the EU imported 900,000 tonnes of biodiesel from the US last year, or about 18.4 kb/d.

7. Kate Dourian at Platts reports that OPEC has moved up its emergency meeting from November 18 to October 24. Ahmed Rouaba at Bloomberg reports that OPEC President and Algerian Oil Minister Chakib Khelil told journalists that the "ideal" price for crude is between $70-90/b. Iraqi Oil Ministry spokesman Assem Jihad said that $100/b was a fair and reasonable price for both producers and consumers, as per the AP. Alonso Soto at Reuters reports that Ecuador's Oil and Mines Minister Derlis Palacios said today that OPEC should cut production. Ecuador, though tied to Chavez politically, has generally taken a moderate stance on price recently. Maher Chmaytelli at Bloomberg reports that the Qatari Oil Minister Abdullah al-Attiyah said OPEC will cut production by 1 million barrels or more come October 24. Qatar is generally not hawkish on price and this echoes PFC Energy's prediction yesterday. Iraq joins the list of OPEC countries that have reported they will need to revisit their 2009 budget today. Sinan Salaheddin at the Associated Press reports that the Iraqi Finance Ministry said yesterday that it will likely have to scale back its $79 billion budget on lower oil prices. This comes on top of political rhetoric in the US regarding the costs of the Iraqi war. Taken in isolation these items should provide some support to the price of oil. The growing spread between front month and December 2016--at around $14/b last I looked--may partially be explained by these OPEC signals. Ole Petter Skonnord at Reuters reports that non-OPEC producer Norway announced today that it has no plans to reduce output on the declining price.

8. Juan Forero at the Washington Post reports that Chavez has ramped up the fear factor in preparation for upcoming elections.

Documentaries on the CIA-supported coup of Chile's socialist president, Salvador Allende, in 1973 are daily fare on Venezuelan state television, with pundits warning that the same could happen here. One recent program included excerpts of the 1997 Barry Levinson film "Wag the Dog," in which a Washington spin doctor hatches a war. Carlos Lanz, an associate of the president, provided commentary, explaining that the film showed how the United States topples governments.

The Russian naval maneuvers are seen as an effort to warn off an impending US invasion of the country. Pretty far-fetched. I guess it is fair to say it is straight out of Bush's playbook.

9. RIA Novosti reports that the Russian Federal Antitrust Service (FAS) announced it would take legal action against the five largest Russian crude producers unless they reduced their product prices inside the country. I am not clear on whether the FAS is working at cross-purposes to the Kremlin here or not. It is an interesting item. Russian product prices are slightly below market rate--or they were a few months ago.

10. The EIA reported that crude oil stocks grew by 5.6 million barrels for week ended October 10. This is at the middle of the historical range and against analyst expectations of a 3.1 million barrel build, as per Platts' survey Tuesday. Gasoline stock grew by 7 million barrels versus analyst expectations of the same 3.1 million barrel build. Though stocks are still below the historical average for gasoline, they are much closer to the historical band than they were in the last two weeks where stocks dropped to their lowest levels since 1967. Distillate stocks dropped by 0.5 million barrels and are slightly below the historical average. Taken in isolation, this should put downward pressure on the price of oil.