Daily Sources 11/28

1. Somini Sengupta and Keith Bradsher report on the efforts of the security forces in Mumbai to put an end to the terrorist attack there instigated on Thursday, with over a hundred dead and as many as 300 wounded. Salman Masood at the New York Times reports that the chief of Pakistan's Inter-Services Intelligence will visit New Delhi shortly in an effort to allay suspicions that elements in Islamabad were behind the attack on Mumbai.

2. Sudarsan Raghavan at the Washington Post reports that the Iraqi Parliament approved the status of forces agreement with the US. 149 members endorsed the security agreement, 35 opposed it, 14 abstained, and 77 were not present. Juan Cole at Informed Comment carries the text of a translation by the Open Source Center of a radio broadcast of the Voice of the Islamic Republic of Iran which endorses the agreement. Tehran seems to especially welcome the notion of a referendum on the matter, which appears to have been the compromise the pact required for passage.

3. Oleg Shchedrov at Reuters reports that Moscow today welcomed the news that the US has abandoned their effort to suspend the traditional application process for NATO membership for the Ukraine and Georgia on Wednesday. Conor Sweeney, also of Reuters, writes that Colonel-General Nikolai Solovtsov, Commander of Russia's Strategic Missile Forces, told the media that Russia has intensified its efforts to develop a new missile system given the plans for a US missile shield in eastern Europe which Moscow believes it will need by 2020.

4. Galrahn at Information Dissemination takes a look at the Russian Navy's shipbuilding plan through 2015 and concludes that their naval strategy in the short term will be underwater strength and nuclear capability. Moscow plans no new aircraft carriers through 2015.

5. Nadia Rodova at Platts reports that Moscow has cut its export tariff on crude again to $192.10/mt ($26.31/barrel) from December 1, 33.1% down from the current $287.30/mt.

6. Ralph Atkins at the Financial Times reports that analysts expect the European Central Bank to cut rates by at least 50 basis points (0.5%) next week.

7. Eurointelligence reports that the German Finance Minister, Peer Steinbruck, has rejected the pan-European stimulus package proposed by the European Commission earlier this week, saying that Berlin wants to see how the current programs play out before committing more funds.

8. Jim O’Neill, chief economist at Goldman Sachs, has an opinion piece at the Financial Times which argues that China, India, and Germany must increase domestic consumption growth in order to make up for the decline in US imports and thus avoid a serious global downturn.

9. Polly Yam at Reuters reports that the Chinese State Reserve Bureau is considering purchasing as much as 20-30 billion yuan ($2.93 billion-$4.39 billion) in base metals. Apparently Beijing wants to help the metals industry in an effort to restrain job losses. Such a move would be very welcome by emerging nations with commodities based currencies in what is beginning to look like a strategic stance in Beijing.

10. Li Yanping at Bloomberg reports that Zhang Ping, chairman of the National Development and Reform Commission, told the media yesterday that several economic indicators in China showed that the economy was rapidly weakening in November. He told reporters, "Employment is being impacted by factory closures and many migrant workers are returning to their home towns."

11. Michiyo Nakamoto at the Financial Times writes that Japan is facing a serious downturn as Chinese imports are not making up for the fall in demand for products in the United States. The Japanese demographic situation--where the size of the population is shrinking and the share of the elderly is getting larger--is leading to a decline in consumption as a percentage of GDP. It now stands at 57%. Growth has to come, therefore from exports. Exports have grown from 11.4% of GDP in 2002 to 17.6% in 2007. China has recently edged out the US as the largest destination for Japanese exports, but slackening demand overseas looks like it will result in a very weak economic picture. Well-worth reading in full. Toru Fujioka and Jason Clenfield at Bloomberg report that factory output fell 3.1% in October from September and that household spending fell 3.8% in its eighth consecutive decline.

12. The JoonYang Daily reports that Seoul has delayed a plan to send ships to help police the waters off Somalia, citing the costs of the effort in the current economic crisis and the need for more talks with the United States. I suspect that the naval traffic passing the Gulf of Aden important to Seoul is their trade with Europe, which may not represent a particularly large share of the export-import market. Their energy security is not threatened as their imports do not pass by it.

13. The AP reports that Venezuela is reconsidering several foreign refinery projects, including ones in Nicaragua and Ecuador, due to the fall in oil prices. Caracas is looking for other ways to finance the projects.

14. Daniel Denvir at Alter.net reports that a special debt audit commission in Ecuador released a report that argued that much of the country's foreign debt was illegitimate or illegal. The commission recommended that Quito default on $3.9 billion in foreign commercial debts. It doesn't look like Quito will follow-through on the recommendations, but that it will use the report as leverage in its renegotiation of debt going forward. (h/t Jesse's Café Américain.)

15. Platts reports that Nigerian crude production has fallen to 2.14 mb/d after the sabotage seen in the last few weeks. "The head of crude marketing at state oil company NNPC, Aminu Baba-Kusa, said that around 1.2 million b/d of the country's crude production was currently shut in."

16. Andrew Martin at the New York Times reports that food prices are expected to continue rising in the United States despite the fall in energy prices.

17. Daniel C. Vock at Stateline.org reports that several US states have either already passed their own stimulus programs or are in the process of doing so, as opposed to waiting for the Federal government to act. Florida, Ohio and Vermont have already passed programs and California, New Jersey, Washington, and Wisconsin are considering them. Worth reading in full. (h/t Real Time Economics.)

Daily Sources 11/26

1. Stephen Castle and David Jolly at the New York Times report that the European Commission proposed today a stimulus package totaling €200 billion (~ $256 billion). However, of the €200 billion, only €30 billion would come from Brussels, and, as we noted yesterday, Germany's Chancellor Angela Merkel appears to be set against a coordinated response. Much of the monies included are packages that have already been announced by member nations, and the EC has very little ability to bend the national governments to their will. Some analysts see it as an effort to pressure member governments to coordinate their responses to the crisis.

2. Norma Cohen at the Financial Times reports that the services sector in the UK contracted by 0.4% in the third quarter, as per the Office for National Statistics (ONS). This was the largest drop seen in the sector since the ONS began keeping track. The ONS also confirmed that GDP fell by 0.5% in the third quarter as per earlier predictions.

3. Olesya Vartanyan and Ellen Barry at the New York Times reports that Erosi Kitsmarishvili, Georgia’s former ambassador to Moscow, testified before Parliament that Tblisi was responsible for the conflict in South Ossetia.

"A former confidant of President Mikheil Saakashvili, Mr. Kitsmarishvili said Georgian officials told him in April that they planned to start a war in Abkhazia, one of two breakaway regions at issue in the war, and had received a green light from the United States government to do so. He said the Georgian government later decided to start the war in South Ossetia, the other region, and continue into Abkhazia."

When Mr. Kitsmarishvili tried to confirm that a green light had been given with US diplomats in Tblisi who told him that there had been no go ahead. Meanwhile, the New York Times' Judy Dempsey reports that US diplomats began an effort to have the Ukraine and Georgia admitted to NATO without going through the traditional admission process. Secretary of State Condoleeza Rice has allegedly had long telephone conversations with senior German, French, and other European diplomats in support of the initiative. In light of the most recent news from Georgia ... not gonna happen.

4. Vandana Hari and Mriganka Jaipuriyar at Platts report that IEA Executive Director Nobuo Tanaka told journalists in Singapore today that the integration of China and India into the organization was of strategic importance given that most new demand was in those countries. He urged OPEC to carefully examine the market data in their upcoming meetings and to stand ready to act should the market reverse. In the IEA oil market report released November 13, the IEA forecast that the fourth quarter call on OPEC crude would be 31.1 million b/d, about 1 million b/d below their estimate of OPEC's October production of 32.13 million b/d. Tanaka also suggested that the IEA might revise further downward their projection of 2009 oil demand growth, "Certainly there is a possibility of [another] downward revision. But how far, how much, I don't know."

Tanaka also said he would like to see greater cooperation with the countries of Southeast Asia and that the organization's interest in Indonesia is growing. (Indonesia recently left OPEC.)

5. Platts reports that Turkish energy minister Hilmi Guler told television reporters in Istanbul today that during his visit to India Monday he and Prime Minister Tayip
Erdogan discussed the development of MedStream--an oil transit corridor between the two countries. He told reporters that a preliminary study of the feasibility of the project has been completed and that Turkey is in talks with other participatory countries to determine whether to move ahead with a full feasibility study.

"The route involves the construction of the long-planned Trans Anatolian Pipeline from the Black Sea to Turkey's Mediterranean oil hub at Ceyhan.

From Ceyhan a second pipeline would be built, to the Israeli oil port of Ashkelon and on to Israel's Red Sea port of Eilat from where tankers would carry the oil to markets in India and the Far East, he said.

Guler added that plans for the link between Ceyhan and Israel involved the construction of a triple pipeline carrying oil, natural and fresh water as well as electricity and fiber optic links."

6. Aaron David Miller has an opinion piece in the Washington Post which argues that it would be folly to make the Isreali-Palestine issue the Obama Administration's first foreign policy priority, but that Isreali-Syrian relations are ripe for a breakthrough. His primary argument against focusing especially on Palestine is that there is no real negotiating authority that Tel Aviv can negotiate with just now. Given that complication, expecting a serious resolution to an issue that includes resolving the status of a city holy to three separate religions seems quixotic. Syria, on the other hand, has a stable government and the issues between the two countries are well-understood and straight-forward: withdrawal, peace, security and water. I think Mr. Miller is probably right on this issue from a tactical perspective. His argument is well-worth reading in full.

7. Matthew Rosenberg at the Wall Street Journal report that Afghan President Hamid Karzai's office released today a transcript of a meeting with a UN delegation yesterday where the President said,

"'This war has gone on for seven years, the Afghans don't understand anymore, how come a little force like the Taliban can continue to exist, can continue to flourish, can continue to launch attacks.'"

Some think the harsh criticism comes as Karzai readies himself for elections, where he must be seen as independent of the West in order to counter domestic critics. But Karzai's comments include the remark that "If there is no deadline we have the right to another solution for peace and security, which is negotiations," which suggests he wants a deadline for the end of the war.

8. Sudarsan Raghavan at the Washington Post reports that the Iraqi Parliament has postponed a vote on the Status of Forces Agreement until tomorrow. They have also agreed that should Parliament pass the proposal, it will be subject to a national referendum next year. Grand Ayatollah Ali Sistani has said that any deal should have the support of every Iraqi party in order to be legitimate. Thus the Sunni bloc of 44 votes in a 275 member parliament has proved enough to block the deal. The Sunnis are demanding the dissolution of the special criminal court which tries former members of Saddam Hussein's government and the reinstatement of former Baath members to government jobs.

9. Fiona MacDonald at Bloomberg reports that the Kuwait state news agency has announced the country is not considering rerouting its tankers away from the Suez Canal.

"Eighty percent of Kuwaiti tankers go to Asia, bypassing the Gulf of Aden, al-Shuwaib said, according to KUNA. The remaining vessels leaving the country are rented and non-Kuwaiti, or are Kuwaiti ships that sail under international military protection, the news agency said, citing al-Shuwaib."

That is, most of our ships don't go through the Suez, those that do are protected by others' navies, and the rest don't fly our flag.

10. Jamie Dale at Lloyds List reports on further distress in the shipping industry, with Cargill chartering a capesize (of 180,180 dead weight tonnes) for a transatlatic round trip voyage at $1,000/day, which is way below the market rate as expressed on the Baltic Exchange of $1,864/day.

"Today the capesize average time charter rate fell to $2,773 per day, down $456 from a day earlier, and its lowest level since the Baltic Exchange began reporting this rate on March 1, 1999."

The decision to avoid the Suez Canal doesn't seem to have had much of an effect upon the price of shipping generally, as expressed by a chart of the Baltic Dry Index for the last month below:


11. The Associated Press reports that on Sunday Somalian pirates moved the Sirius Star 30 miles offshore Harardhere in a defensive move prompted by the promise Friday by Islamist fighters to free the ship--giving as cause its Islamic provenance. The promise was made by fighters claiming to represent al-Shabab, but yesterday the official spokesman for the group denied that they were part of the movement. "Al-Shabab had never attacked a pirated ship before, but militias linked to the Puntland administration in northern Somalia had twice intervened when pirates captured a ship with connections to Somali business interests."

12. David Osler at Lloyd's List reports that the pirate "mothership" destroyed by the Indian frigate may in fact have been a Thai fishing boat. The development has damaged Indo-Thai relations, with Bangkok summoning the Indian Ambassador for an explanation.

13. Tim Johnston at the Washington Post reports that Thai Army chief Anupong Paochinda told a news conference today that Prime Minister Somchai Wongsawat "'should dissolve parliament and call a snap election' as a way to end the crisis." He also called on protesters to disperse. Both refused. The article has a pretty good summary of the course of events and worth reading.

14. Li Yanping and Nipa Piboontanasawat at Bloomberg report that the People's Bank of China announced today it will reduce its benchmark lending rate tomorrow by 108 basis points (or 1.08%) to 5.58%. The deposit rate will also be reduced by 108 basis points to 2.52%. David Barboza at the New York Times reports that heavy industry in China is taking a serious hit.

15. Dorothy Kosich at Mineweb reports that the Soros, Citadel and Invesco hedge funds have recently taken large stakes in US coal mining operations. Investors apparently think coal is a good buy because it is used for power generation--which is less elastic than, say, transportation--and demand is growing. (It might face some substitution difficulties, though, especially from natural gas in the United States. China just made a major coal find.)

16. AP reports that the Commerce Department published data showing that new home sales fell 5.3% in October, the lowest level recorded since 1991. The median price of new homes sold fell by an annual rate of 7%. The Commerce Department also released data today indicating that consumer spending fell by 1% in October, per the Associated Press. Meanwhile, the AP also reports that the Labor Department announced that new jobless claims fell slightly from 543,000 to 529,000 (on a seasonally-adjusted basis). The number of people who continue to claim unemployment has also dropped from 4.02 million a week ago to 3.96 million.

17. Jane Black at the Washington Post reports that the number of Americans using food stamps looks likely to exceed the highest level ever seen. The Agricultural Department will release the data next week, but provided a basic sense of what to expect in a briefing last month.

18. The EIA's This Week in Petroleum announced that crude stocks grew by 7.3 million barrels(!) in the week ended November 21 and are nearing the top of the historical average. The Platts survey had analysts expecting a 400,000 barrel build. Gasoline stocks also grew by 1.9 million barrels, which is still at the bottom of the historical average, but well above the expectations of Wall Street of a 300,000 barrel build. Distillate stocks fell 200,000 barrels and are at the very bottom of the historical average. Analysts expected a draw of 900,000 barrels. Taken in isolation, this should be pretty bearish data. Taken in combination with a $30 full curve contango and it should be very bearish. But, so far, it looks like the market is mostly responding to the interest rate cut in China with a $4-5/b price rise.

19. Leslie Moore Mira at Platts reports that MasterCard Advisors published a survey on Tuesday which indicated that gasoline demand was up in the week ended November 21. Gasoline consumption still appears to be at 3% below the 2007 rate.

Daily Sources 11/25

1. Brad Setser at Follow the Money argues that the time of the sovereign wealth funds is over. Those funded by oil revenues are no longer receiving the cash flows that they once enjoyed. Brazil, Russia, South Korea, and India will not have large funds in the near future in Setser's opinion. Abu Dhabi's fund will be hampered by the need to finance Dubai's debt, as the emirate's domestic state firms were heavily leveraged. Norway's fund had $380 billion earlier in the year, and now has about $300 billion. The problem is that the funds were set up to invest surplus funds in equities and it is precisely the equity markets which have been hit the hardest by the current crisis. In an ironic twist, the US is purchasing equities now that they are cheap by taking stakes in firms with large international positions. China is the wildcard. Well worth reading in full.

2. Platts reports that Russian energy minister Sergei Shmatko told reporters in New Delhi that Russia "will coordinate with OPEC." OPEC representatives have recently suggested that one critical element of the November 29 meeting in Cairo would be to secure Russia cooperation with their efforts to shore up the price of oil. Moscow has typically been cool to the idea of coordinating production with the cartel, but yesterday a senior executive at Lukoil suggested that doing so would be in the Russian interest. This is the first indication from an official government representative that Moscow might adopt the strategy of pursuing a closer relationship with producers rather than a symbiotic energy security relationship with Europe. Moscow could potentially play the role of a swing producer--it produces about as much oil as Saudi Arabia--but so far has opted to produce at full tilt and send it all to market.

3. Ulf Laessing at Reuters reports that the Kuwait Investment Authority has repatriated $3.7 billion in foreign investments in order to shore up the local stock market.

4. Eric Watkins at the Oil & Gas Journal reports that Total and Saudi Aramco have decided to delay the award of the $10 billion, 400 kb/d, export refinery in Jubail given the global economic environment. Last week Riyadh decided to suspend development of the Manifa field, which was planned to produce 900 kb/d by 2011 and which was to fuel the Jubail refinery. (Also last week Conoco and Aramco announced they would delay construction of the 400 kb/d export refinery to be built at Yanbu.)


5. The Associated Press reports that Russian warships arrived off Venezuela's coast today. The ships are slated to take part in military exercises this month and were clearly sent in response to the American presence in the Caucasus. US State Department Spokesman Scott McCormack on Monday seemed to mock the move in the State Department's daily briefing of the press, saying "You know, I don’t know. Are they accompanied by tugboats this time? I – you know, look, there’s no – I don’t think there’s any – there’s any question about, you know, who the region looks to in terms of political, economic, diplomatic and as well as military power." (Peter the Great is the Russian Navy's flagship--a nuclear cruiser--which seemed to face some operational difficulties earlier this year.) The joke suggests a certain level of insobriety at the State Department, a not entirely welcome apprehension. Almost immediately afterward, however, he gave the official American response: "I don’t know if the intention was provocative. Certainly, we don’t – we won’t view it that way."

6. Sinan Salaheddin at the Associated Press reports that the chair of the Iraqi Parliament's Committee on Oil and Gas has criticized the deal between the Oil Ministry and Shell to jointly exploit natural gas in the southeastern province of Basra.

7. Galrahn at Information Dissemination posits the argument that it is in the interests of the US to fail to police piracy originating from Somalia because to do so would deny funding to the capitalist elements of society at the very time that the Islamists are struggling for funding. The argument contains some odd presumptions, and, for example, his analysis of the operating cost additions in the shipping industry is misguided. (It is not just, for example, the oil industry which is abandoning the route via the Suez Canal, but all shipping--including container ships, etc.. When so many tonne miles are added, and so much capacity is thereby taken off line, prices should go up. And, the shipping industry certainly hopes so!) Alaric Nightingale at Bloomberg reports that tanker rates have not revived on the back of the route shift, however, with the cost of shipping Middle East crude to Asia, the global benchmark, falling to 66 Worldscale (WS). That is a big decline from the top of the market, but, if I understand correctly, much better than what other categories of shipping are receiving on the market.

"[W]hile hire rates may have declined, returns for shipowners remain profitable. The route from Saudi Arabia to Japan is paying shipowners $44,442 a day, according to the Baltic Exchange. Frontline Ltd. said Aug. 21 it needs $31,500 a day to break even on each of the vessels."

And sending tankers past the Cape of Good Hope instead of through the Suez adds a considerable amount of time to a shipment.

"Sailing at 14 knots, it takes 33.2 days to ship Saudi Arabian crude oil to Rotterdam via the Cape of Good Hope, compared with 19.2 days going through the Suez Canal, according to the world-register.net Web site."

That said, business requires the rule of law in order to operate, which, for example, is why the Islamists have supporters in Somalia, and, as an article today suggests, support is rebuilding for them in Afghanistan. Nonetheless, it would be interesting if the US were put in a position to support the pirates as the only viable governing alternative to the Islamists. It would not, as Galrahn suggests however, be especially supportive of the free market ideology.

8. Steven Bodzin at Bloomberg reports that Hugo Chavez told reporters that OPEC should reintroduce the practice of announcing a price band that it is prepared to defend, and that a fair price for oil is between $80-100/b.

9. AFP reports that on Monday China signed a protocol with Jordan to assist Amman in mining and enriching uranium, as well as with scientific training for the construction and operation of nuclear power plants. "The country's 1.2 billion tonnes of phosphate reserves are estimated to contain 130,000 tonnes of uranium and the government intends to start mining the radioactive ore to fuel its first nuclear plant."

10. Kim Barker at the Chicago Tribune reports that "pervasive corruption" is fueling anger at the Karzai government in Kabul. The corruption is causing many to long for Taliban rule as the Taliban strictly enforced the law. As I have pointed out in a few posts much earlier in the year, one of the central preoccupations of Islam is with the rule of law.

11. Calvin Lee at Platts reports that Yang Qing, deputy director of China's National Development and Reform Commission's price monitoring bureau told a forum in Beijing Tuesday that export growth was falling sharply due to the fall in US demand. According to Yang, a 1% drop in US GDP will cause Chinese export growth to contract by 7-8%. (Not exports, but export growth.) Geoff Dyer at the Financial Times reports that the World Bank's quarterly report on China predicted that China's growth rate will fall to 7.5% next year, 0.5% below the rate generally reported as necessary to absorb growth in the labor market and thus avoid social unrest.

12. José de Cordoba at the Wall Street Journal reports that the government of Hugo Chavez is providing safe havens inside Venezuela for members of FARC to carry out cross-border operations into Columbia. FARC is allegedly setting up road checks, "meting out justice to petty thieves and extorting businessmen." FARC leadership is also apparently living on and operating from the Venezuelan side of the border, and some of the organization's predatory behavior with the locals has apparently roiled some in Caracas. FARC also evidently has offices in Venezuelan cities deep inside the country. The article is worth reading in full and includes, in a sidebar, translations of some of the FARC emails found on a computer captured earlier this year. Below is the Journal's map of the regions where FARC and the ELN have set up shop inside Venezuela.



13. Tim Johnston at the Washington Post reports that Thai protesters broke through riot police lines and stormed the Suvarnabhumi Airport, shutting down the new facility. Generally speaking, this would be pretty startling news, indicating that the government is about to fall in short order. But the protest movement has only been able to muster about 20,000 people, which is not enough, usually, to do things like grab control of major ports or broadcast stations. Either the government is about to change, a crackdown is about to be instituted, or the numbers are being woefully under-reported. This seems especially the case given that the police have been fired upon by some protesters. The Post has a slide show of the protesters--looks like they overpowered a considerable force of riot police.

14. Eurointellingence reports that the Franco-German summit went badly. Angela Merkel wants to schedule another summit for January to see how successful the various national stimulae have been, and just after France has passed on the baton of the EU Presidency.

15. Aaron Eglitis and Ellen Pinchuk at Bloomberg report that the Latvian Finance Minister Atis Slakteris told the journalists that the country will likely ask the IMF and the European Union for emergency funds of as much as €3 billion (~ $3.85 billion).

"'The Baltic countries, in particular Estonia and Latvia that have experienced the strongest upswing, are now facing a severe downturn," Helge Pedersen, global chief economist for Nordea, said in a report. Estonia contracted 3.3 percent in the third quarter. Swedbank AB, the biggest bank in the Baltic states, said on Nov. 20 it expects Latvia’s economy to shrink 4 percent next year."

16. Robert Barnett has an opinion piece at the New York Times which points out that the UK on October 29 recognized Tibet as a part of the People's Republic of China, a switch from its previous position that Tibet was an autonomous region. The British recognition of Tibet as an autonomous region had provided the legal basis for negotiations between Beijing and Tibetan representatives. No more. Barnett suggests that London has reversed course because the UK requires the cooperation of Beijing in the current financial crisis.

17. Norma Cohen at the Financial Times reports that the OECD released its world economic forecast today which predicts that the US and the eurozone both are about to enter four straight quarters of economic contraction. "In pinpointing countries that will experience a severe downturn, in addition to the UK, the OECD lists Hungary, Iceland, Ireland, Spain and Turkey."

18. Stefan Wagstyl at the Financial Times reports that the European Bank for Reconstruction and Development has cut its forecast of GDP growth in 2009 for Central and Eastern Europe from 5.7% to 3%.

"In Russia, the region’s largest economy, the bank forecasts a slowdown in growth from an expected 7.3 per cent this year to 3 per cent, following the drop in oil prices. In neighbouring Ukraine, the decline is predicted to be even steeper, from 6 per cent to 1 per cent. The average for the former Soviet Union (minus the Baltic states) is likely to be 3.4 per cent, from 7.3 per cent this year.

Further west, in Poland, the second biggest economy after Russia, the EBRD predicts a decline from 5.3 per cent to 2.8 per cent.

The worst performance is expected in the Baltic states, with recession in Estonia and Latvia next year. Central Europe and the Baltic states as a whole are predicted to see growth almost halve from 4.3 per cent in 2008 to 2.2 per cent. In south-east Europe the forecast fall is even greater, from 6.5 per cent to 3.1 per cent."

19. The Associated Press reports that the Conference Board said today "that its Consumer Confidence Index was 44.9, up from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967."

20. Michael M. Grynbaum at the New York Times reports that most recent numbers for the Case-Shiller Home Price Index were released today and that they suggest that home prices fell across the United States by an annual rate of 16.6% in the third quarter. Also today the Commerce Department revised its estimate of the contraction seen in the third quarter from down 0.3% from the year before to down 0.5%.

21. Damian Paletta at Real Time Economics reports that the FDIC has released its list of troubled banks and the number of challenged banks has grown from 171 at the end of the third quarter from 117 at the end of the second quarter. The post includes a link to an interactive table of the banks that have been forced to shut down by federal regulators this year.

22. Yves Smith provides a quick reaction to the news that the Treasury and Federal Reserve Bank have announced a plan to provide $800 billion to support consumer lending. Real Time Economics provides the text of the announcement.

Daily Sources 11/24

1. On Friday Anurag Kotoky of Reuters reported that Goldman Sachs' most recent forecast calls for US GDP to fall by 5% in the fourth quarter 2008 and unemployment to grow to 9% by the end of 2009.

2. Real Time Economics reports that home resales fell to a 4.98 million annual rate in October, down 3.1% since September. The medium home price was down 11.3% since October 2007. The post contains the reactions of various economists.

3. Galrahn at Information Dissemination has a post hailing the current international interest in coordinating the naval response to the piracy infesting the Somalian littoral as a success of American international maritime strategy. In short, US maritime strategy calls for building international consensus of maritime issues and using such consensus to enforce rule of law on the seas. By waiting for the international community to clamor for coordinated action before making naval commitments to the region, then, the US has met its international policy goals in terms of piracy. Interesting read.

4. Mark Pittman and Bob Ivry at Bloomberg have an analysis showing that with the bailout of Citibank, the commitment of tax payer funds to rescue the financial industry now tops $7.7 trillion, or more than half the GDP.

"The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."

5. Philip P. Pan at the Washington Post reports that the Georgian and Polish presidents claim they were shot at as their motorcade approached South Ossetia to inspect a Russian checkpoint. Russian officials deny the accusation.

6. Ben Farey at Bloomberg reports that OPEC President Chakib Khelil told reporters in Vienna today that OPEC has provided the world with an economic stimulus by "accepting an oil price" lower than their "target price" of $85/b. (This is disingenuous, of course, as OPEC has called several emergency meetings and cut production in order to try and stave off the collapse in prices. Moreover, OPEC had refused to publically announce a target price they would defend.)

Khelil also suggested that were OPEC to meet today, production would be cut by 1 million barrels. Khelil also said that there had been 85% compliance with the October cut. Brian Baskin at Dow Jones reports that Lawrence Eagles, head of commodities research at JPMorgan Chase & Co., said Friday that without a "massive" production cut from OPEC, oil was likely to fall to $35/b. He said in a conference call that:

"OPEC needs to cut 3 million barrels a day to compensate for the bleak global economic outlook, which is expected to result next year in the first contraction to oil demand since the early 1980s."

Steven Bodzin and Daniel Cancel at Bloomberg reported yesterday that Venezuelan Energy and Oil Minister Rafael Ramirez told the media that Caracas will call for a 1 million barrel cut in production at OPEC by year end. The Associated Press reports that Iraqi oil exports in October grew to 1.7 million b/d, up from about 1.64 million b/d, an increase of roughly 60 kb/d. Iraq is not bound by any production quota as it recovers from the wars.

7. Ernesto Londoño at the Washington Post reports that the Kurdish regional government took delivery of three planeloads of small arms they had purchased from Bulgaria without seeking approval from Baghdad. Kurdish officials last week were complaining that al-Maliki was in the process of establishing a praetorian guard of sorts. The news of the arms sale is sure to alarm Iran, and, in all probability, Turkey, though Barzani's KRG has been at pains to try and smooth ruffles with Ankara.

8. The Associated Press reports that Saudi Arabia reduced its benchmark interest rate by 1% to 3%. Riyadh also reduced the cash reserves banks are required to hold from 10% to 7% of total deposits and loans.

9. Simon Romero at the New York Times reports that Chavez supporters won the great majority of gubernatorial and municipal elections held in Venezuela this weekend, but the opposition takes comfort in the fact that their victories were in the most populous and economically significant regions.

10. Choe Sang-Hun at the New York Times reports that North Korea has announced it will suspend all trips of the only running rail line between it and South Korea. Pyonyang will ban South Korean tourists from visiting Kaesong, which hosts the Kaesong Industrial Park--the joint economic project of the two countries. Pyonyang will also "'selectively expel' South Koreans working in a joint industrial complex there starting Dec. 1."

11. Rachel Donadio reports that Pope Benedict XVI wrote a letter published by Corriere della Sera on Sunday in which he cast doubt on the notion of an "interfaith dialogue." On the other hand, the Pope emphasized the importance of inter-cultural dialogue: "He called for confronting 'in a public forum the cultural consequences of basic religious decisions.'" Words, and their meanings, are important to theologians, and the Pope's point is not a trivial distinction. Iran's reformist leadership had, some time ago, called for a "dialogue of civilizations." In practice, though, this was mostly an effort to get all parties to express their respect for the cultural differences of their neighbors.

The Pope's call puts this notion on a more pragmatic plain, which is interesting, and reminds me of his--widely criticised--letter last year where he pointed out that possibly the most important Christian religious council had been called to accept, as inspired revelation, translation of the Old and New Testaments. A key criticism of Christianity by Islamic prosyletizers is that the Bible was distorted by the very process of translation. Since the Koran is in its original language, it has not, in their view, been so twisted. In that letter the Pope also pointed out that if Christians were to regard all lands previously controlled by Christians as legitimitely the target of Christian reconquest, most of the world would be considered as such. That is, I understand this new letter primarily as a challenge.

12. Dan Eggen at the Washington Post reports that members of APEC warned President-elect Obama that pulling back from free trade agreements would exacerbate the current global economic situation. APEC also issued a statement similar to that put out after the G20 summit on November 15 which pledges to maintain low trade barriers going forward. Canada specifically warned against the reworking of NAFTA.

13. Marc Lacey at the New York Times reports that many of the people protesting the recent municipal elections in Nicaragua are former Sandinistas. Mary Anastasia O'Grady has an opinion piece at the Wall Street Journal which reports that the Carter Center, the European Union, and the Organization of American States were all denied credentials to observe the election by Managua. Local observers were also prevented from entering polling stations. O'Grady's reportage needs to be taken with a grain of salt, however. For example, she writes that "Mr. Ortega ruled the country from 1979-1990 as a Sandinista dictator." Well, maybe, except you have to admit that the Sandanistas held elections and then abided by the result when they lost. Atypical of dictators.

14. Keith Wallis at Lloyd's List reports that seafarer groups internationally are calling for a boycott of South Korean goods. A very large crude carrier anchored off South Korea was hit by a barge which had partially come off its tow. The captain and chief officer were taken into custody, and even though a South Korean court cleared them of responsibility, prosecutors are still calling for a three year jail term. The two seafarers are of Indian nationality.

Spot Life CL Dec 08 Entire

More news of difficulties in the Chinese economy. More sobering data on the developed economies. The G20 summit yields little. OPEC schedules another extraordinary meeting in Cairo. Lukoil seems to think that Russia should join OPEC in cuts. Pirates! But the true story arc: Demand forecasts down down down. The national oil companies all agree price will fall to $40/b.

If you click on the reported causes table below, it will become legible. (I don't put together all the reported causes for the month in a single table, because I can't figure out how to do that and still make it legible.)



It looks to me as if crude is leading the Euro, but I am only thinking visually here. From October 22 to November 20, the price of crude dropped by 25.7%. In that time, the Euro lost 4.7% of its exchange value for the dollar (interbank).



The super contango just gets steeper. The graph below gives a pretty good picture I think. The price of last month oil (the contract for December 2016 delivery) lost during the spot life of CL Dec 08 $1.93/b. That is a 2.2% decline. During its spot life, CL December 08 lost $17.13/b, or 25.7% of its value. The differential on expiry between front month and last month was $35.19/b, or 70.9% of front month. (Today the differential widened even further, with the differential between front month--now CL Jan 09--and last month at $36.05/b or 72.2% of front month.)



There was a sharp switch of commercials and non-commercials in terms of being net long or short in futures in the last CFTC Commitment of Traders Report (for November 18.) That might indicate support at current prices.



The number of futures contracts on the market dropped a bit in the last reporting period, by about 32,000 contracts. The number of futures and options combined dropped sharply by 520,000, or 15.6%.



Still, the interesting data point to me recently was that Saudi Arabia needs $50/b oil to maintain a balanced budget. Given that financing is expensive and difficult to find these days, what choice do they have but to defend that price level?

Two Important New Publications

I have not had time to read them carefully yet, but they will prove important.

1. The National Intelligence Council has released its forecast of the international geopolitical environment through 2025. The National Intelligence Council used to coordinate the operations of the various arms of the American intelligence services. I am not entirely clear on its role since the changes post-9/11, but this is a glimpse into the thinking going on in the analyst departments of US intelligence.

2. The American Foreign Policy Project has published a "Joint Experts Statement on Iran" where they authors argue--rightly in my view--that the United States should pursue its interests with Iran via diplomacy. Jaw jaw is always better than war war. The notion that the silent treatment combined with loudly broadcast threats is likely to produce results in the American interest is frankly childish in my view. That said, no one, I think, is arguing that we ought to court Tehran, but instead that we ought to make ourselves available for negotiations. (They also put together a handy list of common misunderstandings about Iran.)

The signatories are very impressive folk:

Ambassador Thomas Pickering, Co-chair
Vice-Chairman, Hills & Co.; Fmr. U.S. Ambassador to the UN, Russia, Israel
Ambassador James F. Dobbins, Co-chair
Fmr. Special Envoy for Afghanistan; Rep. to the Afghan opposition after Sept. 11, 2001
Gary G. Sick, Co-chair
Snr. Research Scholar, Columbia Univ. SIPA’s Middle East Inst.
Ali Banuazizi
Prof. of Political Science & Dir.; Islamic Civilization & Societies Program, Boston College
Mehrzad Boroujerdi,
Assoc. Prof. of Political Science; Founding Dir., Middle Eastern Studies Program; Syracuse Univ.
Juan R.I. Cole,
Richard P. Mitchell Collegiate Prof. of History, Univ. of Michigan
Rola el-Husseini,
Asst. Professor, Bush School of Government, Texas A&M Univ.
Farideh Farhi,
Ind. Researcher and Affiliate Graduate Faculty, Univ. of Hawai’i-Manoa
Geoffrey E. Forden,
Research Assoc., Program on Science, Tech. & Society, MIT
Hadi Ghaemi,
Coordinator, Int’l. Campaign for Human Rights in Iran
Philip Giraldi,
Fmr. Counter-terrorism Specialist, CIA
Farhad Kazemi,
Prof. of Politics and Middle Eastern Studies, NYU
Stephen Kinzer,
Author & Award-winning Foreign Correspondent
Ambassador William G. Miller,
Snr. Fellow, Woodrow Wilson Int’l. Center for Scholars
Emile A. Nakhleh,
Fmr. Director, Political Islam Strategic Analysis Program, CIA
Augustus Richard Norton,
Prof. of Int’l Relations & Anthropology, Boston Univ.
Trita Parsi,
Pres., National Iranian American Council
Barnett R. Rubin,
Dir. of Studies & Senior Fellow, Center on Int’l Cooperation, NYU; Fmr. Special Advisor to the UN SRSG for Afghanistan
John Tirman,
Exec. Director, Center for Int’l Studies, MIT
James Walsh,
Research Associate, MIT

Daily Sources 11/21

1. Bill Faries and Shamim Adam at Bloomberg report that the heads of state from the Asia-Pacific Economic Cooperation forum will be meeting this weekend in Lima.

"With talks on a global trade deal stalled, APEC members are unveiling new bilateral agreements this week to sustain growth amid predictions of a prolonged slowdown. Peru and China announced a free trade deal on Nov. 19, while Australia and the U.S. disclosed yesterday they are planning to join a pact with four other nations to lower trade barriers."

The leaders are expected to back the crisis strategy outlined in the November 15 G-20 summit and to look for ways forward on the global trade deal known as the Doha round.

2. Brent Scowcroft and Zbigniew Brzezinski have an op ed in the Washington Post urging President-elect Obama to make the Israeli-Palestinian peace process a priority.

"Resolution of the Palestinian issue would have a positive impact on the region. It would liberate Arab governments to support U.S. leadership in dealing with regional problems, as they did before the Iraq invasion. It would dissipate much of the appeal of Hezbollah and Hamas, dependent as it is on the Palestinians' plight. It would change the region's psychological climate, putting Iran back on the defensive and putting a stop to its swagger.
...
This weakness [the political weakness of the negotiating parties limits their ability to come to an agreement by themselves] can be overcome by the president speaking out clearly and forcefully about the fundamental principles of the peace process; he also must press the case with steady determination. That initiative should then be followed -- not preceded -- by the appointment of a high-level dignitary to pursue the process on the president's behalf, a process based on the enunciated presidential guidelines. Such a presidential initiative should instantly galvanize support, both domestic and international, and provide great encouragement to the Israeli and Palestinian peoples."

Brzezinski is widely known to be a key foreign policy adviser to Obama. The piece is well-worth reading in full.

3. Gregory Gause has an analysis in the UAE paper The Nation, arguing that should Iran acquire the bomb it will not acquire commensurate influence in the Middle East. He points out that Iran's influence is primarily with non-state actors and that their clout with such organizations is unlikely to increase with the nuclear arms. Furthermore, Iranian hard power gains would probably cause other regional actors to work together to offset any perceived imbalance, and, in fact, are already doing so absent an Iranian bomb. Worth reading in full.

4. The Wall Street Journal editorial board takes issue with Democratic efforts to prevent military ties with Indonesia unless more progress is made on the human rights front in that country.

"[T]his issue is starting to impinge on U.S.-Indonesia ties. In February, Secretary of Defense Robert Gates visited Indonesia, pledging full military support. The State Department canceled joint military exercises with Kopassus [a special forces unit which is the cause of much human rights concern] two months later, under pressure from Senator Leahy. In retaliation, Jakarta has stopped cooperating in U.S. counternarcotics efforts in the region."

Indonesia is an important ally of the United States. It is a state with a moderate Muslim majority--a worldview the US wants to encourage. However, the US Navy is probably the most important protector of Indonesian interests outside of Jakarta itself, given the security requirements of the Straits of Malacca, Lomboc, and Sunda. The US is not in the best position, just now, to lecture other countries on human rights abuses. Still, US-Indonesian ties are strong enough (and important enough) to support encouragement by American Senators for an increased respect for human rights.

5. Keith Wallis at Lloyd's List reports that India is considering plans to send four warships to the Gulf of Aden in an effort to police that sea lane in response to a request from the shipping ministry. New Delhi is already replacing the guided missile frigate which destroyed a pirate "mother ship" Tuesday with a larger Delhi-class destroyer. Although India is reportedly eager to increase its naval presence short-term, it appears to be against a long-term role, favoring instead a UN-mandated operation comprised of existing US and European task forces. In the meantime, as Caroline Alexander and Marianne Stigset at Bloomberg write, Saudi Foreign Minister Prince Saud al-Faisal told reporters in Oslo today that the kingdom would contribute "naval assets" to a NATO fleet on an anti-piracy mission in the region.

"The North Atlantic Treaty Organization has four warships off Somalia. India, Malaysia and Russia have sent warships, and a European Union fleet is expected to reach the zone next month. The U.S. coalition in Afghanistan has a task force there, bringing the total of warships in the area to 15, according to French military spokesman Christophe Prazuck."

David Osler, also at Lloyd's List, reports that the UN's International Maritime Organization hailed yesterday last week's decision by the UN Security Council to toughen economic sanctions against Somalia. However, it is not known whether the Security Council extended resolution 1816, which provides the legal basis for naval intervention off the Somalian littoral and is due to expire next month. A press briefing by the Security Council said that

"Prior to the open meeting, the Security Council voted unanimously to freeze, without delay, the funds and other financial assets of individuals designated as engaging in, or providing support for, acts that threaten the peace, security and stability of Somalia."

In the meantime, Reuters reports that dozens of Somali Islamists stormed the port of Haradheere in pursuit of pirates who had hijacked the Sirius Star.

"'Saudi Arabia is a Muslim country and hijacking its ship is a bigger crime than other ships,' Sheikh Abdirahim Isse Adow, an Islamist spokesman, told Reuters. 'Haradheere is under our control and we shall do something about that ship.'"

The Somali Islamist movement--al Shabaab--pledges to stamp out piracy if they gain power.

"Some analysts, however, say Islamist militants are benefiting from the spoils of piracy and arms shipments facilitated by the sea gangs. Analysts also accuse government figures of collaboration with pirates."

6. The New York Times editorial board is skeptical of efforts to negotiate with the Taliban and calls on the Bush Administration to authorize the 20,000 additional troops military commanders have requested for Afghanistan.

7. Stephen Farrell reports in the New York Times that 10,000 supporters of Moktada al-Sadr convened in Baghdad square today to protest the status of forces agreement being debated in the Iraqi Parliament. The protesters do not believe that the agreement guarantees the eventual exit of US forces. The protest was peaceful. From an ideological perspective, the Iranian support for the agreement, which could be characterized as pragmatic, contrasts strongly with Sadr's opposition, which might be seen as principled.

8. Eric Watkins of the Oil & Gas Journal reported yesterday that Myanmar awarded the right to manage two pipelines which the two countries plan to construct to take gas and oil from the Bay of Bengal to the Chinese province of Yunnan. The oil pipeline would carry crude shipped from the Middle East to Myanmar onward to China, thus avoiding the Strait of Malacca. The gas pipeline would carry natural gas from wells in the Bay of Bengal. I've given a rough idea of the planned path of the pipelines below.



China was recently called upon by Myanmar and Bangladesh to resolve their dispute over gas exploration in the Bay of Bengal. The plan may have some added luster given recent concerns about piracy.

10. PFC Energy gave Reuters a useful estimate of the oil prices required by various OPEC countries to balance their external accounts:



The key is Saudi Arabia, the swing producer--the numbers suggest that it will be likely to defend $50/b.

11. Pratik Parija at Bloomberg reports that the Chairman of Indian national oil company ONGC, R.S. Sharma, told the media that he expected the price of oil to rebound to $100/b in the long term. He was offering the price point as justification for the overseas acquisition of Imperial Energy, Plc, which has exploration and production projects in Siberia and registered reserves of 526 million barrels of oil equivalent. ONGC has been unable to build its reserve base and thus overseas acquisitions have become a part of India's long term energy strategy. Overseas acquisitions have also become a key part of the energy security strategies of China, South Korea, and Japan in recent years. Imperial Energy represents the one key acquisition that India has managed to make in competition for overseas assets with Chinese national oil companies, which has led to some hand wringing in New Delhi. Still, recently the cost of reimbursing the oil companies for sales of subsidized petroleum products inside of India has put serious pressure on the country's finances and some may be questioning the wisdom of pursuing high cost assets in a country with a government so tightly aligned to its own domestic oil industry and the current low-price environment.

12. David Brunnstrom and Christian Lowe at Reuters report that U.S. Assistant Secretary of State Dan Fried indicated today that the US was reluctant to renew NATO dialogue with Moscow.

13. The Wall Street Journal's editorial board reports that the Russian Prosecutor General's office warned media outlets to be careful about how they report on the financial crisis. Andrew Osborn in the Wall Street Journal reports that wage arrears in Russia have jumped to over 4 billion rubles (~ $145 million)--the highest seen in a year. Government data shows that over 300,000 people in Russia are owed back pay.

14. Stephen Bierman and Gianluca Baratti at Bloomberg report that Spanish paper El Economista reported today that Lukoil has offered €28 (~ $35) a share to Criteria Caixacorp SA and Sacyr Vallehermoso SA for a stake of just under 30% in Repsol. The Spanish government had earlier voiced opposition to the notion of Gazprom taking a stake in the company. And some suggested that Spain might follow Sarkozy's suggestion of using sovereign wealth funds to defend national assets in a period where they would be sold cheap. Given the financial support provided to the major oil companies by the Kremlin in recent months, such a purchase might strike some as odd. Beyond that consideration, Bierman and Baratti point out that financing for the deal might be difficult to find.

15. Juan Forero at the Washington Post reports that opposition groups expect to make gains in Sunday's elections for governors and mayors in Venezuela.

16. Platts reports that Petrobras announced today that it has discovered an additional 1.5-2 billion barrels of oil equivalent in subsalt in the Santos Basin. The oil is light, with a reported gravity of 30ºAPI.

17. Brian Blackstone at Real Time Economics reports that Federal Reserve Bank of Richmond President Jeffrey Lacker expressed more concern about impending inflation than deflation in prepared remarks to the Tech Council of Maryland. He was skeptical of the theory that there is a causal relationship between a weak economy and a decline in core inflation. (Isn't he taking issue with the notion of supply and demand determining price, then?)

"Once the recovery begins, the temptation is to keep interest rates low until a clear rebound is ensured, Lacker noted. “The risk associated with that path is that inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery,” Lacker said."

Lacker is considered an inflation hawk.

18. Brad Setser at Follow the Money notes that yields on 3 month treasury bills are at nearly zero again. 0.02% to be exact.

Because it's Funny

Dan Ariely has an op ed in the New York Times which discusses experiments he conducted which show that high monetary compensation causes below average results.

What’s the Value of a Big Bonus?

You might think the author had a vested interest in the outcome, but it's still pretty damned funny. (Especially the bit on the banking executives declining to commit funds for further study of the phenomenon.)

Because it's Awesome

Recreate the Mammoth for a Mere $10 Mil



I mean, hell, if we can pony up $750 billion for deadbeat banks so they can think of new ways to privatize profits and socialize losses, we can full well spare a measly $10 mil to resurrect the wooly mammoth! Am I wrong?

Daily Sources 11/20

1. Brian Blackstone at Real Time Economics reports that the Labor Department released job claims data which shows there was another jump in claims for the week ended Nov. 15.

"In quarterly forecasts released Wednesday, the Federal Reserve said the central tendency of officials’ unemployment rate forecasts for the end of 2009 was 7.1% to 7.6%, though individual forecasts went as high as 8%."

Henry J. Pulizzi, also of Real Time Economics, reports that Dana Perino, White House Spokesman, has signaled that the Administration backs the extension of unemployment benefits, "Because of the tight job market, the President believes it would be appropriate to further extend unemployment benefits, and he would sign the legislation now pending in Congress."

2. The Economic Times reports that the European Commission is planning a €130 billion (~ $164.2 billion) stimulus plan according to a spokeswoman for the German economic ministry. That would equate to about 1% of GDP for each member state. (For Germany that means something along the lines of €25 billion.)

3. Maya Jackson Randall at Dow Jones reports that the minutes of the October 28-29 Federal Open Market Committee meeting demonstrate that they stand ready to cut the Federal Funds Rate further, should that prove necessary. The minutes also reveal that most Committee members expected the economy to contract in the second half of 2008 and the first half of 2009. In a related story, Jason Clenfield at Bloomberg reports that JP Morgan economist Jason Clenfield advised clients that he expected the Fed to cut the Federal Funds Rate by 50 basis points (0.5%) in each of the next two FOMC policy meetings on December 16 and January 28 to 0%. Paul Krugman argued the same on November 7. Neither, however, feel that that would mean that the Fed had emptied its economic tool kit. Arnold Kling at EconLog argues that zero isn't even necessarily the lower bound for interest rates, and that you might have negative interest rates. He is speaking theoretically, but it does make a kind of sense--in a deflationary environment, you could pay interest to be in dollars and make a return.

4. Sahar Ahmed at Reuters reports that Pakistan and the IMF have agreed upon terms for a $7.6 billion emergency loan to the country. "The interest rate on the credit facility would vary between 3.51 and 4.51 percent with changes according to market conditions, and would be payable between fiscal 2011/12 and 2015/16." Delphine Strauss at the Financial Times reports that Turkey is close to an agreement for a loan from the IMF in the region of $20-40 billion.

5. John Acher and Wojciech Moskwa at Reuters report that Norways Sovereign Wealth Fund has increased its holdings of European stocks from 0.77% of total European securities to 1.25% and on the lookout for purchases worldwide. The Norwegian finance ministry has given the fund permission to invest up to 5% of its assets in real estate. The fund's Executive Director, Yngve Slyngstad, says they have about $20 billion waiting to invest in real estate, but that they are not sure if they will enter the market in the first or second half of 2009.

6. Luke Pachymuthu at Reuters reports that Koch and Shell are renting oil tankers for use as storage.

"Koch has booked Very Large Crude Carrier (VLCC) the Dubai Titan, with capacity to hold over two million barrels, for storage in the U.S. Gulf Coast, ship brokers said on Thursday.

Koch has already taken two other VLCCs for storage in the U.S. Gulf, they said.
...
Oil major Royal Dutch Shell has booked a second supertanker to be used for storage, shipbrokers said on Thursday."

Although the container shipping market seems to have collapsed, anecdotal evidence suggests that oil tankers are still fetching profitable rates of around 70 world scale. That suggests to me that either land based storage is becoming scarce or that financing for floating storage is somehow easier to secure.

Either way, the contango in oil is so steep, that floating storage is a profitable proposition even though demand for oil tankers is fairly steady. (Yesterday, the differential between front month and the Dec '09 contract was $10.21/b or 19% of the front month price. The differential between front month and the Dec '16 contract was $32.86/b, or 61% of the front month price.)

Jamie Dale reports that Black Sea and Middle east shipping rates have doubled on piracy concerns. The Baltic Dry Index shows a very small uptick.



Alaric Nightingale and John Martens at Bloomberg report that with the announcement--telegraphed yesterday--today that Maersk will stop sailing ships through the Suez, and Euronav NV, TMT Co. Ltd., BW Shipping Managers Pte, and Frontline Ltd. are reviewing doing so themselves. Odfjell SE is the other shipping company that has official abandoned the Suez route. Combined the companies control 117 supertankers, 2.7 days of global demand or 229.5 million barrels of oil. Tony Gray at Lloyd's List reports that "Senior figures in the maritime industry are calling for a co-ordinated approach to dealing with the crisis in the shipping industry." That is, some are calling for the creation of a cartel to artificially take shipping supply off the markets and thus shore up price.

7. Gary Kasparov has an editorial in the Wall Street Journal saying that Obama has the chance to start fresh with Russia, and that he should do so by labeling Putin a dictator from the start.

8. Del Quentin Wilber at the Washington Post reports that US District Judge Richard J. Leon has ordered the release of five Algerian detainees held at Guantanamo. Leon was a Bush appointee. He took the extraordinary step of urging the government not to appeal, saying that 7 years was long enough for these people to face uncertainty in terms of their fate.

9. Juan Cole at informed comment has a long post on al-Qaeda leader Ayman al-Zawahiri's long anti-Obama video released onto the internet Tuesday. He spends a long time pointing out the inaccuracies in Zawahiri's characterizations of the facts which is just odd. The main thing to be learned, it seems to me, from the video is how weak al-Qaeda's--and in the Middle East generally--understanding of the West is. There is little point in debating the facts with the leadership of al-Qaeda--for them nothing is as it appears. This is not just true of radical groups, but also of leadership in important nations like Iran. The Bush Administration has only lent more credibility to this perspective over the last eight years, of course.

10. Henry Meyer and Lyubov Pronina at Bloomberg report that Vladimir Putin has pledged to a conference of the United Russia party--which he leads--to do everything in his power to prevent the financial collapse of the country. He announced measures to increase welfare payments and cut corporate taxes and promised to defend the ruble. He said, "We'll do everything we can to prevent a repeat in our country of the problems of past years, the collapse of past years."

11. Eric Watkins at the Oil & Gas Journal reports that the Indonesian government has ordered oil firms to keep funds for energy projects in domestic banks. Companies that do not do so will not be allowed to participate in the cost recovery scheme for the various projects.

"Djoko Harsono, BPMigas deputy for finance, said, 'This policy aims to help boost rupiah value against the dollar. We want contractors in energy projects to put all their US dollar funds in local banks, especially state-owned banks.'"

12. In another interesting article by Eric Watkins, Saudi Arabia announced that it has canceled its contract for the Manifa field with Snamprogetti, which would potentially have added 900 kb/d in capacity by 2011. The project to add the capacity is now under review.

13. Eric Watkins at the Oil & Gas Journal report that CNPC and Costa Rica's Recope are considering plans to build a 200 kb/d capacity refinery in that country. "As part of the Moin development, Recope announced plans in February to expand its storage capacity by 550,000 bbl to 3.95 million bbl by 2011."

Daily Sources 11/19

1. Jack Healy at the New York Times reports that the US Labor Department released the updated Consumer Price Index, which showed that consumer prices fell by 1% in October from September. This is the largest month-over-month decline since the Index was first compiled in 1947. 0.1% of the decline was core prices--consumer prices for all products minus food and energy. The bulk, therefore, of the price decline was in petroleum product prices--mostly retail sales of gasoline and diesel. "And while energy prices fell sharply in October, they were still an unadjusted 11.7 percent higher than a year ago, thanks to a long run-up in oil and energy costs." Brian Blackstone at Real Time Economics reports that the Vice Chair of the Federal Reserve Donald Kohn said that there is an increased risk of deflation to the economy now, but that its chances are still pretty minimal.

"Kohn noted that while 'some have argued that we should save our ammunition' on interest rates, he thinks that 'were we to see this [deflation] possibility…we should be very aggressive with our monetary policy, as aggressive as we can be.' Indeed, Kohn said the lesson from Japan’s experience with deflation is 'not to let that get ahead of us.'"

2. The IEA's This Week in Petroleum shows that crude stocks built by 1.6 million barrels in the week ending November 14--stock levels are little above the historical average. The Platts survey had analysts expecting on average a 1.2 million barrel build. Gasoline stocks built by 500,000 barrels and distillate stocks fell by 1.5 million barrels--both are at the bottom of their historical averages. Analysts expected builds of 700,000 and 900,000 in gasoline and distillate respectively.

FT Alphaville noted that Goldman Sachs most recent note took a look at the super contango in oil on NYMEX I began taking notice of several weeks ago. Goldman noted that contangos this steep have only been seen thrice before in the last twenty years, once in 1998, and briefly at the end of 2001 and 2006. (Goldman gives a decent layman's explanation of why contangos are structurally difficult to maintain.) In all of the historical occurances of these contangos however, the reason was that the world had run out of places to store the oil. Goldman asserts, as I did the other day, that financing difficulties are creating this problem, not storage, as the EIA report shows, crude stocks built by 1.6 million barrels last week. Gregor MacDonald points out in a post that the yield curve on US Treasuries has steepened to 10 year highs in a sort of parallel to the contango seen in oil. He believes this is strong evidence that we will see inflation going forward, not deflation. Mish's Global Economic Trend Analysis has an interesting post looking at the story that American Express delinquency rate hit 4.4% as defaults reached 6.96%. He concludes that the economy is facing a credit freeze--which suggests at least near term deflation.

3. Anthony Faiola and Zachary A. Goldfarb at the Washington Post report that the Treasury Department released data yesterday which showed that China passed Japan in September as the largest holder of US treasuries. China now owns $1 in $10 of US government debt.

"China's investment in U.S. Treasury bonds surged by $43.6 billion to $585 billion in September, pulling ahead of the Japan, which now holds $573.2 billion worth. Overall, analysts say China's holdings may be $800 billion or more. China is thought to be purchasing U.S. debt through third countries, purchases that are not immediately recorded by the Treasury as being held by China, analysts say."

That last bit is interesting: why would China be trying to avoid detection of its US debt purchases? The analysts quoted see the interdependency between the US and China as a bad thing on balance. The vulnerability, however, cannot be exploited without doing grave damage to their own economy. That said, it does seem that the financial crisis is making China more keen to decouple its economy from the West, in as much as that is a realistic possibility. However, in an interesting post by Yves Smith at naked capitalism, Japanese economists are suggesting that the United States government sell debt denominated in Yen. Ms. Smith's analysis conflates suggestions originating inside the private sector with an official government position from Tokyo--no one here is playing "the heavy"--but it remains interesting that there is a vigorous debate going on in Japan as to how to leverage its current account balance. That said, it seems extremely unlikely that such an idea might be picked up at the US Treasury. (The fact that the Carter Administration did so would only make it that much less likely.)

4. Alan Beattie at the Financial Times reports that Fu Chengyu, CEO of CNOOC, told an industry conference in Barcelona that in a recent meeting of national oil company executives in Beijing the consensus was that oil prices would fall to $40/b. 27 national oil companies from 23 different countries attended the meeting, and Mr. Fu characterized its tone as one of "panic." Mr. Fu said that the meeting took place on either October 17 or 18 and that most executives expected prices to quickly rebound to $50-55/b, but that those prices were not sufficient to support much of their planning.

"'If the oil price remained around $50 or $55, that would mean cutting at least 60 per cent of budgeted projects for the next one or two years from the national oil companies,' Mr Fu said.

Of the new extraction projects planned by state-owned oil companies in deep-sea areas, the lowest break-even oil price was about $60 a barrel and the highest about $90 per barrel, he said."

In an interesting counterpoint, the EIA pointed out today that they estimate that US crude production is going up, predicting an 8.1% increase in 2009.



Some of this will be production shut in from the hurricanes--a little more than 300 kb/d is still shut in--but most is from new productions. The EIA specifically expects the Thunderhorse and Tahiti deepwater platforms to produce most of that increase. That is, most of the increase will come from the Gulf of the Mexico, which means that it will be especially vulnerable to weather extremes.



Platts also reports that Petrobras, which has all-of-a-sudden become a major exporter and holder of crude, is considering a change in its production target, from heavy crudes to light sweet crudes favored by most refiners. Most of the light sweet crudes are offshore.

5. Anna Shiryaevskaya and Nadia Rodova at Platts report that Lukoil Deputy CEO Leonid Fedun has called on Russia to cooperate with OPEC in oil production cuts.

6. Timothy R. Homan at Bloomberg reports that US housing starts in October were at the lowest level seen since the Commerce Department began keeping track in 1959. "Construction starts on housing fell 4.5 percent in October, less than economists forecast, to an annual rate of 791,000 ...."

7. Keith Bradsher at the New York Times reports that Chinese automakers are sounding out Beijing on the possibility of emergency assistance. Chinese automakers are expected to sell 10 million vehicles in 2008, as opposed to the 14 million anticipated in the US. Sales in China dropped slightly in September and October, just as the companies manufactured more in order to avoid a run of layoffs. The BBC reports that companies in the two provinces of Hubei and Shandong have been told by the authorities that they must seek official approval for layoffs of 40 or more workers. The piece reports that in Shandong 700,000 people have lost their jobs so far this year.



In a predictable side effect, Ariana Eunjung Cha at the Washington Post reports that Chinese authorities are becoming more reluctant to enforce environmental regulations as the economic crisis deepens. Also, the inclination is to spend money on growth as opposed to projects designed to safeguard the environment.

8. The Iraq Oil Report has what it says is the text of the Status of Forces Agreement approved by the al-Maliki Administration and signed by US Ambassador Ryan Crocker.

9. Juan Cole at Informed Comment has an interesting translation of an article published in a Kurdish regional paper, asking about a militia being put together by al-Maliki, known as Isnad, or "Support." The author asks, "who can identify the differences between Saddam's Al-Quds Army and Dr Nuri al-Maliki's 'Support Councils'? It is a simple question, is it not?" I have no idea of whether the accusation has merit. However, if al-Maliki does not believe he has controlling interest, so to speak, in the official Iraqi armed forces, then a praetorian guard is a rational choice.

10. Faiza Saleh Ambah at the Washington Post reports that Saudi Foreign Minister Saud al-Faisal told reporters in Athens yesterday that Riyadh was going to join the UN Security Council's initiative to send ships and planes to Somalia's littoral in order to fight piracy. (Greece is a major center of international shipping.) Platts reports that the Arab countries bordering the Red Sea will hold an emergency conference tomorrow in Cairo to coordinate policing of the sea lane as well as political efforts at the UN and elsewhere in support of an international effort there. Cairo is where OPEC will hold its extraordinary meeting on November 29 and, obviously, Egypt is the home of the Suez Canal. Emily Wax at the Washington Post report that today an Indian frigate sank a pirate "mother ship" 285 nautical miles southwest of the coast of Oman. India is a net oil importer and imports nearly all of its requirement from the Middle East.





This comes on news reported by David Osler and Nigel Lowry at Lloyd's List that AP Moller-Maersk, the Danish shipping firm, is expected to make a decision to avoid the Suez Canal today. On November 6, a Maersk subsidiary, Svitzer, announced its decision to sail the Cape of Good Hope instead and so most expect the full company to do the same. Tony Gray at Lloyd's List blogs that historically the closure of the Suez Canal has led to better times for shipping companies. The Six Day war led to the mining and bombing of the waterway in 1967 creating the largest boom in tonne-mile demand ever seen. The canal was really re-opened until 1975, after which time the (new at the time) Very Large Crude Carriers had made their speculative builders very wealthy. Gray's post is well worth reading in full.

It may be important that the hijacking of the Sirius Star took place far from the coast of Somalia. 450 nautical miles to the southeast, just north of the Seychelles, as the map I altered below should show. If the naval powers decide they do not have the resources to police the Gulf of Aden, then ships may be forced to give the east coast of Africa a wide berth on the way to the Cape of Good Hope. That would suggest to me--a non-expert--even further upward pressure on tonne mile demand.



The International Chamber of Commerce hosts a "Live Piracy Map of 2008" which provides a virtual push pin for each attach which then links to details on the incident. Caroline Alexander and Flavia Krause-Jackson at Bloomberg report that the Saudi government is in negotiations with the hijackers, which have apparently anchored the ship off the Somalian province of Puntland.



NPR carried an enlightening interview with J. Peter Pham, director of the Nelson Institute for International and Public Affairs at James Madison University, on the character of the Somali pirates yesterday. Will McCants at Jihadica noted that the a jihadist website posted the question recently whether Shabaab--the Islamist movement in Somalia--will declare itself a fully fledged state soon. Shabaab has consolidated it control of southern Somalia, south of Mogadishu, and thus south of the southernmost province of Puntland, Mudug. Given the renewed interest in talks with the Taliban, and world-wide interest in security off the Somalian littoral, this will be very interesting to watch.