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.