Daily Sources 11/5

1. Paul Kedrosky at Infectious Greed has a very interesting post ranking the institutions with the largest net exposure to credit default swaps. It turns out that of the 18 institutions most exposed, nine are governments. To wit: Italy, Spain, Brazil, Germany, Russia, Turkey, South Korea, France and Portugal.



I am somewhat non-plussed, therefore, as to why Merkel's administration is so against a coordinated European response to the financial crisis. According to Eurointelligence, the French are similarly confused by the response. Germany apparently wants to put the kibosh on Sarkozy's recent proposal for holding regular euro summits. In the meantime, Italy will provide up to €30 billion to recapitalize its bank over the next few days. Also,

"The European Commission yesterday proposed a new strategy to improve access by European companies to some markets for rare and strategic commodities, amid suggestions that China and some other emerging markets have signed contracts with an intent to corner the market."

Very interesting, in a number of ways, and it sure would be nice to know that that new strategy is.

2. Steve Gutterman and Vladimir Isachenkov at the Associated Press report that Russian President Dmitry Medvedev announced in a state of the union speech that Russia would deploy short range missiles near Poland in order to counter the anti-missile shield that the US plans to install there.

"'From what we have seen in recent years — the creation of a missile defense system, the encirclement of Russia with military bases, the relentless expansion of NATO — we have gotten the clear impression that they are testing our strength,' Medvedev said."

State Department spokesman Sean McCormack said in response today that "But, again, this [the anti-missile shield] is not directed at them. Hopefully one day they'll realize that." The notion that Washington apparently wants to sell Moscow, or maybe the American public--it is so absurd I frankly am unsure who its intended audience is--is that the anti-missile system is meant to defend Poland from Iran. I simply cannot make sense of why such obvious nonsense would be the official statement of the United States of America! What American interest is being served?

Medvedev also announced that the United Russia Party was considering an effort to change the Constitution so as to extend the President's term from 4 to 6 years. In related news, Platts reports that Russia has purchased Oman's 7% stake in the Caspian Pipeline Consortium bringing its share to 31%. CPC is

"a privately owned, Chevron-led crude pipeline that currently pumps around 670,000 b/d from Kazakhstan through Russia to the port of Novorossiisk on the Black Sea.

Oman said earlier this year it wanted to sell its stake because of its inefficiency and complicated shareholder structure. State shareholders Russia and Kazakhstan had pre-emptive rights to buy the stake, which Oman values at $700 million.

Kazakhstan had hoped to split the stake with Russia."

3. RIA Novosti reports that Gazprom CEO Alexei Miller told reporters that OPEC ministers are considering further cuts of as much as 10% of current production. Stefano Ambrogi at Reuters writes that Lloyd's Marine Intelligence Unit estimates that OPEC seaborne exports (excluding Ecuador) fell to 22.837 mb/d from 23.031 mb/d--194 kb/d--seen in the four weeks beginning September 21. The consultancy says that shipments are down 830 kb/d from the peak seen in mid-September.

4. Tony Gray at Lloyd's List reports that Jefferson Clarke at Poten & Partners told a conference that rates for very large crude carriers were likely to remain above long-term averages despite the current price climate.

"He said the US’s domestic production was 'not robust' and output from some relatively close sources of imports, such as Mexico, was in decline.

Thus, long-haul cargoes would continue to be in demand.

'The Middle East will have a real impact on tonne-mile demand,' Mr Clarke said.

'Tanker demand significantly increases with incremental growth of long-haul trades.'
...
Fleet growth so far this year had been modest, with the VLCC sector increasing only 1%, and suezmaxes actually experiencing nil growth."

5. The EIA's This Week in Petroleum reported that crude inventories remained unchanged for the week of October 31 at 311.9 million barrels, versus analyst expectations of a 1 million barrel build. Crude stocks are slightly above the historical average. There was a build in gasoline stocks of 1.1 million barrels versus expectations of a 700,000 barrel draw. Gasoline stocks are at the very bottom of their historical averages. Distillate stocks grew by 1.2 million barrels which was basically what was expected by Wall Street and is a just a bit below the historical average. The report also had this to say about the outlook for 2009:

"OPEC surplus capacity could reach 4 million bbl/d by the end of 2009, nearly all in Saudi Arabia, providing Saudi decision-makers with a significant cushion that they could use to dampen the impact of future disruptions or geopolitical uncertainties.
...
The credit crunch and the recent decline in prices for oil and natural gas are likely to affect exploration and production investment in both OPEC and non-OPEC countries. Some countries with nationalized oil sectors will be under considerable pressure to maintain the flow of oil revenue to social programs, reducing resources available for reinvestment in the oil sector. High-cost projects such as Canada’s oil sands or Brazil’s subsalt, already technically and financially demanding, could face additional challenges to their profitability. (In fact, delays in some new oil sands projects in Canada have already been reported.) Insofar as non-OPEC producers are concerned, the major investor-owned oil companies are likely to be less affected by the credit crunch than independent producers. The greater the delays in investment in existing and new oil fields, the lower production will be once the world economy and oil demand recover, increasing the risk that we will return to a tight supply situation."

6. Ben Lando at UPI has acquired a copy of a heads of agreement between the Iraqi Oil Ministry and Royal Dutch Shell--the Anglo-Dutch major. The HOA would give a joint venture between Shell and the government of Iraq sole access to natural gas production in the province of Basra of which Iraq would hold a 51% stake and Shell 49%. Most of the natural gas covered by the JV is mostly associated gas--or gas that is produced as part of the drilling process for oil. (Just now most associated natural gas is either flared off or re-injected into the oil fields.) The JV will purchase the natural gas from Iraqi state oil companies and either transport it to customers or convert it into salable products.

"Shell, which has proposed to the Iraqi government a nationwide gas master plan, will create a "high-level evaluation of dry gas export schemes."

Shell would have the rights to all liquefied natural gas. Although Iraq currently does not have LNG facilities, the HOA tasks Shell with assessing the 'feasibility of an early LNG export project.'"

It appears that the HoA also would also basically give the JV rights to any gas found offshore Basra in the Persian Gulf. (As you can see from the map below, Basra is the only littoral province in Iraq.) The JV would be for 25 years, renewable, and all revenue, dividends, and investments will be split 51/49 as well. It would be subject to corporate taxes.



7. Nizam Ahmed and Masud Karim at Reuters report that the Foreign Minister of Bangladesh met with the Chinese Ambassador to that country in Dacca to appeal for Chinese help in resolving the maritime dispute with Myanmar. Bangladesh is pursuing a diplomatic solution to the row and sent a diplomatic team to Yangon Tuesday in that effort.

8. Yves Smith at naked capitalism reports that Nouriel Roubini thinks China is headed for a hard landing economically.

"[N]et exports (or the trade balance surplus) are close to 12% of GDP (up from 2% earlier in the decade) and exports represent about 40% of GDP. Real investment in China is about 45% of GDP and, leaving aside the part of this investment that is housing and infrastructure spending, about half of this capex spending goes towards the production of new capital goods that produces more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most of Chinese aggregate demand depends on its ability to sustain an export based economic growth."

But the main importer, the US, will not have an appetite for more goods at the moment. (Though, if I remember correctly, American imports from China have been flat for two years now and the problem now is not just shrinking American demand but shrinking European demand.) Either way, worth reading in full.

9. Platts reports that China is expected to cut its guideline prices for oil products in mid-November in response to the fall in international crude prices. "'We have been told to clear our high inventory as fast as possible as it is widely expected the guidance price will be cut in mid-November,' a source with a Sinopec refinery in Shandong said."

10. Irene Tang at Platts reports that Taiwan's national oil company, CPC, is working to end Taiwan's oil product subsidy program by November 27. The company has informally raised the issue with the ministry of economic affairs, but has yet to receive a firm answer. Taiwan instituted subsidies on May 28, 2008, as a measure to mitigate gas pump pain as crude prices soared. (Taiwan has no significant oil production of its own and must import to meet its requirements.)

11. Renae Merle at the Washington Post reports that the stock market fell on a variety of bad economic data. The Institute of Supply Management saw a decline in its service sector index to 44.4 in October from 50.2 in September. ADP found that private employers cut 157,000 jobs from September to October on a seasonally-adjusted basis. "GMAC Financial Services, which is owned by Capital Management and General Motors, reported a $2.52 billion third-quarter loss, compared with a loss of $1.6 billion during the same period last year."