Daily Sources 12/1

1. Ambrose Evans-Pritchard at the UK Telegraph writes that a Citibank report asserts that traders are paying close attention to rumors coming out of China suggesting that Beijing is considering "boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies." The report predicts that gold will go to $2,000/ounce, arguing that the economic crisis is so deep and widespread, and the remedial action required of governments so radical, that we are either in for an inflation shock once economies begin to recover or for a period of instability, unrest, and international conflict. Both would traditionally be good for the price of gold. (The Telegraph is not known for the sobriety of its commentary.) In a related story, Judy Chen and Belinda Cao at Bloomberg report that today the yen fell 0.7%

"after the People's Bank of China set the daily reference rate at the weakest level since August, prompting speculation policy makers favor a depreciating currency to spur demand for Chinese goods. ... The yuan has now lost all the gains it made since the [the US and China] last held trade talks in mid June, after it advanced 6.6 percent in the first half of 2008."

Maureen Fan at the Washington Post reports that Chinese President Hu Jintao told a politburo meeting this weekend that "'External demand has obviously weakened, and China's traditional competitive advantage is being gradually weakened' as international demand is reduced." Dow Jones reports that the China Federation of Logistics & Purchasing said that China's Purchasing Managers Index fell to 38.8 in November from 44.6 in October. A reading above 50 indicates growth, anything below indicates contraction.

2. Roland Jackson at the AFP reports that OPEC decided in their meeting in Cairo on the 29th to maintain the current production quotas. The organization is looking at data to see to what extent various members are exporting at quota. Reuters reports that OPEC President Chakib Khelil told the media that the commercial inventories of the OECD will likely reach 59 days of supply if OPEC doesn't take action in the December 17 meeting. "Latest estimates are that stocks are at 55-56 days of cover and several OPEC ministers have said they would like to cut inventories to 52 days."

On Saturday, Saudi King Abdullah said in an interview published in a Kuwaiti paper that "We think that a fair price of oil is $75/b." In the meantime, Reuters reports that Riyadh has shelved plans to restart the Dammam oil field, which was expected to produce 75 kb/d and 100 million cubic feet of natural gas a day. The contract was to be awarded in the second quarter of 2009. The AFP reported that Oil Minister Gholam Hossein Nozari told journalists on Sunday: "There is oversupply of two million barrels per day on the market ...." Ladane Nasseri and Ayesha Daya at Bloomberg report that today in Tehran Secretary General Abdalla el-Badri told the media that "Everybody is in favor of a cut in the Algeria meeting - we are all gearing toward a cut."

El-Badri also said,

"We told Russia that OPEC will take action to lower output, but the burden is heavy. Mexico and Norway have a decline by themselves, but Russia promised to join OPEC in trying to solve the problem."

If Russia does decide to coordinate a production, export, or effective supply cut to the oil markets, it will represent a tectonic shift in their global strategy. Since the Soviet Union began piping natural gas to Europe in the 1980s, Moscow has geared its energy policy to integrating itself with Europe and supplying its full productive capacity. China, another large consumer, also appears to be the beneficiary of that policy. Were Russia to decide its interests were more closely bound to the producing nations than to the consuming nations, a number of long-held policies might be revisited.

In a related story, Platts reports that Moscow has given the green light for a pipeline to be built connecting the Druzhba (or "friendship") pipeline to the Baltic Sea port of Ust-Luga. Ust-Luga is a port to the west of St. Petersburg in the Luga Bay. The map below gives an idea of the path of the Druzhba pipeline and where the Baltic Pipline System 2 would be placed, though it wouldn't terminate in Primorsk, but to the south west. The pipeline would have a 1 mb/d capacity upon completion. By late 2012 it would be expected to have 600 kb/d in capacity.



Of course, exporting via pipeline to Europe means that the crude can go nowhere else. Via tanker it could have any destination outside of Russia. In another related story, Sam Fletcher at the Oil & Gas Journal writes that GCES has a report that Moscow, at the urging of Prime Minister Putin, is in the process of reconfiguring their crude export tariff system. Under the new system the export duty would be determined by the 30 day average of the price for Urals crude ending in the middle of the month prior to implementation, as opposed to the current system which determines the tariff by averaging the price seen in the previous two months every two months. Though this system would certainly be an improvement, it does not on the face of it appear to be flexible enough to prevent financial losses to either the government or the companies given current volatility.

3. Nadim Kawach at Business 24/7 reported Sunday that Saudi foreign assets grew by about SR48 billion ($12.8 billion) in October, but grew at a rate of about 30% less than that seen in previous months. The Saudi Arabian Monetary Agency announced yesterday that the foreign assets held by the kingdom's central bank stood at SR1.679 trillion (~$448 billion) at the end of October.

4. Alex Nicholson at Bloomberg reports that VTB Bank Europe published its Purchasing Managers Index for Russia fell to 39.8, its lowest level, from 46.4 in October. These indices mostly measure market sentiment.

5. Jan Cienski at the Financial Times reports that the Polish Prime Minister, Donald Tusk, told him that Warsaw has no intention of accumulating huge debt in order to combat the financial crisis. Tusk indicated that Poland had not been deeply affected by the crisis so far. His comments align Poland with Berlin in regards to the stimulus package proposed by the European Commission last week. Warsaw on Sunday announced a stimulus package of 91 billion zlotys (~ $30.6 billion), but apparently very little of those monies represent new, previously un-budgeted, spending. Well worth reading in full. Simon Kennedy at Bloomberg reports today that "[Manufacturing indexes] for Poland, Hungary, Sweden and the Czech Republic ... showed some of the steepest-ever declines as recession struck their main export markets." If I remember correctly, the zloty has been under pressure as investors have repatriated their equity. (From June 1 to November 30, the zloty lost 26.8% of its interbank value versus the dollar.)

6. Eurointelligence reports that German Chancellor Angela Merkel secured the backing of her party for her policy of delaying any tax cuts until after the election in September 2009. Finance Minister Peer Steinbruck told Der Spiegel that he thought the crisis should not be countered with government money. The papers in Germany favor the government approach. Bertrand Benoit at the Financial Times reports that Merkel told her party conference that "Germany will keep analyzing the situation. We will always keep all our options open. I repeat: all options."

7. Pradeep Rajan at Platts writes that Gibson Shipbrokers released a report showing that Shell and Koch have taken out time charters of very large crude carriers mostly for storage purposes. Both Shell and Koch have long term contracts with producers, and given the current market, much of that oil, if refined, would put further downward pressure on refined products prices. They also may be inclined to capture profits afforded by the current steep contango in crude oil prices.

8. RIA Novosti reports that the Saudi Ambassador to Kenya told reporters that the Sirius Star will be returned to Saudi Arabia within two days. He also said that no ransom would be paid. Jeffrey Gettleman at the New York Times reports that the head of a Kenyan maritime association charged with mediating between the pirates who captured the Ukrainian freighter lugging 33 T-72 battle tanks, grenade launchers and anti-aircraft guns told the media that the pirates have agreed on a ransom. The ship is expected to be released today or tomorrow and the final ransom is estimated at between $3-5 million. In the meantime, Oliver Smith at the UK Telegraph reports that Somali pirates attacked a luxury cruise liner in the Gulf of Aden yesterday. The liner possesses a "long-range acoustic device" which apparently was used to drive off the attackers.

9. Sudarsan Raghavan and Saad Sarhan at the Washington Post report that Grand Ayatollah Ali Sistani expressed on Saturday concern about the status of forces agreement the Iraqi Parliament ratified earlier in the week. Sistani thought that much of the language in the pact was a "mystery" and that he could discern no guarantee of a return of sovereignty to Baghdad.

10. Rama Lakshmi at the Washington Post reports that anger, quite understandably, is building over the attacks in Mumbai, leading to the resignation of the Indian home minister. Efforts to console the families of victims by government representatives have been met with snubs. Preliminary investigations by Indian authorities lead them to believe that the gunmen were trained in Pakistan and came to Mumbai via boats on the Arabian Sea. This has led a senior representative of the Hindu nationalist BJP to say,

"'It is time for unilateral action against the training camps in Pakistan. If the U.S. can go into Afghanistan to punish the Taliban and chase Osama bin Laden, why should India hesitate?'"

Condoleeza Rice is being sent to New Delhi on Wednesday to try and help calm tensions. An FBI team has been sent to help investigate the scene. Pakistani representatives deny any link to the terrorists, but Candace Rondeaux and Craig Whitlock report in the Washington Post today that the Lashkar-i-Taiba, the Kashmiri terrorist organization currently thought responsible for the shootings, has been operating openly in Pakistan as Jamaat-ud-Dawa.

"Jamaat-ud-Dawa was instrumental in delivering aid to victims of the 2005 earthquake in Kashmir. ... The US government classified Jamaat-ud-Dawa as a terrorist group in April 2006, calling it an 'alias' of Lashkar. But the Pakistani government has not reciprocated and allows the network to raise money, run religious schools and offer social-service programs. It hosts an extensive Web site, with versions in English and in Urdu."

11. Christopher Toothaker at the Associated Press reported yesterday that Hugo Chavez is asking supporters to petition for a national referendum to abolish term limits in the Venezuelan Constitution.

"'Last year, when we lost the referendum, I said I should accept the majority's decision,' the former paratroop commander told a crowd of red-clad government supporters at a rally in Caracas. But now, he added, 'I say you were right: Chavez will not go.'"

12. Tim Johnston at the Washington Post reports that thousands of government supporters rallied in Bangkok this Sunday. Pro-government supporters are wearing red shirts. Anti-government: yellow. So far there has been little violence between the two factions, but there is growing anxiety about the possibility of it. Given that the anti-government protesters (or members of PAD) allegedly number about 20,000, it seems odd that they have managed to shut down so many arteries of the city for so long. Considering that the pro-government supporters are urban, they should outnumber the mostly rural PAD. However, Johnston notes, "The government has only tenuous control over the army and police, which seem to be following their own agenda, allowing the [anti-government] PAD to break the law with impunity."

13. Lauren Etter at the Wall Street Journal reports that Brazil's agricultural sector is slowing down as farmers are having a hard time finding the financing they need for fertilizer, pesticide, and seed. Brazilian farmers get most of their financing from multinational agricultural firms like Cargill, as opposed to from local banks. Evidently these firms are being tighter with credit as they try to conserve cash. Worth reading in full.

14. The Associated Press reports that the Fed is widely expected to cut the federal funds rate by 50 basis points (0.5%) in their next meeting scheduled for December 15-16.

15. Timothy R. Homan at Bloomberg reports that the Institute for Supply Management’s US factory index dropped to 36.2 in November, the lowest level seen since 1982. "[T]he UK’s Chartered Institute of Purchasing and Supply’s factory index was at 34.4, the least since the survey began in January 1992."

16. Emelia Sithole-Matarise at Reuters reports that the spread on 10 year US Treasury credit default swaps has widened to 68.4 basis points (0.684%) today. Evidently the notion of a US default is slowly gaining some credence in the market. (I remain confused, though, as to how these instruments would actually provide any insurance given that the CDS is denominated in dollars .)