Tuesday, December 16, 2008

Daily Sources 12/16

1. Maher Chmaytelli and Ayesha Daya at Bloomberg report that Saudi Arabian Oil Minister Ali al-Naimi told journalists today in Oran that "there will be a cut in production of about 2 million barrels." To borrow a phrase, the Saudis are the "deciders." The question now, it seems, is just how will Russia coordinate a production cut with whatever the cartel announces tomorrow. Platts reports that Igor Sechin, Russia's First Deputy Prime Minister in charge of oil, will meet with OPEC governors later today in Oran, Algeria. Energy minister Sergei Shmatko is with Sechin, as well as a coterie of senior executives from Lukoil, Rosneft, Surgutneftgaz, TNK-BP and Gazpromneft.

If Russia coordinates with OPEC, together they represent a little over 50% of total world crude supply. Eric Watkins at the Oil & Gas Journal reported yesterday that the current President of OPEC, Algerian Oil Minister Chekib Khalil, said "We always wanted [Russia] to join OPEC." He went on to say that "We expect concrete support from [Russia.]"

In this context Platts has the fascinating story that Russia will delay the introduction of a new reserves methodology to 2012. The new methodology would have more closely synchronized reserves accounting with Western methods which account for things such as whether or not, given the prevailing price environment, it would be profitable to develop any given oil deposit. These accounting methods "shrink" reserves in low price environments and "grow" them in high price environments. The Russian natural resources ministry spokesman indicated that the agency expected valuations of reserves held by Russian companies to grow under the new methodology. However, given cooperation with OPEC--and the potential decision at the top that Russian interests are more closely aligned with commodity exporters than the developed world--it looks like decisions about increasing transparency will be put off. Synchronizing Russian reserves accounting with the West would have clearly been in the interests of consumers as opacity is one of the central difficulties plaguing the oil markets.

Also today, Alexander Kwiatkowski at Bloomberg reports that OPEC, in their monthly oil market report, predicted that global oil demand would fall by 150 kb/d to 85.68 mb/d in 2009. The organization predicted that the call on OPEC, or demand for crude produced by the cartel, will fall by 700 kb/d to 30.22 mb/d. It also forecast that non-OPEC supply would fall by 170 kb/d in 2009.

Anthony DiPaola and Camilla Hall at Bloomberg report that the Saudi Arabian Monetary Authority reduced its main benchmark lending rate to 2.5% from 3% today.
"The step was taken 'to ensure adequate system liquidity to meet genuine domestic credit demand and in view of evolving global developments,' the central bank said in a statement."
The Saudis peg the Riyal to the dollar and have seen inflation slow somewhat recently from an annual rate of 10.9% in August to a rate of 10.4% in September. (Edmund Andrews at the New York Times reports that the Federal Open Market Committee cut the federal funds rate by between 0.75 and 1%, bringing it to a range of between 0-.0.25%.)

Hector Igbikiowubo, Yemie Adeoye and Victor Ahiuma-Young at the Nigerian Vanguard report that there is a crisis brewing as petroleum products marketers are refusing to import product given the current exchange rate at which the central government is making payments via the subsidization program. The government owes marketers a huge sum on backdated subsidization payments, but appears to be ready to pay that debt at an old stipulated rate of $1 to 118 Nigerian Naira. The problem is that today on free exchanges the dollar--which is what oil and oil products contracts are generally denominated in--fetches from 127-135 Naira. The marketers are also worried that prices may be set to rise given the upcoming OPEC decision and that the debt repayment at the old rate would further erode their ability to purchase product at prices inflated by the OPEC decision.

In the meantime, Alaric Nightingale at Bloomberg reports that Jens Martin Jensen, interim CEO at Frontline Ltd, told her in a telephone interview that oil companies have booked about 25 VLCCs to store crude. Although all may not be fully loaded, the 25 VLCCs can potentially hold 50 million barrels of oil, or about 59% of a day's worth of global consumption. 25 vessels account for 5% of a global fleet of 502 vessels. The companies are using the tankers to store the crude so they can take advantage of much higher forward prices on the futures markets--an unusual phenomenon known as "super contango."

2. Joellen Perry at Real Time Economics has a brief analysis which reports that the policy of the European Central Bank looks to now diverge from US Fed policy. It now sounds as if ECB governors want to see how the easing policy so far will pan out--do I hear echoes of Peer Steinbrück?--and wants to focus on jump starting bank lending again. Perhaps this is a case of prisoners' dilemma given that there is no certainty as to what the incoming US Administration will do. Short post worth reading in full.

3. Nipa Piboontanasawat and Kevin Hamlin at Bloomberg report that China's central bank governor Zhou Xiaochuan indicated at the Financial Stability Forum in Hong Kong today that the bank was likely to reduce benchmark lending rates again this month.

4. Eurointelligence reports that the Frankfurter Allgemeine has a scoop this morning, having obtained an internal memo from the German economics ministry containing a forecast which was intended to be made public in its annual economic report due January of a contraction in 2009 of 3%. That would be the worst economic showing for the country since the end of WWII. The memo estimates an 1.25-1.75% contraction will have taken place in the fourth quarter 2008.

5. In an interesting story given Ecuador's decision to default on its sovereign debt yesterday, Takeo Kumagai at Platts reports that Japan's Inpex took at 40% stake in onshore Block 18 in that country from a subsidiary of Petrobras. "The 1,138 square km block is located in Oriente Basin in eastern Ecuador and pumps 30 kb/d of crude oil with an average API of around 28."

6. Xinhua reports that the China Natural Resource Committee announced on Sunday that a major natural gas field containing about 100 billion cubic meters was recently discovered in northern Xinjiang.

7. Bret Stevens suggests in an opinion piece that the US ought to purchase Pakistan's nuclear arsenal and the industrial support complex for it for $100 billion to be dispersed over 10 years. The money would only be discharged if Islamabad remained democratic and secular government and would be supplemented by military aid and the explicit extension of the US nuclear umbrella to Pakistan. The idea is unworkable, but the piece is well worth reading in full nonetheless--it gives a pretty good account of the role the bomb plays in the national consciousness (there is a national holiday dedicated to it), what strategic dilemmas possessing it resolves, and the situation general all over Pakistan.

8. In odd news, the Associated Press reports that Kenya has decided to impose sanctions upon the UN-backed leadership of Somalia as its control of the country crumbles in the face of Islamist insurgents. In the meantime, the United Nations Office on Drugs and Crime [UNDOC] published a press release today suggesting that "ship riders" from countries neighboring Somalia should be placed on naval assets policing the sea lane, so that pirates could be delivered over to them as authorities who would then take the suspects to trial in their home country. The organization also points out that the piracy problem will ultimately need be tackled by making their hold on land impossible. You might be somewhat skeptical as to whether nations like Yemen, Kenya, Ethiopia, Eritrea, Djibouti, and Tanzania are all that interested in spending considerable sums trying and punishing Somali piracy suspects. Furthermore, you might doubt that the regional judiciaries would welcome the inevitable human rights criticisms that would follow from Western nongovernmental organizations. And I wouldn't blame ya.

In the meantime, Andrew Spurrier at Lloyd's List reports that Anne Sophie Avé, the head of the French shipowners organization, wrote:
"[O]nly co-ordinated and efficient action by states removes the temptation for foreign shipowners to outdo the violence of the attacks by embarking uncontrollable mercenaries whose commercial interest is that the situation should persist."
Yes, mais oui, shipowners should take the flags of states that do not have navies to protect them so that shipowners will not have to pay for the cost of those navies, but clearly shipowners should not be forced to pay for private protection even if unwilling to contribute to public protection, for private protection would have an interest in perpetuating the problem! Not for nothing they say that shipping is the most global market of em all.

9. Jack Healy at the New York Times reports that the Labor Department announced today that consumer prices fell at a seasonally-adjusted rate of 1.7% in November from October. The basket of prices was led by energy prices, which fell by 17%. Food and beverage prices rose by 0.2% and clothing prices were up 0.3%. Prices for finished goods fell by 2.2%. Excluding food and energy prices, producer prices grew at 0.1% in November.

10. Morton Abramowitz, former US Ambassador, career diplomat, and head of the Carnegie Endowment for International Peace, proposes that President-elect could make a significant change in American foreign policy if he simply decided to appoint mostly career diplomats to the post of Ambassador. Exceptions could be made for those non-diplomats who nonetheless are especially suited to the job. Typically 30-40% of US ambassadors are not career diplomats, but chosen for political reasons. A very reasonable suggestion--well worth reading.

11. Fouad Ajami in the Wall Street Journal delivers a critique of the international affairs school of realism, which is the position, it seems, of much of Obama's foreign policy team, ironically enough. My personal views are close to those of the so-called realists, but Ajami makes the important point that history, as it unfolds, may push the Obama Administration to undertake similar--idealist, or neo-con--overseas efforts. In particular, he points out that if you thought that Iraq's borders were "artificial"--in the sense of not representing the physical boundaries of the residence of a political unit bound together by ethnicity and language--then have a gander at Afghanistan. As events progress it will be difficult for calm humility to prevail with those who make the decisions.

I would add that there appear to me to be several neo-cons in his advisory team, and that the language of neo-conservatism appeals to the American notion of itself in a way that the cautious, and reluctant to commit, and fundamentally self-serving thought process of "realism" never will. In that sense, interventionists are fundamentally better equipped to exploit the news of the day to push their agenda in any Administration than are realists. Ajami couldn't be more right in thinking so.

Well-worth reading.

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