Wednesday, December 17, 2008

Daily Sources 12/17

1. OPEC announced a large cut in production quotas today.
"[OPEC] agreed to cut 4.2 million barrels a day from the actual September 2008 OPEC-11 production of 29.045 mb/d, with effect from 1 January 2009, with Member Countries strongly emphasizing their firm commitment to ensuring that their production is reduced by the individually agreed amounts."
OPEC always strives to make it difficult to understand what it is they are doing, exactly. In any case, the numbers cited above give a 24.845 mb/d production quota. The implied target from November 1 was 27.306 mb/d, sdo that is a cut of 2.461 mb/d. (The reason the November 1 target is referred to as an "implied" target is because we only had the numbers for how much the organization wanted to cut, not the previous OPEC allocation numbers. Those numbers had to be deduced by various methods with competing results.) As it stands, the OPEC has given no idea of how the members will split up the cut, though the bulk of it would likely have to come from Riyadh.

2. Maher Chmaytelli and Fred Pals at Bloomberg report that Russian Deputy Prime Minister Igor Sechin told the media today that Russia will consider cutting crude exports by 350 kb/d if the OPEC cut does not prove sufficient to arrest the price decline. Sechin indicated that Kazakhstan may also cut supply. Azerbaijani Oil Minister Natig Aliyev also told reporters today that Baku is willing to cut supply by as much as 300 kb/d. If you add just the Russian and Azeri potential cuts to OPEC's cut of 2.461 mb/d, you would get a reduction in supply of 3.061 mb/d or about 3.6% of daily global oil demand (assuming 85 mb/d.) The delay on the part of Russia, Kazakhstan, and Azerbaijan to see the effect on price may have something to do with the opacity of OPEC's data and cuts--though one shouldn't rule out the possibility that they were privy to details in Oran. I definitely suspect that the delay in changes to their reserves accounting is related to this issue.

That said, unless and until Russia announces a cut in coordination with OPEC, so far my talk about a major realignment of Russian interest calculations has been much ado about nothing. ITAR-TASS reports that Sechin told journalists that Russia is seeking "permanent observer" status at OPEC.

3. Emma O’Brien at Bloomberg reports that Roland Nash, the chief strategist at Renaissance Capital, told her in an interview that Bank Rossi will allow the ruble to fall whenever the dollar is weakening.
"'It’s pretty clear that every time there is dollar weakness they will allow a devaluation now,” Nash said in an interview today. “They don’t want instability in the ruble- dollar rate because that’s what defines economic stability in Russia.'"
The Yen is at historic highs versus all currencies and the dollar has weakened some versus the euro of late.
"Banks including Germany’s Commerzbank AG and Troika Dialog, Russia’s oldest investment bank, are calling for a one-off depreciation of as much as 20% to prevent speculators from continuing to bet on further ruble weakness."
4. This Week in Petroleum reports a 500 kb build in crude oil stocks for the week ending December 12, near the top of the five year historical average. (Platts did not make their survey of analyst expectations freely available to the public this week--which is too bad, given that they were helpful for understanding the way the market reacted, despite chronic mis-prediction on the part of Wall Street analysts.) Gasoline stocks built by 1.3 million barrels and are at the bottom of the five year historical average. Distillate stocks jumped by an impressive 2.9 million barrels, putting them in the middle of the historical average--stocks have leapt up from historically very low levels in recent weeks, the build for the week ending December 5 was a striking 5.6 million barrels, so the reported over the last two weeks was a combined 8.5 million barrels! (see Daily Sources 12/10 #9) Considered in isolation, stock builds should have a depressing affect on market prices. Furthermore, the way these data are behaving is making me suspect that all or nearly all easy on-ground crude oil storage is taken, though we are still below the top of the five year historical average. If there is no place but tankers to place crude in storage, very few market participants will purchase crude in anticipation of future prices or to capture the current contango, which is way steeper than cost of carry. That also would put downward pressure on front prices as it makes the market shallower as a percentage of buyers are out of it for the time being.

Moreover, Katharine Fraser at Platts reports that US gasoline demand fell by 3.5% to 8.91 million b/d year over year in November, according to the American Petroleum Institute. That decline is substantially more than the 2.1% decline reported by MasterCard advisers on December 3 for the four week period ending November 28. (see Daily Sources 12/3 #14)

5. Lester Pimentel and Matthew Walter report that various analysts think that Rafael Correa's decision to default on Ecaudor's debt will inevitably lead to Ecuador abandoning the dollar, which it adopted as its own currency in 2000 (along with Panama and El Salvador) in order to curb inflation. It is not clear to me how much a new fiat currency from Quito would fetch on markets, though perhaps both scenarios for the dollar--inflation or deflation--would prove unpalatable for Ecuador in any case.

6. The China Daily, an official publication of the government of the People's Republic of China, ran an editorial today entitled "Keys to the Treasury" which warned:
"China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis."
But then it goes on to say:
"With few options to invest its increasing reserves safely and profitably, China may thus have to buy more US Treasury securities in spite of growing domestic skepticism that such purchases may incur huge losses later.

Besides the undesirable consequences that reducing purchases of US Treasury bills will have on global markets, it is also a bad idea to sell them before the world economy can restore stability.

If creditors stop recycling the dollars they accumulated back into US, interest rates in the US would rise to undermine that government's efforts to bailout distressed financial institutions and companies.

In a time of crisis, expanded government spending financed by foreign capital may be necessary to prevent the worst from happening.

Yet, as more and more creditor countries introduce their own stimulus packages to boost domestic demand, the US government should not expect continuous inflow of more cheap foreign capital to fund its one-after-another massive bailouts.

The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds.

Instead, it should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon."
Worth reading in full.

7. Andrea Dudikova and Yon Pulkrabek at Bloomberg report that the Czech central bank has cut its benchmark lending rate by 0.5% to 2.25%.
"'The Czech economy is slowing sharply and needs looser policy conditions,' Michal Brozka, an economist at Raiffeisenbank in Prague, said in a note. 'We continue to see the rate dropping to 1.5 percent by mid-2009.'"
8. China Daily reported that a "military source" told them on Tuesday that Beijing is set to send ships, and perhaps troops, to support the international piracy suppression effort off Somalia. The China Daily story emphasizes that Beijing is being lobbied by Somali representatives to do just that:
"'We hope China joins the efforts of the international community in supporting the Somali government,' the Somali Ambassador to Beijing, Mohammed Awil, said on Monday."
(h/t Information Dissemination)

9. Laurie Goering and Alex Rodriguez at the Chicago Tribune write about a report dated October 2008 by Grain--a non-profit based in Spain--which shows that food security concerns are driving several nations to purchase overseas farmland.
"Important grain producers like India, Vietnam and Indonesia within the last year cut off exports of key crops such as rice and wheat to ensure supplies at home, boosting prices worldwide and raising concerns about potential shortages.

Now countries like Saudi Arabia say they would prefer to be in charge of their own grain production rather than relying on their vast cash reserves to buy what they need, particularly when cutting out the middleman can reduce costs by 20 percent or more, experts say. Fast-developing countries like China, in turn, see demand for food at home outstripping their ability to produce it in years to come and want to line up supplemental supplies with some of their huge foreign currency reserves built up through trade surpluses."
The Chicago Tribune report is well worth reading in full. (h/t Gregor MacDonald) The Grain report can be found here. It identifies China, India, Japan, Malaysia, South Korea, Egypt, Libya, Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates as nations that are seeking overseas farmland in an attempt to improve their food security situation. Grain provides a detailed breakdown of these investments in the categories of both state and private investments here. Though the alarmist tone of the report can be irritating, the annex is a pretty good summary of the manifestation of this food security strategy worldwide and worth reading.

An important caveat to their conclusions of course is that as of now few of the countries pursuing these strategies have the military reach to enforce the export of foodstuffs from the nations where they have purchased farmland. (As opposed to, say, England's capability vis-a-vis Ireland during the Great Potato Famine.) Should one of those countries face a food shortage, an accountable government will ensure that the food produced there stays there. The trouble, of course, is that there are plenty of unaccountable governments, especially in Africa and central Asia where much of the farmland is being purchased. The Sudan, for example, is a target for farmland purchases even as it chronically seeks international food relief.

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