Daily Sources 12/23

1. Wall Street Journal Europe yesterday published an opinion piece by the finance minister of Germany, Peer Steinbrück, in which he outlined Berlin's view of how to approach the crisis. This is probably in response to the heavy criticism he has recently received in the opinion pages of the New York Times, by Paul Krugman, and the Financial Times, by Martin Wolf and Wolfgang Münchau, that Germany's stimulus package is in effect a "beggar thy neighbor" policy. Much of his position can be restated, in my view, as that the way forward is to implement the five goals iterated in the global financial summit of November 15th. They are:

"- Strengthening Transparency and Accountability: Financial-market participants must provide comprehensive information, including for complex financial products. There must be no more excessive risk-taking.

- Enhancing Sound Regulation: In the future, the G-20 will ensure that all financial markets, products and participants are regulated or subject to oversight (including rating agencies).

- Promoting the Integrity of Financial Markets: This includes better protecting investors, avoiding conflicts of interest and taking measures against market manipulation and fraud.

- Reinforcing International Cooperation: The cooperation among national regulators for crisis prevention, crisis management and crisis resolution must be better coordinated.

- Reforming International Financial Institutions: : The IMF should, in cooperation with the FSF, enhance its early warning capabilities and play a key role in coping with crises. Developing countries and emerging economies should be given a greater say in the IMF and World Bank, while the FSF should be enlarged to include leading emerging market economies."

Steinbrück goes on to say that he thinks that the G-20 has gone a long way toward implementing these reforms, which seems fairly counterfactual to me. That said, the three top points are in my view variations on one theme: that we need to have a credible way of investigating what it is we are being asked to invest in. As long as no one trusts the books of the various financial institutions, no one is going to be all that anxious to loan to them or invest in them. This might especially be true of banking institutions which have a very good idea of the kind of financial instruments which could be in their competitors' books and how they might be hidden. Still, it's not clear it would be in their interest to provide a light onto how best to determine the risk posed to other institutions, because that would serve to shine a light on their own risk-taking. But, whether or not you think strong, medium, weak, or even non-Keynesian methods should be applied to the financial crisis, it seems that more needs to be done about the primary issue of transparent book keeping. In any case, Steinbruck states that the stimulus programs being considered by other capitals around the world are not suitable to Germany's situation:

"It is more than likely that such large-scale stimulus programs -- and tax cuts as well -- would not have any effects in real time. It is unclear whether general tax cuts can significantly encourage consumption during a recession, when many consumers are worried about losing their jobs. The history of the savings rate in Germany points to the opposite. Targeted measures are clearly preferable to scattershot ones."

And, he concludes with:

"Governments can reduce the likelihood of the emergence of financial-market crises and mitigate significant declines in economic activity. No more, no less. Anybody who claims otherwise is deliberately pulling the wool over people's eyes and thus undermines confidence in the political process. That is the last thing we need now."

Well worth reading in full.

2. Platts reports that a study conducted by a committee of the Gas Exporting Countries Forum found that it would be impractical to abandon pricing mechanisms for natural gas contracts which links natural gas prices to the price of oil.

"'Due to inter-fuel competition, it is impossible to eliminate the link to the oil price [in gas markets], where gas consumers are able to switch to oil products,' the committee said."

As a larger percentage of natural gas is available for spot purchases due to liquefaction capabilities, the market will become more global. However, as it stands, the high capital costs, fixed production and transportation options, and consequent long-term contracting will continue to fragment the market. In that vein of thought, Platts reports that Algerian oil minister Chakib Khelil said today there were no plans to turn GECF into a cartel operating along the lines of OPEC.

"Asked whether the organization would be reshaped along the lines of oil exporters group OPEC, Khelil replied: 'Really, it is different. The OPEC of oil looks at today. For gas, today is already there. Gas is sold for the next 10-15 years.'"

(Contracts for natural gas usually are very long term contracts lasting for 10 to 20 years and linked by specific bespoke formula to the price of oil--usually as expressed by the front month price of light sweet crude on either NYMEX or ICE.)

"'We are not going to spend too much time looking at today, we will be spending a lot of time looking at tomorrow, looking how we can cooperate among us, how markets can evolve, how legislation in consuming countries will evolve, regulations,' [Khelil] said."

That said, Lucian Kim at Bloomberg reports that the Venezuelan Oil Minister, Rafael Ramirez, told the GECF meeting in Moscow that the forum should organize along the same principles as OPEC. The organization also announced that its headquarters will be based in Doha, Qatar, the least politically divisive position of the potential choices mooted of Russia, Iran, or Algeria. Platts also reported that Russian Energy Minister Sergei Shmatko at the meeting urged close cooperation by energy producers with an end to market stability, saying Russia is ready for "very close cooperation."Moscow is still waiting on data on OPEC member compliance with the cut announced December 17.

3. Uchenna Izundu at the Oil & Gas Journal reports that Gazprom Chairman Viktor Zubkov has warned that the dispute over natural gas price with Ukraine may force Gazprom to shut off supply, which would affect European supply as much of their natural gas is shipped via pipelines through the Ukraine. "Ukraine wants to pay $100/Mcm for Russian gas in 2009, while Gazprom is demanding international prices of $250/Mcm to $300/Mcm." In short, Kiev wants a subsidized price of natural gas to a government which is fairly openly hostile to Moscow--including efforts to join NATO which have even been proposed in such a way as to appear hostile to Moscow--as opposed to the market price for that gas.



4. Dorota Bartyzel and Ewa Krukowska at Bloomberg report that the Polish central bank--the Narodowy Bank Polski--cut its benchmark interest rate by 0.75% (75 basis points) to 5%. This was a sharper cut than any of the analysts surveyed by Bloomberg expected.

5. Charles Lee at Platts reports that the Korean National Oil Corp. (KNOC) has recently completed the expansion of oil storage facilities at Yeosu which can now hold 49.75 million barrels of oil in both underground and ground tanks, up from 30.75 million barrels when the project began 11 years ago. 49.75 million barrels represents about 23 days of South Korean oil consumption, about 36% of the country's current storage capacity of 138 million barrels. Yeosu is a coastal city in the southernmost province of South Jeolla.



South Korea plans to have storage facilities for 146 million barrels of oil by the end of 2009 and to add an additional 6 million barrels of storage to Yeosu by 2011, bringing the total to 152 million barrels. South Korea's energy strategy revolves around importing vastly more than the domestic requirement and exporting the refined surplus. It also stores foreign crudes for states looking to store oil so they might capture profit opportunities from price spikes or other market irregularities. Over 35 million barrels are stored by KNOC for Algeria, Norway and China. The terms of the storage provides that South Korea has first access to the oil should there be a supply crisis.

6. Jay Lefkowitz argues that now is the time to take the regime in North Korea to task for its human rights abuses. And just now South Korea is no longer pursuing quite so enthusiastically its sunshine policy. Still, I think that Lefkowitz, who was a Bush envoy to the country, might consider that the only real time when the US possessed to requisite international political will to address the problem of North Korea was just subsequent to 9/11. If at all.

7. Rama Lakshmi of the Washington Post reports that Pakistan scrambled jet fighters yesterday over several of its cities Monday as tensions slowly boil between the two countries. Indian Foreign Minister Pranab Mukherjee told a meeting of over 120 foreign envoys to New Delhi that "We have so far acted with utmost restraint, [but we] will take all measures necessary as we deem fit to deal with the situation." He also suggested that India might strike at camps inside Pakistan unilaterally, if Islamabad is not seen to be making progress against extremist elements inside its borders. On Monday the Chairman of the US Joint Chiefs of Staff, Admiral Michael Mullen, arrived in Islamabad to meet with Pakistan's army chief, Gen. Ashfaq Kiyani, and the head of its Inter-Services Intelligence agency, Lt. Gen. Ahmed Shuja Pasha. Worth reading in full.

8. Sam Dagher and Graham Bowley at the New York Times report that the Iraqi Parliament accepted the resignation of its speaker, Mahmoud al-Mashhadani, and then immediately passed a resolution allowing the troops of those troops not covered by the Status of Forces Agreement to stay in Iraq past the new year.

9. Keith Bradsher at the New York Times reports that Indonesia is planning an economic stimulus plan and summarizes an interview he conducted with the governor of Indonesia’s central bank, Mr. Boediono. Worth reading in full.

10. Reuters reports that Iranian state radio has announced that Tehran has sent a warship, of unspecified class, to the Gulf of Aden in order to contribute to the fight against piracy off Somalia. (h/t Galrahn at Information Dissemination.)

11. Alan Cowell at the New York Times reports that the death of long-time President Lansana Conté of Guinea has sparked a coup attempt by the military of that country.

12. Bob Willis and Shobhana Chandra at Bloomberg report that sales of new and existing single-family houses fell by 7.6% in November. Median sales prices fell by 13%, which is the sharpest decline seen since records were first kept in 1968.

13. Aaron Clark at Bloomberg reports that the EIA's Market Assessment of Upcoming Planned Refinery Outages was released today showing that Petroleum Administrative Defense District 1--the East Coast--is expected to take much more refining capacity offline than the historical norm. Historically on average about 30 kb/d of fluid catalytic cracker refining capacity is taken offline in February for maintenance and repairs. The EIA report forecasts that 164 kb/d of FCC capacity will be taken offline. (To simplify, fluid catalytic crackers units are sophisticated distillation units at refineries designed, generally speaking, to maximize the output of gasoline versus other products like diesel.) PADD 1 is one of the larger consuming regions of the country (which was divvied up into 5 petroleum administration defense districts in World War II as the government managed production as part of the war effort.) Last year on average PADD 1 ran 1.387 kb/d of crude through its refineries in February. That said, for the country as a whole, crude distillation unit outages (or outages for all refineries) are expected to be about 28 kb/d more than is historical, not an especially sharp divergence from the norm. However, the EIA also expects distillate production--by distillate the EIA means diesel for the most part--to be much higher over the next few months than it has been over the course of the last three years. Heating oil--which is almost identical to Diesel No 2--margins over crude are quite attractive if you consider NYMEX futures as opposed to gasoline, where the crack spread is clearly negative. This would seem, in isolation, to presage continued low crude prices through March.