Wednesday, December 3, 2008

Daily Sources 12/3

1. Eduard Gismatullin at Bloomberg reports that BP's chief economist, Christof Ruehl, told a conference in London yesterday that oil prices will continue to fall in the next 12 to 18 months unless OPEC institutes sufficient cuts. He expects the global economy to recover in 18 to 24 months, after which time there will be the possibility of oil price spikes. Christopher Swann at Bloomberg reports that the Institute for International Finance today released analysis arguing that the price of oil will average $56/b in 2009.
"The collapse in oil prices will reduce growth of the GCC countries -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- to 3.6 percent in 2009, down from 5.7 percent this year, the IIF said."
The report also suggests that housing prices in the Gulf are at risk of a "major correction." The IIF also predicted that the GCC countries will have $1.47 trillion in foreign assets at the end of the year, up from $1.24 trillion in 2007. (Of this, Saudi Arabia's central bank held ~$448 billion at the end of October, or a little over 30%. See Daily Sources 12/1 #3)

In the meantime, Anthony DiPaola and Arif Sharif at Bloomberg reports that Qatar's Oil Minister, Abdullah bin Hamad al-Attiyah, told a conference in Dubai today that OPEC will "definitely" cut production allocations in the December 17 meeting in Oran. And Alex Lawler at Reuters reports that a Reuters survey shows that OPEC has made good on about 990 kb/d of 1.5 mb/d in cuts effective November 1, or about two-thirds. Even were all cuts made by the member nations, the organization would still require about another 270 kb/d to reach the implied supply quota for OPEC-11. Saudi Arabia and the UAE have nearly made good on promised to cut by 480 kb/d and 134 kb/d, respectively. Nigeria's production has also dropped by more than the cut, due to violence in the Niger Delta. In any case, their production is well below their implied target. Venezuela and Iran have made 10 kb/d and 50 kb/d cuts in supply on 129 kb/d and 199 kb/d production cut promises in the October 24 meeting. Both countries' budgets required high oil prices in order to balance.

The Associated Press' Nasser Karimi reports the Iranian President Mahmoud Ahmadinejad told the state news agency that the drop in oil prices will force the government to make steep cuts in government spending. He said,
"Suppose we plan to base next year's budget on $30 per barrel of oil; we have to leave a major part of our projects behind. But we are obliged to set it on $30-$35 because we do not decide the price of oil on the global market."
2. Yesterday the UN Security Council announced that Resolution 1846 (2008) had passed unanimously, authorizing states and regional organizations to use all necessary force to suppress piracy off the Somalian coast. The resolution is only temporary, and not designed to establish customary international law. (Though the UK, for example, is in the forefront of an effort to alter the law of the sea to do just that. See Daily Sources 10/29 #9) The resolution was only authorized after the Security Council received a letter on November 20 from the Somali Transitional Federal Government (TFG) signaling their consent to the measure. (The resolution itself notes that the TFG had requested assistance from the international community for policing the pirates.) The resolution also urges member states to establish the judicial capacity to prosecute persons suspected of piracy.

In a related story, Jerry Frank at Lloyd's List reports that Africa experts at Exclusive Analysis expect the Ethiopian pull out of Somalia, signaled last week to take place by the end of the year, will likely lead to a civil war as well as the downfall of the TFG.
"The Islamist rebels tend to clamp down on pirates in areas under their control and have spoken out against the practice," [the] Africa analysts noted. "It is likely that any piracy activity based in areas under the Union of Islamic Courts (UIC) or al-Shabaab control will forcibly be stopped."
Al-Shabaab on November 12 gained control of the port of Merka, just south of Mogadishu, and Exclusive Analysts expects fighting between the two competing Islamic groups to intensify. They do not expect piracy to flourish as the civil war intensifies.

Below is the NATO Shipping Center's November 26 update on what were at the time the on-going piracy incidents off Somalia. Note the graph in the lower left hand corner, showing the spike in activity in September and November.

Steven Erlanger at the New York Times reports that NATO yesterday announced it would recommence, gradually and conditionally, engagement with Russia.

3. Luke Pachymuthu at Reuters reports that BP booked a very large crude carrier (VLCC), the Eagle Vienna, to load a cargo of 2 million barrels of crude in the North Sea for storage in the Gulf of Mexico. "BP's booking takes the total capacity booked for storage by oil firms and traders to at least 12 million barrels, nearly 15 percent of one day of world oil demand." Alaric Nightingale at Bloomberg reports that Johnny Plumbe at ACM Shipping Group Plc told her that as many as 12 VLCCs and four vessels half that size (ie, with a capacity of 1 million barrels) have been booked with an option for storage. That's potentially 28 million barrels worth of storage, or about 28.2% of daily world consumption. As a result, Persian Gulf tanker rates may climb. Rates for VLCC shipments from West Africa to the US rose 19%. (The article includes a decent explanation of World Scale, which is the pricing basis in shipping.)

4. Galrahn at Information Dissemination reports that following exercises off the Venezuelan coast Russia will send the RFS Admiral Chabanenko to replace the RFS Neustrashimy, which is fighting pirates off the Somalian littoral. The RFS Chabanenko is the largest surface warship built by Russia--a Udaloy Class II, or multipurpose, destroyer--in the last two decades.

5. Cherian Thomas at Bloomberg reports that in the wake of the Mumbai terror attacks, India may adopt a new stimulus plan which would establish a fund for investments in transportation and energy infrastructure, subsidies for housing and exports, and another cut in the central bank's benchmark lending rate, known in India as the repurchase rate. The notion that India, as well as China, are looking to maintaining exports or even seeding their growth to sustain their economics through the crisis is troubling. Brad Setser has a post today looking at what some think is going to be China's policy going forward--the depreciation of the renminbi. A policy of depreciation, of course, will fuel protectionist fire in the developed countries. Worth reading in full. Yesterday's post recorded that the one other nation analysts hope will consume has also rejected a large stimulus--Germany.

6. Nipa Piboontanasawat and James Peng at Bloomberg report that after losses totaling $6 billion in Morgan Stanley and Blackstone Group, Lou Jiwei, Chairman of China Investment Corp., said the sovereign wealth fund "wouldn't dare" invest in foreign financial firms. He said,
"The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything."
7. AFP reports that a US military official said yesterday that the Pakistanis have moved no ground or nuclear forces as tensions between it and India grow and that the Indian military posture shows great restraint as it is completely unchanged. (h/t Informed Comment) Eric Schmitt and Somini Sengupta at the New York Times report that Condoleeza Rice is in New Delhi holding meetings with Indian leaders while Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, is in Islamabad meeting with their Pakistani counterparts. Further, a bomb was discovered in Mumbai, set to go off at a train station. Also, a former Defense official told the reporters that American intelligence had determined that the Mumbai attackers were trained by former officers of Pakistan's Army and Inter-Services Intelligence. However, no direct tie between current government or military and the attackers has been discovered.

8. Eric Watkins at the Oil & Gas Journal reported yesterday that the Ecuadorian oil and mines ministry released a statement contradicting remarks by PdVSA Vice President Elogio Del Pino on November 29 which indicated that Venezuela was reassessing international refinery construction plans. (See Daily Sources 11/28 #13)
"Work on the joint-stock Refineria del Pacifico, held 51% by Ecuador's state-owned Petroecuador and 49% by PDVSA, is scheduled to start in 2010 and operations are expected to begin by 2013."
The 300 kb/d refinery is projected to cost between $6-10 billion to construct. PdVSA and Petroecuador are expected to finance 30% of the cost themselves. Chinese and Iranian national oil companies, as well as an English corporation, are allegedly interested in participating in the project.

9. Michael S. Derby at Real Time Economics reports that Federal Reserve Bank of Philadelphia President Charles Plosser wrote in prepared remarks for an event hosted by the University of Rochester's Business School that "economic growth will continue to be weak over the next several quarters before improving in the latter part of 2009 and then returning to near-trend growth in 2010 and 2011." Plosser indicated that he didn't think that deflation was a "serious threat." He also forecast that unemployment would reach 7% in 2009 before beginning a "gradual decline."

10. Ambrose Evans-Pritchard at the UK Telegraph writes that Kevin Norrish, commodities strategist at Barclay's Capital, published a report which shows that key industrial metals have fallen more in the past four months than during the worst years of the Great Depression. Norrish says that the average fall for copper, lead, and zinc since July of this year has been 60%.
"Prices for the three metals fell 40% from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. 'Lead and zinc have already lost more than they did in the 1930s,' Norrish said."
Copper lost 70% in the Great Depression, despite the electrification drive in the US and the Soviet Union, mostly because of an 85% fall in construction in the US.

11. Bob Willis at Bloomberg reports that ADP Employer Services published a report today showing that large corporate employers in the US cut 250,000 jobs in November. The number was higher than analysts had expected. The Labor Department will release new unemployment data on Friday.

12. Shobhana Chandra and Bob Willis at Bloomberg report that the Institute for Supply Management's service sector index fell to 37.3 from 44.4 the prior month. Anything below a 50 indicates a contraction. Analysts had expected a more modest decline to 42.

13. Bob Willis also reports that the Mortgage Bankers Association's
"index of applications to purchase a home or refinance a loan jumped 112 percent to 857.7, the highest level since March, from 404.4 the prior week. The group’s refinance index skyrocketed 203 percent, while the purchase index rose 38 percent."
14. John Kingston at The Barrel reports that MasterCard Adviser numbers show that US gasoline consumption declines have fallen from 8% year over year for the four week period ending October 24 to 2.1% year over year for the four week period ending November 28.

15. The EIA's This Week in Petroleum indicates that crude oil stocks fell by 400 kb, still at the high end of the historical average, but Wall Street analysts had expected a 1.1 million barrel build. Gasoline stocks fell by 1.6 million barrels versus expectations of a 1 million barrel build, and are well below historical averages. Distillate stocks also fell by 1.7 million barrels versus an expected build of 300 kb and are well below historical averages. (I understand that some of this draw was due to a build in diesel sales to Europe.)

No comments: