Saturday, January 31, 2009

Spot Life CL Mar 09

The story of the CL March 09 contract's first eight trading days as front month, or spot, remains dominated by gloomy economic news. The data from Japan and South Korea were especially grim and the most recent US GDP and housing data only contributed to the sense that things are only going to get worse in the near term. Germany saw a much higher increase in unemployment than was expected. The British media spoke darkly of a "disorderly fall" in Sterling. That said, there has been some evidence that the collapse in trade volumes has bottomed out and there have been some reports that the credit markets have begun to function again, if barely. (The Baltic Dry Index seems to have bottomed, tight bunker fuel supplies in Hong Kong, and a growing spread between 10 year TIPS and 10 year Treasuries.) The FOMC maintained rates at 0-.25% and a $800 billion stimulus plan was passed.

Initial reports on OPEC compliance with the new quotas suggest that, for the most part, the cartel's members have met the stated supply cuts and Riyadh appears ready to cut beyond the quota as it stands. There have been some rumblings from members about whether there would be much point cutting further, as from Nigeria and Ecuador, but most members are telegraphing further efforts. Tehran has been especially anxious to convince non-OPEC members to join in supply cuts, though I haven't seen any evidence yet that Iran is keeping faith with its own quota. Moscow, which had indicated some interest in cooperating in cuts, along with Azerbaijan and Kazakhstan, has not yet seen fit to join in--despite its apparent difficulty of seeing eye to eye with continental Europe and the United States. CGES suggested that cuts so far are sufficient to stabilize price around $45/b, but warned that further cut allocations would probably undermine gains in price as it would likely result in further demand destruction. Moamar Ghaddafi simultaneously offered his plan for peace in the Middle East--Isratine--and warned that he--as well other producing countries--is considering nationalizing the assets of majors in Libya.

On the general political front, the Gazprom Naftogaz dispute was put to rest, for the time being, and Israel ended its operation in Gaza--with a large discovery of natural gas off its northern coast. President Barrack Obama was inaugurated and most governments seemed to sigh a sigh of relief and talk of resolving disputes. Davos of course took place, though it is hard to see what the point of it was, exactly.

Other news which directly affects supply included the oil rig count in North America dropping by nearly 23%. (I am guessing that a lot of stripper wells have come off line also.) Rigs came offline in Venezuela due to non-payment. Nigeria suggested that prices below $40/b meant that offshore drilling was no longer viable economically, and PENGASSAN threatened on the 30th to shut down all the oil export terminals if a suspect government contract wasn't canceled. Valero--one of the largest refiners in the US--has announced that it will take its Texas City refinery offline (225 kb/d) and that it will be reducing throughput given slack demand in the product market. Petrobras decided not to seek financing from the credit markets for their offshore development plans, saying that the cost of money was too high to justify the move. Oh, and French transport, port and energy workers joined in a strike to bring activity there to a halt on Thursday. (See what that Czech artist meant by Grève!?)

And the giant contango of 2008 didn't budge.

The EIA reported that crude in storage amounted to 338.9 million barrels, the most seen since July 2007 of 352.6 million barrels. (These storage numbers are still less than what was seen in the last super contango in 1998.) That said, some VLCCs being used for storage lifted anchor, presumably so as to deliver their cargoes, leaving one to wonder whether some storage tanks are being kept off the market. As you can see from the graph below, the spread between CL Mar 09 and Apr 09 delivery grew to $4.45/b as of January 30th, or ~10.7%. The spread between Cl Mar 09 and Mar 10 grew to $14.70/b, or ~ 35.3% of front month. The spread between front month and Dec 16 delivery (I will not use Dec 17 until I see more open interest and activity in it) was $30.41/b or ~ 73% of front month. (Extraordinary, but not the largest spread we've seen in the last few months.)

Below is the chart of CL versus the dollar euro interbank exchange rate. It doesn't look to me like the two are moving in concert, and now the analysts are saying that they have "decoupled." I am interested in whether the correlation was causal or not. I doubt it ... and suspect if anything crude was the driving force in any exchange movements, but I am not a monetary economist, so it is mostly just my suspicious nature speaking I guess. At interbank exchange rates, the euro gained $0.0107 or 0.8% from January 21, CL lost $1.87/b or ~4.3% during that same period.

Below is a graph of the interbank exchange rate of the euro, sterling, yen, Norwegian kroner, Brunei dollar, ruble, and Canadian dollar to the dollar as a percent change from the rate as of January 1, 2000 against the price of CL on NYMEX expressed as a percent change from that date. You can see that the Norwegian kroner and euro do seem to mirror each other, though the kroner seems to have decoupled as of late November or so. A quick internet search reveals that oil exports accounted for about 17% of GDP in 2004--so perhaps it accounted for as much as 30-35% in 2007 and 2008. In 2004 oil exports accounted for 40% of total Norwegian exports, I imagine that share must have been at least 50% in 2007-2008. It would make sense that its exchange value to the dollar would rise as the price of oil rose, but the euro? It now seems to be mirroring the Canadian dollar. The ruble appears to have lost much more value relative to the dollar than it presumably gained as a result of strength in the commodities complex. That said, I think the graph shows pretty clearly that there is no simple relationship between the cost of oil and the exchange rate of the dollar and any of these currencies. (During this time period, by the way, the renminbi has risen a little more than 21%, suggesting that the tempered rise was an indirect tax on consumption in China.)

As you can see from the graph below, RBOB has recovered from the lows of December and now appears to provide a reasonable profit on a per barrel basis versus crude. Heating oil, which is nearly identical to diesel, still seems to provide the largest profits. Natural gas is selling at a comfortable discount to crude on a Btu basis after skirting near parity last month.

At close on January 30, the same month delivery differentials of forward same month contracts for gasoline over crude on a per barrel basis seem to show that the gasoline market does not expect crude to fetch the price the crude contracts are going for. That said, the same month differentials of heating oil over crude seem to suggest the opposite. (The end of the curve shows the anticipation of the cyclical growth in demand for gasoline in the Summer and for heating oil in the Winter. Note that natural gas anticipates that the increased demand for heating generation will be more than offset by additional heating oil supply, presumably not at the prices the December contracts are going for now however.)

The commitment of traders report of January 27 still seems to suggest that the market expects the price to rise, given that commercials are hedging against a fall in price and non-commercials are long.

Friday, January 30, 2009

Daily Sources 1/30

1. Jason Clenfield and Toru Fujioka at Bloomberg write that Japan's Trade Ministry reported that industrial output fell by 9.6% in December from November, which itself had fallen 8.5% from October.
"The jobless rate soared to 4.4% from 3.9%, the government said. Household spending slid 4.6%, a 10th monthly drop, as people grew more concerned about job security."
2. William Sim at Bloomberg report that South Korean industrial production fell 18.6% from a year earlier in December, after recording a 14% decline in November. The decline was 9.6% from November.
"Confidence among South Korean manufacturers remained close to a record low, a central bank survey showed this week. Exports, which make up about half of the economy, probably plunged by a record 29.1% in January, economists forecast ahead of a Feb. 2 report.
South Korean sales of consumer goods fell 1.8% in December from November and dropped 7% from a year earlier, today’s [government statistics office] report showed. Construction orders plunged 33.5% from a year earlier and investment in factories decreased 24.1%."
3. Choe Sang-Hun at the New York Times reports that North Korea declared today that it was scrapping all accords it signed with South Korea to ease military tensions between the two countries.
"'All the agreed points concerning the issue of putting an end to the political and military confrontation between the North and the South will be nullified,' said a statement from the Committee for the Peaceful Reunification of Korea, the North Korean agency in charge of relations with South Korea."
The agreements include a 1991 agreement on reconciliation and non-aggression. Pyongyang also reportedly referred to the 1953 armistice ending the Korean War as "a useless piece of paper."

4. Keiko Ujikane and Kyoko Shimodoi at Bloomberg report that the finance ministers of China, Japan and South Korea together with those of ASEAN are planning an emergency meeting next month in order "to forge a pact to pool $120 billion of foreign exchange reserves to help defend their currencies."
"The grouping plans to increase the pool from the $80 billion proposed last May in Madrid in an expansion of an arrangement that allows only bilateral currency swaps known as the Chiangmai Initiative. The meeting may take place on Feb. 22 in Thailand, according to two Japanese Finance Ministry officials who spoke on the condition of anonymity."
5. Danny Friedmann at IP Dragon reports that inventors and corporations in China have filed the sixth largest number of patents applications in the world under the Patent Cooperation Treaty (PCT) in 2008.
"Using the PCT, [corporations[ can file patent applications in different countries in an efficient way: filing ... patent applications in more than one country using one patent office. A real international patent does not exist yet, but the second best is to get a bundle of national patents, using the PCT."
China surpassed the UK in patent applications using PCT. (h/t Carlos Tejeda at China Journal)

6. The International Air Transport Association published a press release yesterday announcing that global international air cargo traffic fell by an annual rate of 22.6% in December compared to December 2007. International passenger traffic fell by 4.6% against the same month.
"For the full-year 2008, international cargo traffic was down 4.0%, passenger traffic showed a modest increase of 1.6%, and the international load factor stood at 75.9%."
(h/t Calculated Risk)

7. Janet Porter at Lloyd's List reports that container lines have cut the number of Asia-Europe ship loops by more than a quarter in recent months.
"The latest string to be removed is the Grand Alliance’s EU5 service, which is being suspended for at least five months with immediate effect.

Member lines Hapag-Lloyd, NYK, OOCL and MISC said this would remove about 12% of capacity from their Asia-Europe network of services."
That said, the Baltic Dry Index still appears to have bottomed, though the indicator is still sharply down from the highs of early 2008:

In an interesting piece of related news, Rajesh Nair at Platts reports that average daily demand for bunker fuel in Hong Kong "in January far exceeded expectations, even surpassing average volumes seen in November and December." Bunker fuel is the petroleum product used to power ships, and strong results in that category should indicate that shipping has bottomed, though from a steep decline--partially due to the comparative advantage of nearby ports in southern China. Delays in bunker fuel cargoes have even reportedly caused the Hong Kong market for the fuel to tighten.

8. Javier Blas at the Financial Times reports that the International Grains Council forecast a sharp drop in the world's wheat harvest in 2009-10. The crop is expected to fall to 650 million tonnes, or 5%, from the record harvest of 687 million tonnes in 2008-9.
"'The largest declines are expected in the EU, Russia, Ukraine, the US and China,' the IGC noted in its monthly report."
Lack of credit is reportedly forcing wheat importers to purchase on a hand-to-mouth basis, reducing up front demand. The steep decline in prices has caused farmers to reduce acreage cultivated with wheat by 1%, globally. (h/t Yves Smith at naked capitalism.)

9. Eurointelligence reports that European Central Bank data shows that the volume of loans in the eurozone fell by 0.4% in December from November. But: "On an annual basis, loans to companies were still up 9.4% compared with 2007, and loans to consumers were up 1.8%.

10. Edward Evans and Francine Lacqua at Bloomberg report that Hamad bin Jasim, the prime minister and head of Qatar's $58 billion sovereign wealth fund, said the country's fund was on the hunt for three blue chip investments. The fund is reportedly interested in the financial services, industrial, and tourism sectors. (Clearly it believes that these sectors are near their bottoms. The news is also interesting insofar as most analysts believe that the Gulf's sovereign wealth funds have been hard hit by the fall in oil prices and equities generally. Evidently, Qatar has managed to weather the current financial crisis without too many losses.) "Bin Hamad said Qatar would 'very seriously' consider raising its stake in Barclays Plc, if the London-based bank seeks more capital. Barclays raised £5.3 billion ($7.6 billion) in October by selling securities including convertible notes to Middle Eastern investors such as Qatar Holding."

11. Sebnem Arsu and Katrin Bennhold at the New York Times report that Turkish Prime Minister Recep Tayyip Erdogan returned home to a hero's welcome after an angry exchange with the Israeli president, Shimon Peres, at the World Economic Forum in Davos. Crowds met the prime minister in Istanbul waving Turkish and Palestinian flags and chanting pro-government slogans. Erdogan was upset that his comments about Gaza were curtailed by David Ignatius, of the Washington Post, who was moderating the debate. The final exchange is described thus:
"'Mr. Peres, you are older than me,' [Erdogan] said. 'Your voice comes out in a very high tone. And the high tone of your voice has to do with a guilty conscience. My voice, however, will not come out in the same tone.'

Resisting efforts by Mr. Ignatius to end the session, Mr. Erdogan continued, saying to Mr. Peres, 'When it comes to killing, you know well how to kill.'

Eventually, the prime minister gathered up his papers and departed, saying, “And so Davos is over for me from now on.'"
The Associated Press reports that Peres told reporters he spoke with Erdogan after the incident and that "My respect for him didn't change."Turkey is a linchpin in Israeli security strategy in the Middle East and Tel Eviv hopes to link its energy infrastructure to it as well.

12. Emily Wax at the Washington Post reports that due to lobbying by Delhi, Jammu-Kashmir has been taken off the mandate of the Administration's envoy to the Pakistan and Afghanistan, Richard C. Holbrooke. The decision has been received in India as a significant concession--a symptom of warming relations with Washington.
"'I think it is time for us -- having fobbed off Holbrooke--to sit quietly and ask where are we and how do we manage the situation,' said C. Raja Mohan, an Indian strategic analyst who served on India's national security advisory board in 2006."
13. Dexter Filkins at the New York Times reported yesterday that the Karzai administration announced it would postpone Afghani elections until August.
"[The] decision, which appeared to contravene Afghanistan’s Constitution, raised questions about the legitimacy of what could be President Hamid Karzai’s final months in office."
14. The news yesterday reported by the Guardian UK that the Obama Administration was composing a letter to the Supreme Leader of Iran (see Daily Sources 1/29 #9) appears to be false. From the State Department's daily press briefing yesterday:
"QUESTION: ... So is the State Department helping President Obama draft a letter to President Ahmadinejad, and what’s the status of that letter?

MR. WOOD: Look, what I can tell you – and I’ve had a number of conversations this morning about this issue. Nobody from the Administration has tasked anyone within the White House, the State Department, to draft any letter to the Iranians.

Now, there is a review underway, as you know, on Iran, and there are lots of ideas that are being bandied about. But until that review is completed, we’re not going to be able to outline how we’re going to go forward with regard to engaging Iran.

Could somebody in this building at some point have taken it upon his or herself to draft something? You know how large this building is. It’s hard to know. But I can tell you with certainty that no one – not the Secretary, or the President, no one has tasked anybody within the Administration to draft any kind of a letter to Iran."
15. Michael Schwirtz at the New York Times reports that Raul Castro and Dmitry Medvedev signed a "strategic partnership" during Castro's visit to Moscow this week.
"Russian officials promised the delivery of 25,000 tons of grain and a $20 million loan for the development of Cuba’s construction, energy and agriculture sectors."
Cuba's economy is estimated to have contracted by at least 60% following the interruption of subsidies provided by the former Soviet Union after its collapse in 1991. Recently there has been considerable national oil company interest in E&P efforts off the Cuban coast in the Gulf of Mexico.

16. Carlos Camacho at Platts reports that PdVSA announced on Thursday it will certify 235 billion barrels in proven reserves this year.
"PDVSA has been working with Canadian oil accountancy firm Ryder Scott, as well as several national oil companies ... to assess the Orinoco reserves carefully as part of the Magna Reserva plan which began in 2006."
When Magna Carta was launched, PdVSA announced that it thought there are 1 trillion barrels of crude in the Orinoco basin of which 20-30% is recoverable with existing technologies. Orinoco crude, however, is extremely heavy (tar essentially), and needs to be upgraded before it can even be refined. As it stands, the corporations with the most experience and technical competence in that field remain the major international oil companies.

17. Xinhua reports that the Nigerian National Union of Petroleum and Natural Gas Workers (PENGASSAN) have threatened to shut down all of Nigeria's 21 crude oil export terminals by February 11 unless the government cancels a contract with Cobalt Services Nigeria Limited as a pre-shipment agent. The union does not believe the corporation has the requisite qualifications to fulfill its contract and that Nigeria's Minister of Petroleum, Rilwanu Lukman, has a stake in the company.

18. Timothy R. Homan at Bloomberg reports that US GDP contracted by 3.8% in the fourth quarter from the year before. The number is considerably less than what most analysts I have read expected and some expect the numbers to be considerably revised, on the downside. Unadjusted for inflation, the economy shrank by 4.1% for the period considered. Consumer spending led the fall, dropping 3.5% in the fourth quarter after a 3.8% decline in the third. "For all of 2008, the economy expanded 1.3% as a boost from exports and government tax rebates in the first half of the year helped offset the deepening spending slump."

19. Calculated Risk has an analysis of the recent Census Bureau report that new home sales fell at an annual rate of 44.8% in December. The blog provides a helpful graph plotting new home sales since 1963, with past recessions marked in blue:

You should check out their graphs of months of new home supply and and new home inventory. Not good for housing prices and thus not good for household debt to equity ratios. In short, bad.

20. Barry Ritholtz at the Big Picture posts that LPS Applied Analytics announced findings showing that as of December 28% of existing option adjustable rate mortgages are delinquent or in foreclosure. That is up from 23% in September. Ritholtz provides a graph demonstrating the rise in delinquencies and foreclosures as a share of outstanding option ARMs:

JP Morgan believes that fully 55% of borrowers with option ARMs are underwater, meaning that the nominal debt is more than their value of the home. The post doesn't estimate the share of option ARMs of the overall mortgage market.

21. In a bit of good news, Rebecca Wilder at News N Economics reports that investors are beginning to move money from low yielding treasuries to corporate bonds. She provides a graph illustrating the differential between 10 year treasuries and 10 year treasury inflation-protected securities (or TIPs which automatically adjust payout to inflation, guaranteeing no losses due to inflation):

She notes that the inflation expectation inferred from the differential is rather low given the fundamentals of the government's balance sheet, but that it is a great improvement from what we were seeing before. That said, the market is so volatile it is by no means assured that the indicator indicates long term direction. short and to the point, with several helpful illustrations--worth taking a look.

22. Jesse's Café Américain features a Reuters piece which reports that Goldman Sachs economists think that were the Obama Administration move ahead with the plan to set up a bad bank to absorb the "toxic" assets of the financial sector costs could reach $4 trillion. $4 trillion is about one third of US GDP.
"The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

'Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset,' they wrote in a note to clients."
I'd like to say fat chance. But who knows? That said, it seems to me that there is little reason to absorb these toxic assets if they will cost the government more than purchasing the equity of the banks in question. (As Brad Setser points out in a recent post, $350 billion is enough to purchase most of the equity in the US financial system.) Clearly, much of the reason it is difficult to posit a value for any asset is because the books are cooked. Until we have an honest accounting and rating system--and a transparent market for the derivatives that are the source of the toxicity--there seems little point in buttressing the financial system.

23. Barbara Kiviat at the Curious Capitalist reports that the freelance economy is being hit by the financial crisis as well, predictably enough. She points out, however, that the stimulus bill will do little for the self-employed, as "things like extending unemployment benefits and COBRA health care coverage ... do nothing for the self-employed people out there whose incomes are getting obliterated, too." She provides a graph to illustrate how that sector is being affected:

If the Great Depression is to be our guide, historically the sector is especially vulnerable.

24. I should have linked to this earlier, but better late than never, Putin's exclusive interview with Bloomberg. In it he suggests that he is far too trusting and treats us to his mother's advice: "never complain." I have to note that the notion of a former KGB operative being too trusting is, well, odd in its conceit.

25. Another thing I should have linked to earlier, but better late than never, Obama's interview on al-Arabiya:

Thursday, January 29, 2009

Daily Sources 1/29

1. The Wall Street Journal carries a transcript of Vladimir Putin's remarks at the Economic Forum in Davos today. Sadly, Putin made sure that many of his interlocutors on the US side of the pond were sure to stop paying much attention early on in his speech with:
"In the last few months, virtually every speech on this subject started with criticism of the United States. But I will do nothing of the kind.

I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasized the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism."
Not a good start. However, constructive remarks did follow, including the remarkable:
"Although additional protectionism will prove inevitable during the crisis, all of us must display a sense of proportion.

Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake.

True, the state's increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent.

The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.

In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated."
In terms of addressing the financial crisis, Putin had the following to say:
"This means we must assess the real situation and write off all hopeless debts and 'bad' assets.

True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalization, bonuses or reputation. However, we would "conserve" and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today's needs.

Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbor any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts."
He also reiterates the call for the establishment of multiple reserve currencies, which is a fine idea of course, but given market participation it is unclear to me, precisely, how such alternative reserve currencies could be established by fiat.
"Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.

Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states.

This highlights mutual interests and interdependence.

Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognized rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive."
Putin also emphasized that interdependence was the best means of pursuing international energy security--and takes aim at "speculators."
"The only way to ensure truly global energy security is to form interdependence, including a swap of assets, without any discrimination or dual standards. It is such interdependence that generates real mutual responsibility.

Unfortunately, the existing Energy Charter has failed to become a working instrument able to regulate emerging problems.

I propose we start laying down a new international legal framework for energy security. Implementation of our initiative could play a political role comparable to the treaty establishing the European Coal and Steel Community. That is to say, consumers and producers would finally be bound into a real single energy partnership based on clear-cut legal foundations.

Every one of us realizes that sharp and unpredictable fluctuations of energy prices are a colossal destabilizing factor in the global economy. Today's landslide fall of prices will lead to a growth in the consumption of resources.

On the one hand, investments in energy saving and alternative sources of energy will be curtailed. On the other, less money will be invested in oil production, which will result in its inevitable downturn. Which, in the final analysis, will escalate into another fit of uncontrolled price growth and a new crisis.

It is necessary to return to a balanced price based on an equilibrium between supply and demand, to strip pricing of a speculative element generated by many derivative financial instruments."
Which means that Russia has now officially joined OPEC in blaming "speculation" for price distortions in the oil market. Although I agree that as an asset class oil futures will attract investment disproportionate to supply and demand in certain situations, I would also note that OPEC and Russian oil industries would both increase control over the oil markets were that to happen. (One of many objections to the speculation is the source of all problems in the oil markets meme.)

Putin also emphasized the benefits to European supply security of Blue Stream, South Stream, Nord Stream, Yamal-Europe and the Baltic Pipeline System. He emphasized that Russia is becoming a key source of energy diversification in the Asia Pacific via the LNG plant under construction at Sakhalin. (Several nations of the Asia Pacific import over 80% of their oil and gas requirements from the Middle East.) The New York Times helpfully produced a map of competing natural gas pipeline proposals in southern Europe:

Near the end of his speech, Putin wishes the Obama administration success and emphasizes the need to develop international cooperation and trust. He also pointedly alludes to the foment of internal unrest elsewhere as a means of distracting domestic constituents at home. Quite long, but worth reading in full nonetheless. Meanwhile, Emma O’Brien at Bloomberg reports that the ruble experienced its worst two-day drop in over a decade versus the dollar. The currency is nearing the exchange rate the government has pledged to defend.
"Russian banks are 'getting cheap funding and shorting the ruble,' said Yefim Pavlotskiy, deputy director-general at Moscow’s Trinfico Group, which manages about $1.3 billion in Russian assets. 'The central bank will have to show the ruble can strengthen on some days so speculators get burned a few times, this way they won’t be so bold.'"
And Anna Shiryaevskaya at Platts reports that Turkmenistan suggested that the proposed capacity of a pipeline carrying Central Asia gas to Europe through Russia should be increased to 80 billion cubic meters/year (bcm/y) from 60 bcm/y.
"Julian Lee, senior energy analyst at the centre for global energy studies, said the proposal shows Turkmenistan wants to boost its production and sees Russia 'as the most viable way of getting its gas to Europe.'"
Turkmenistan has plans to increase its natural gas exports from 50 bcm in 2007 to 125 bcm by 2015 and 200 bcm by 2030.

2. Olesya Vartanyan and Ellen Barry at the New York Times report that opposition parties have gathered to call for new presidential and parliamentary elections in Georgia.
"'Today almost all the political parties agree,' [David Gamkrelidze, a chairman of the New Rights party] said. 'Every day more people and politicians understand that he has no capacity to overcome the crisis and that he is responsible for all these mistakes in Georgia and he must resign.'"
3. Jason Dean, James T. Areddy and Serena Ng at the Wall Street Journal report that Chinese Premier Wen Jiabao squarely placed the blame for the global financial crisis on the United States.That said,
"Frictions between the two countries began to worsen long before Mr. Obama took office. The Chinese central bank last year stopped lending its Treasury holdings for fear the borrowers will go bankrupt, according to people familiar with the discussions -- a decision that disrupted the functioning of the Treasury market. Beijing rejected pleas by Washington to resume its lending of Treasurys, the people said.

Meanwhile, China -- for years the largest foreign investor in bonds from Fannie Mae and Freddie Mac -- has been sharply trimming its holdings of that debt. After making direct net purchases of $46.0 billion in the first half of 2008, China's government and companies were net sellers of $26.1 billion in the five months through November, according to the latest U.S. data.

Weak demand for such debt from China and other foreign investors helped prompt the Federal Reserve to announce in November that it would take the step of buying up to $600 billion in debt from Fannie, Freddie and two other U.S. government-related mortgage businesses."
The journalists note that many in China suspect that the fiscal authorities are too close to Washington.
"Around October, a lengthy Chinese-language essay began circulating on the Internet excoriating Mr. Lou [Jiwei, chairman of China Investment Corp. (CIC)]and other top CIC officials, along with Zhou Xiaochuan, China's central bank governor, for being too close to the U.S. and then Treasury Secretary Henry Paulson. The diatribe quickly gained wide circulation in Chinese financial circles. One passage charged that Mr. Zhou 'colluded with Henry Paulson to buy US bonds, forced [Chinese yuan] appreciation, attached China's economy to the US and broke China's economic independence.'"
Well worth reading in full.

4. Maureen Fan at the Washington Post reports that Beijing has launched raids in Tibet, a "strike hard" campaign raiding thousands of homes and businesses in Lhasa. It is interesting that Beijing chose to begin the raid in the middle of the Economic Forum at Davos--apparently they are worried about the upcoming 50th anniversary of the Tibetan uprising of March 10. Meanwhile, Rebecca MacKinnon at the Huffington Post writes a letter to the President suggesting that Chinese public opinion is important despite the lack of its democratic character. I feel sure that the international relations gurus in the Obama Administration are fully aware of this given the role the German press played in foreign affairs prior to WWI. That said, MacKinnon provides the helpful reminder that,
"It is this young generation born after 1980 who were most vocal on the Chinese Internet last year, lashing out against Western critics and Western media coverage of their government's crackdown in Tibet. In response to international pressure, the Chinese government negotiated with the Dalai Lama, but it didn't feel the need to concede anything meaningful. In maintaining a hard line, the Chinese leadership could feel doubly secure in the fact that, not only did they have the strength of the People's Liberation Army and the People's Armed Police on their side; China's majority Han-Chinese public had no sympathy for the idea of Tibetan autonomy."
She suggests a type internet outreach to the people in a piece which is a strange combination of recognition of differences combined with preference for self.

5. Francois de Beaupuy and Helene Fouquet at Bloomberg report that France's eight largest labor unions went on strike today, disrupting the nation's rail network, airports and school system. The unions are demanding that the government do more about rising unemployment and falling purchasing power.
"About 69% of the French people back the strike, according to a poll by CSA-Opinion for newspaper Le Parisien on Jan. 25. Forty-six percent support the strike, while 23% “sympathize,” with the union call, Le Parisien said. Of those interviewed, 12% were opposed or hostile to the strike."
About half of Paris's subways are operational. Platts reports that 23% of EDF's workforce is taking part in the strike. (EDF provides most of France's power generation.) The FNME energy and mining union told the media that it had cut power output by 10GW, but that it plans to decrease output even further after the morning surge in power demand had passed. The cuts were made in every type of power plant, including nuclear.
"Average half-hourly power prices on France's within-day balancing mechanism rose to almost Eur200/MWh at 0600 CET and were at about Eur190/MWh at 0930 CET, figures from grid operator RTE show.

On Wednesday, day-ahead baseload power closed at Eur75/MWh and peak load
at Eur94/MWh in the OTC market."
Andrew Spurrier at Lloyd's List reports that cargo-handling has been brought to a complete standstill at the ports of Marseilles and Le Havre.
"Bernard Thibault, general secretary of the leading French union confederation, the CGT, warned President Nicolas Sarkozy and the government against behaving as if had nothing had happened after the day of action.

'The head of state cannot not hear us,' he said."
6. John Kingston at the Barrel reports that contract driller Helmerich & Payne has begun idling its rigs in Venezuela because it says PdVSA owes it $100 million in back payments. Kingston notes that this is confirmation of what many suspect, that as cash dries up in the producing countries capacity investment will also dry up. This makes sense, but it worrying in terms of future production needs. Also, I cannot imagine that Venezuela will, given this news and its past tendency to nationalize, be able to attract private corporate interest in its fields without advancing very generous terms. Which of course would be the excuse for a future nationalization, which, were I a private corporation, would make me want terms which would see a return almost immediately. That said, Platts reports that BP CEO Tony Hayward suggested at Davos today that an oil price of $60-80/b would be required for the capacity additions to supply required over the next two decades.
"'Over the next 20-odd years, the global energy industry... will invest of the order of $25-26 trillion, so in the order of $1 trillion/year, to provide the energy the world will need for that time-frame,' Hayward told a session of the World Economic Forum in Davos, Switzerland.

'From the perspective I have, for OPEC countries to be able to balance their budgets, sustain their social investment programs and invest for the future, it would appear that a price somewhere between $60 and $80 is appropriate.'"
Meanwhile, Maher Chmaytelli and Juan-Pablo Spinetto at Bloomberg report that OPEC general secretary Abdalla el-Badri told the forum that the cartel would not hesitate to cut supply further if prices remain low. He said that prices below $50/b were too low and suggested yesterday that the organization's target band was between $70-$100/b. Bloomberg carries video of his remarks at Davos:

7. Kartik Goyal at Bloomberg reports that Indian Commerce Secretary G.K. Pillai said in an interview that exports fell 1% in December and, "The job losses are very substantial and are likely to be of the order of 700,000 to 1 million, including temporary staff."
"India’s exports tumbled 9.9 percent to $11.5 billion in November from a year earlier after contracting 12.1% in October, the first decline in seven years. Industrial production rose 2.4% in November, after dropping 0.3% in October, the first contraction in 15 years.

Export growth may slow to 17% in the 12 months to March 31, compared with 25 percent a year ago, Trade Minister Kamal Nath told Bloomberg Television in an interview in Davos today. 'There will be job losses due to the global recession but I think domestic demand is going to help us.'"
Bloomberg carries video of the Nath interview.

8. The Associated Press reports that the Iraqi finance minister appealed to international financiers to open branches in Iraq at a conference on international banking held in Baghdad yesterday.
"Since the 2003 US-led invasion that toppled the previous regime, the Central Bank of Iraq has licensed some international banks to open branches in Iraq but security concerns prevented them from opening their branches."
The minister, Bayan Jabr, promised banks that the government would take special pains to clear any obstacles to operating in Iraq, including revisiting any laws that might be complicated things. Baghdad wants to attract international capital to the reconstruction effort, but Jabr encouraged international banks to develop joint ventures with local entities to help provide credit to investors.
"Iraq has seven state-run banks and 33 private banks. But only four of the banks have substantial capital, ranging between $40 million and $100 million."
Ahmed Rasheed at Reuters reports that at the conference Jabr also announced that Iraq would shortly issue government debt of about $5 billion. The issue would be the first since the fall of Saddam Hussein. Meanwhile, Juan Cole at Informed Comment carries a US Open Source Center translation of a recent Kurdish newspaper article which warns that the Patriotic Union of Kurdistan (PUK) has formed an emergency action committee in response to central government plans to put Kirkuk under national army control. A PUK official told the press that in terms of Iraqi military control of Kirkuk, "Our final word is that we don't accept that at all." Professor Cole notes: "This dispute has the dark potential to kick off another civil war in Iraq, this one not Sunni-Shiite but rather Arab-Kurdish." The monopoly of force issue was complicated from another side, as Timothy Willimans reports in the New York Times, Baghdad has refused to grant Blackwater a license to operate in the country. Blackwater had been operating without a license through much of 2008, but applied for one recently. A spokesman for the company noted that it had not received official notice of the denial yet. Peter Baker and Alissa J. Rubin report that President Obama visited the Pentagon for the first time yesterday and appears to be seeking a plan from the armed forces which would responsibly reduce our military commitment to Iraq.
"Among those consulted by the president was Gen. Ray Odierno, the top commander in Iraq, who has developed a plan that would move slower than Mr. Obama’s campaign timetable, by pulling out two brigades over the next six months. In an interview in Iraq on Wednesday, General Odierno suggested that it might take the rest of the year to determine exactly when United States forces could be drawn down significantly.Among those consulted by the president was Gen. Ray Odierno, the top commander in Iraq, who has developed a plan that would move slower than Mr. Obama’s campaign timetable, by pulling out two brigades over the next six months. In an interview in Iraq on Wednesday, General Odierno suggested that it might take the rest of the year to determine exactly when United States forces could be drawn down significantly."
9. Keith Weir at Reuters reports that the Guardian UK today ran the story that the Obama Administration is drafting a letter to the Supreme Leader of Iran--Ayatollah Ali Khamenei--which may well suggest opening direct and official lines of communication between DC and Tehran to be published as an open letter.
"In Washington, a State Department official said the policy on Iran was under review and declined to comment on whether a letter was possibly being prepared to send to the Iranians."
10. Keith Johnson at Environmental Capital reports that the EU yesterday announced plans to spend €1.25 billion on research on how best to store and capture carbon emissions at existing coal burning plants in Europe. Some in the coal industry had hoped for more, though many were quite pleased.

11. The Federal Open Market Committee decided to leave interest rates unchanged yesterday at 0-.25%. In its public statement, the FOMC stated that it expected inflation to remain subdued in the near to medium term. It went on to say:
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses."
12. Shobhana Chandra at Bloomberg reports that orders for US durable goods fell by 5.7% in 2008. The Commerce Department announced that orders in December fell for the fifth straight month, by 2.6%. The Labor Department announced that initial jobless claims grew by 3,000 to 588,000 last week. GDP contracted by a 5.5% annual rate in the fourth quarter.

13. Rebecca Wilder at News N Economics has a post which notes the correlation between GDP growth and consumer spending. She points out that analysts expect consumption will fall by a full 2% in the first quarter of 2009.

Consumption, she says, has been affected by high oil prices before, but that the culprit for such a steep fall in consumption must, at least in part, be put at the feet of another cause.
"The qualitative evidence is incontrovertible: this cycle is marked by serious adverse real estate wealth effects. On average (as measured by the Case-Shiller composite 20 index), home values have been declining since July 2006 - over two years - but households saw their biggest declines in home equity in just eleven months of 2008. The associated pull-back by consumers will set records, as households retrench amid record housing equity losses."
Worth reading in full.

14. The Oil & Gas Journal reports that Valero--the major refiner--reported a $3.3 billion loss in the third quarter.
"Calling the sluggish economy 'a headwind against demand growth for refined products,' Bill Klesse, Valero's chairman and chief executive officer, said Valero will manage its refinery run rates according to market demand.

'For example, we will shut down the entire Texas City refinery instead of running portions of it during scheduled maintenance this quarter,' Klesse said. 'At our Corpus Christi East plant, we have shut down the fluid catalytic cracking unit, which primarily produces gasoline. Across our system, the average utilization rate at our fluid catalytic cracking units is currently in the range of 70% to 75% of capacity.'"
The Texas City refinery has a capacity of 225 kb/d. The news comes on top of the news that Big West is shutting down its 66 kb/d refinery in Bakersfield, as it is finding it impossible to find alternative sources of crude.

15. Katherine Harmon at Scientific American reports that the American Society of Civil Engineers released a "report card" on US infrastructure yesterday which suggested that "The nation's roads, bridges, levees, schools, water-supply and other infrastructure are in such bad shape that it would take $2.2 trillion over five years to bring them up to speed."
"Following are the ASCE infrastructure grades, which were based on an analysis of government records by a panel of engineers.

Aviation D
Bridges C
Dams D
Drinking Water D-
Energy D+
Hazardous Waste D
Inland Waterways D-
Levees D-
Public Parks & Recreation C-
Rail C-
Roads D-
School D
Solid Waste C+
Transit D
Wastewater D-

Overall: D"
Drinking water is among the worst scoring categories. Schools do better, which should give us some idea of just how bad the situation is. Water is pretty important. Just saying.

Wednesday, January 28, 2009

Because it's Awesome

English Russia hosts a series of photos which are composites of contemporary photos of St. Petersburg with photos from the siege of Leningrad. Here's my favorite:

A very beautiful and ugly collection. Life and ghosts. Well worth a look.

Daily Sources 1/28

1. Clifford J. Levy at the New York Times reports that a story carried by the Interfax news agency in Russia has sparked speculation that the Kremlin will scrap plans to place new nuclear armed missiles near the Polish border in a response to the initially more friendly approach toward Moscow by the Obama administration. Calls to the ministry of defense yielded no one who would confirm or comment on the speculation. However, ITAR-TASS published the remarks of an unnamed official as saying the news that Russia was pulling back from its new missile plans was nonsense. "Asked about the Interfax report, NATO said through a spokesman that if confirmed, 'It would be a positive step.'" Meanwhile, the Associated Press reports that Cuba's Raul Castro arrived in Moscow today for an eight day visit. (Typically a leader going on an overseas trip for a relatively long period of time--as in more than a few days--is a sign that he is extremely comfortable with their political position at home.)

2. Jane Morecroft at Platts reports the European Commission is expected to announce on Wednesday new plans to invest €3.5 (~$4.6) billion in European Union energy infrastructure over the course of 2009. The monies will be a part of the European Recovery Plan. Meanwhile, Nadia Rodova at Platts reports that Gazprom is considering expanding the planned capacity for the potential South Stream natural gas pipeline from 31 billion cubic meters/year (bcm/y) to 47 bcm/y.

The South stream pipeline plan is being developed in cooperation with ENI.

3. Marcus Hand at Lloyd's List reports that Neptune Orient Lines announced that from he period November 15-December 26 it saw a 24% drop in box container cargo volumes. It is a somewhat unusual time period to report on, but appears to be another confirmation of a general collapse in global trade. The Baltic Dry Index continues to show some sign of recovery, though there wasn't much room left to fall.

Meanwhile, Pete Harrison at Reuters reports that the EU will call for airline and shipping emissions regulations to be included in any successor treaty to Kyoto.

4. Yves Smith at Naked Capitalism reports that the Institute for International Finance has made the first forecast by an official international finance organization of a global economic contraction in 2009. The IIF's forecast now has the global economy contracting by 1.1% this year. Christopher Swann at Bloomberg reports that the IMF has revised downward its prediction for the global economy this year to 0.5% from 2.2% in a new publication.
"The reports signal that write downs and losses at banks totaling $1.1 trillion so far are only half of what’s to come and that contractions may deepen. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets ... ."
As Smith noted, official wisdom usually lags market indicators, and this is grim news.

5. Brad Setser at Follow the Money makes the point that large additional demand for sovereign debt and agencies brought on by growing receipts from export-led growth depressed yields on those instruments, thus pushing money looking for safe returns traditionally provided by sovereign debt and agencies elsewhere. Interesting read.

6. Jeff Stein at Spy Talk reports that the EU took the Mujahedin-e Khalq off its list of terrorist organizations on Monday. Having been taken off this list, assets previously frozen in Europe will become available again. This will prove a windfall to the organization, which is a darling of neocons in the US and was a pawn of Saddam Hussein in his struggle with the Islamic Republic of Iran.

7. Asif Ali Zardari, the President of Pakistan, has an opinion piece in the Washington Post where he congratulates Barrack Obama on his election and urges closer cooperation between Islamabad and DC. Zadari, known as Mr. 5% to his countrymen, urges the Administration to
"encourage Congress to pass the Enhanced Partnership with Pakistan Act. The multiyear, $1.5 billion annual commitment to social progress here would signal to our people that this is no longer a relationship of political convenience but, rather, of shared values and goals ...."
Pakistan is facing serious budgetary difficulties, and thus the call for aid is warranted, though Mr. Zadari is probably not the best messenger. He goes on to urge the Administration to focus on assisting the resolution of long-standing disputes with India:
"Much as the Palestinian issue remains the core obstacle to peace in the Middle East, the question of Kashmir must be addressed in some meaningful way to bring stability to this region. We hope that the special envoy will work with India and Pakistan not only to bring a just and reasonable resolution to the issues of Kashmir and Jammu but also to address critical economic and environmental concerns.

The water crisis in Pakistan is directly linked to relations with India. Resolution could prevent an environmental catastrophe in South Asia, but failure to do so could fuel the fires of discontent that lead to extremism and terrorism. We applaud the president's desire to engage our nation and India to defuse the tensions between us."
Zadari concludes with:
"Pakistan and the United States have much in common and should be partners in peace. This moment of crisis is an opportunity to recast our relationship. We are extending our hand in friendship."
Well worth reading.

8. Nazila Fathi and Aalan Cowell at the New York Times report that President Ahmadinejad urged President Obama to apologize to Iran for 60 years of its behavior toward Iran. The Iranian president suggested that the Administration's change could be a change in tactics as opposed to strategic ends, or even just a change in tone.
"'Change means that they should apologize to the Iranian nation and try to make up for their dark background and the crimes they have committed against the Iranian nation,' he said in the speech broadcast live on Iranian television.

The catalog of crimes, Mr. Ahmadinejad said, stretched back decades, beginning with American support for the 1953 coup that ousted the democratically elected government of Mohammed Mossadegh and installed Shah Mohammed Reza Pahlavi, who ruled until he was ousted in the 1979 Islamic revolution."
9. Emmanuel at International Political Economy Zone reports that the US has prevailed in suits in the WTO alleging intellectual property violations by China.
"# China backed down and agreed to a settlement before a case concerning export rebates given to exporters was formally investigated;
# China lost its appeal in the case concerning discrimination against foreign auto parts manufacturers;
# Now, reports suggest the US has chalked up another one against China regarding intellectual property violations. From the US Trade Representative's site -"
This has led to expressions of regret by Beijing. Worth reading.

10. Norimitsu Onishi and Mark McDonald at the New York Times report that Yasukazu Hamada, Japan's minister of defense, announced today that it would send ships to conduct anti-piracy operations off the Somalian littoral.
"'The pirates in the Gulf of Aden off the coast of Somalia pose threats to Japan and the international community and are an issue that should be dealt with swiftly,' Mr. Hamada said, according to Kyodo News. The deployment, which would be considered a police action, is not expected to be as politically sensitive as other missions in recent years."
However, a new law will still need to be passed in order to allow the ships to leave on the mission. It also was not clear from his remarks whether the Japanese ships would coordinate with the international flotilla already in the region on the same mission, though it seem awfully likely. On January 8, Lloyd's List reported that the Aso administration was considering changes to the Japanese Constitution in order to allow action against the Somali pirates. (see Daily Sources 1/8 #14.)

11. Fabiola Moura and Karla Palomo at Bloomberg report that Petrobras Chief Executive Officer Jose Sergio Gabrielli told journalists that the company would put off issuing new debt to finance its production and exploration plans, as the cost of borrowing on the international markets is too expensive. "'The market conditions nowadays in the secondary market for Petrobras are too expensive,' Gabrielli said. 'We don’t need more funds. We can wait as much as we need.'" Bloomberg posted a video of their interview of the CEO in Spanish--not Portuguese--here.

12. Michelle Boorstein at the Washington Post reports that the Pope made his first comments this morning regarding the controversy sparked by his decision to revoke the excommunication of a renegade order of Catholics, one of whom is a holocaust denier. In his remarks, he reiterated "'full and indisputable' solidarity with Jews and repudiating the idea of denying the Holocaust." He also said the Holocaust should "prompt humanity to reflect on the unpredictable power of evil when it conquers the hearts of men." Boorstein provides a fair summary of the controversy and its ideological background.

13. Sophia Kishkovsky at the New York Times reports that the Russian Orthodox Church has elected a new Patriarch, Metropolitan Kirill of Smolensk and Kaliningrad--who had also acted as interim Patriarch when Aleksy II died last month. Kirill was in charge of international affairs under Aleksy II, and has received some criticism for his ties to the Roman Catholic Church.
"As chairman of the external relations department, he oversaw the drafting of the 'social concept' of the Russian Orthodox Church, presented in 2000. It addresses church positions on social issues, including abortion, globalization and poverty. One of its most cited points allows for civil disobedience if the government violates Christian commandments."
Historically, the Russian Orthodox Church has been fairly establishmentarian, the legitimization of civil disobedience is a fairly significant move in a new direction for the church, if I understand correctly.

14. Justin Lahart at Real Time Economics reports that the conventional wisdom is that it is "all but assured" that the Fed will cut the federal funds rate to 0-0.25% in the FOMC meeting today. In a related post, Phil Izzo, also of Real Time Economics points out that since 2000 money supply growth has been negatively correlated to other economic indicators:

(Chart courtesy of the Wall Street Journal.)

15. Richard Cowan at Reuters reports that the US House of Representatives looks likely to pass President Obama's $825 billion stimulus plan today.

16. The EIA reported today that crude oil stocks for the week ended January 23 built by a whopping 6.2 million barrels to 338.9 million barrels. The amount in storage is getting close to the largest commercial stock holdings on record since 1998, which was 352.6 million barrels in July 2006. (1998 was the last time there was a super contango similar to the current strip.) That said, the historical data suggest that there should still be some storage capacity available. (And reportedly some crude is being offloaded from VLCCs which were chartered for storage purposes.)

According to a survey by Bloomberg, most analysts on Wall Street had expected a 2.8 million barrel build in crude stocks, a large build, but half of what in fact took place. Gasoline stocks fell by 100 kb, remain at the top of the historical range, and against analyst expectations of a 1.75 million barrel build. Distillate stocks also fell by 1 million barrels, but remain at the highest levels seen in recent history and well above the average. The draw down was consistent with analysts expectations of a 1.13 million barrel draw. Taken in isolation, this news should put downward pressure on the price of crude. However, at the time of this writing, the price of sweet light crude on NYMEX hasn't budget much from yesterday's close.

Meanwhile, Maher Chmaytelli reports that Abdalla el-Badri, the Secretary General of OPEC, is seeking rules to limit the number of participants in the US markets who purchase crude without any intention of using it--or "speculators.""'The speculators are still there,' el-Badri told reporters today as he arrived in Davos, Switzerland, where he is attending this week’s World Economic Forum. 'Before, they were playing a supply shortage, now they are playing too much supply. They are delaying a recovery in prices.'" And Edward Morse, managing director and chief economist at LCM Commodities and founder of the Energy Intelligence group of publications, has a piece exploring the validity of WTI as a benchmark for global sweet light crude prices at the Financial Times.
"The problem resides in the physical market of the mid-continent of the US, specifically at Cushing, Oklahoma, an obscure but crucial oil gathering hub and the pricing point for financially traded WTI on the Nymex. Often viewed as the global crude oil reference point, Cushing is really a regional, parochial crude market tenuously linked to international markets by bottlenecked pipelines from the Gulf coast. Cushing pulls oil from the Gulf coast, Canada or the mid-continent but, unless regional refiners process WTI, it becomes landlocked and decouples from global markets. As inventories build, WTI's price must fall until it sells, even if that means trucking oil south.

This physical situation is not new but the problem has worsened as Canada's tar sands production has grown nearly 500,000 b/d since 2002 and should rise another 200,000 b/d this year, most of it headed towards mid-continent, where refining capacity has fallen by 200,000 b/d. A new pipeline will soon increase flows into the region by another 100,000 b/d. WTI will continue to disconnect from world markets until new pipeline connections create a physical escape valve for oil to flow from the mid-continent to the Gulf coast.

Some believe the problem stems from market manipulation but it is the twin facts of higher storage capacity in the mid-continent and the bottleneck that provide a temptation for companies to trade around the storage, building it in weak markets and emptying it in strong markets. Weak markets discount spot sold oil to deferred oil, further encouraging storage and weakening WTI's spot price; the reverse happens when spot prices are at a premium to deferred prices, depleting storage rapidly.

Although what's happening to prices might suggest that some traders are manipulating the market, the more compelling explanation is that, because a peculiar inland market sets WTI's price, the incentive emerges to trade the WTI below its "waterborne" level in weak markets and above it in tight markets."
These are all fair points, but, in practice, as I understand it, the majority of term crude contracts actually use dated Brent or BWAVE as the reference price, not CL/WTI.

Tuesday, January 27, 2009

Daily Sources 1/27

1. Hillary Mann Leverett, former National Security Council and State Department official who has participated in negotiations with Tehran on behalf of the United States has a guest post at the Washington Note which argues that the US ought to take up Iran's offer to allow US officials to interrogate al Qaeda operatives detained in Iran.
"In the wake of the 9/11 attacks and the U.S. invasion of Afghanistan, Tehran detained literally hundreds of suspected Al Qaida operatives seeking to flee Afghanistan into Iran. Iran repatriated at least 200 of these individuals to the new Karzai government, to Saudi Arabia, and to other countries.

The Iranian government documented these actions to the United Nations and to the United States in February 2002, including by providing copies of each repatriated individual's passport. But Iran could not repatriate all of the individuals it detained; for example, the Islamic Republic has no diplomatic relations with Egypt, and Iranian diplomats told my colleagues and me that Tehran was not able to repatriate Al Qaida operatives of Egyptian origin to Egypt.

They also said that Osama bin Ladin's son, Saad, had tried to enter Iran and that Iranian security forces had turned him away. However, these Iranian diplomats expressed concern that, if Saad bin Ladin managed to penetrate the porous Iranian-Afghan border and enter Iranian territory--as he apparently did in 2003, after the Bush Administration had unilaterally cut off our dialgoue with Iran regarding Afghanistan and Al Qaida--Tehran would encounter difficulty repatriating him to Saudi Arabia, which had already made clear it was not interested in taking either Saad bin Ladin or his father.

Instead of working to establish a framework within which Tehran could have made Al Qaida operatives detained in Iran available to U.S. interrogators--as our Iranian interlocutors requested--the Bush Administration insisted that Iran detain and deport all the Al Qaida figures we believed might be in Iran, without any assistance from or reciprocal understandings with the United States.
The post is constructed to debunk the assertions of an article published elsewhere, but still worth reading. Stephen Kinzer, formerly a journalist at the New York Times, has an opinion piece in the Guardian UK which argues that Tehran is the key to solving most conflicts in the West and that President Obama ought to choose an envoy to Iran with that in mind.
"If Iran can be brought back into the world community as a full and welcome partner, it could pressure militant groups like Hamas and Hezbollah to end their war against Israel. That, in turn, might lead Israel to stop its devastating attacks on nearby populations, which intensify hatreds, create terrorists and horrify the world.

Iran also has tremendous influence in Iraq--more, in fact, and any other country, including the US. It is the only country than can guarantee a modicum of stability in Iraq as American troops depart.

Iran's centuries-old relationship with Afghanistan means that it could also play a decisive role in calming the terrifying crisis that is engulfing that country and threatening to blow Pakistan apart. An Iran that feels safe might even agree to compromise on its nuclear program, which much of the world justifiably fears."
Kinzer goes on to suggest that Dennis Ross, rumored to be Obama's choice (see Daily Sources 1/6 #1), would be a bad selection, because he is so mistrusted by the Islamic world. Perhaps Kinzer is right, but if Iran is the key, then Israel is the lock, and the Administration is probably more interested in finding someone who has credibility in Tel Eviv than in Tehran--for obvious reasons. Although there is much talk about a "grand bargain" with Iran, my guess is that Tehran is extremely unlikely to decide that such a bargain is in its interests. (Which isn't to say that acting as if such a bargain was in its interests wouldn't be in its interests, if you see what I mean.)

As I have noted before, the government of Iran is a revolutionary government, the Supreme Leader's title is literally translated as "Leader of the Revolution," and were the US to come to terms with the government, it would lose its raison d'etre. This is not to say that we shouldn't create a formal relationship with the country, just that much of the opposition to war with Iran appears these days to be positing that solving all problems with Iran in one fell swoop is the only real alternative to acts of force, which is wishful thinking at best, in my opinion. Still, the piece is worth reading.

In the meantime, Reuel Marc Gerecht, senior fellow at the Foundation for Defense of Democracies and former CIA case officer, yesterday had an op ed in the Washington Post in which he suggests that the Obama Administration should conduct a bipartisan review of the intelligence community's operations in Iran. But the piece spends plenty of time discussing just how porous the Iranian border is and how that might be exploited by covert operatives. Without going into the false allegations made by the piece--for example Iran's relationship with al-Qaeda--I would note that it probably has to be read in the context of the warning given by the head of Iranian counter-intelligence last week in the Iranian press for the US not to spy on it. (see Daily Sources 1/20 #2.) Yes, I do believe someone felt that an essay such as this was the best possible response to such a warning.

2. Zoltan Simon and Katarzyna Klimasinska at Bloomberg report that EU Energy Commissioner Andris Piebalgs suggested today in Budapest that the EU should provide €200 (~ $259) million for initial funding for the Nabucco pipeline. The Chairman of the European Investment Bank, Philippe Maystadt, indicated at the conference dedicated to the pipeline that his bank may well find as much as 25% of the €7.9 billion in projected costs of constructing the pipeline.
"Azerbaijan, a potential supplier of gas to the pipe, will only decide whether to commit to Nabucco once questions over financing, transit fees and the construction timetable are resolved, President Ilham Aliyev said in an interview in Budapest yesterday."

3. Alan Cowell at the New York Times reports that in an interview with Al Arabiya TV of the UAE, President Obama said he wants to convince the Islamic world that "the Americans are not your enemy." Critically, he reminds his audience that America "was not born" a colonial power and suggests that the US cannot dictate the decisions of the major actors in the Middle East, but only facilitate political decisions and negotiations by the people on the ground. This is more important than some have given it. Certainly, the efforts of Karen Hughes were laudable, but she had no credibility with the target audience. The current administration does. Meanwhile, Griff Witte at the Washington Post reports that Palestinian fighters detonated a bomb by a border fence with Israel today, killing an Israeli soldier.

4. Bettina Wassener at the New York Times reports that the Japanese trade ministry today announced the outline of a plan to take equity stakes in ailing companies.
"Tuesday’s plan by the trade ministry, to be considered by the cabinet next month, reaches out beyond the banking sector to other parts of the Japanese economy. It foresees the state-owned Development Bank of Japan buying shares in companies that are having trouble raising money amid the lingering credit crunch. The government will guarantee the investments should the companies go bankrupt, the ministry said.

Although it did not specify what type of companies might be eligible for such help, the plan will probably be mainly aimed at the small and medium-size outfits that employ 70 percent of the country’s work force and are crucial suppliers to corporate giants."
5. John Kingston at the Barrel reports that the oil rig count in North America is down 99 rigs in the last four weeks, nearly 23%. Kingston quotes Barclay's Paul Horsnell's comment on this development in full:
"With the backdrop of a hail of recent announcements on capital expenditure reductions for both conventional and non-conventional oil, together with the continuing move away from investment in alternative energy, we believe that the sharp fall in industry confidence is likely to have a more lasting effect on the health of the supply-side. Indeed, for that not to represent a severe problem over the course of the following decade, the weakness in global oil demand would have to become fairly prolonged. It tends to be a far longer process to reinstate projects than it is to mothball or cancel them, and the scale of the current industry freeze and confidence loss seems likely to severely affect non-OPEC production. Further, given how much of expenditure in mature areas is directed at trying to contain decline rates, we suspect that those decline rates might now be set for another step up."
Quite. Meanwhile, Platts reports that the Centre for Global Energy Studies (CGES) in London said that OPEC's actions so far have been sufficient to stabilize Brent at about $45/b. (Special attention is paid to the views of CGES because it was founded by Ahmed Zaki Yamani, who served as Saudi Arabia's Minister of Oil from 1962 until 1986.) However, CGES warned that if prices were pushed much higher, they would likely further depress demand, undermine price advances as well as any potential recovery in world trade.

Meanwhile, Randy Fabi at Reuters reports that Mohammed Sanusi Barkindo, the head of Nigeria's national oil company NNPC, said that global prices need to remain over $40/b in order for their offshore production to remain viable. "Nearly all of Nigeria's oil production growth is expected to come from offshore, which already represents 40 percent of current output of less than 2 million barrels per day." Chris Stanton and Tamsin Carlisle at the Abu Dhabi National report that ADNOC--Abu Dhabi's national oil company--awarded $3.5 billion in contracts to expand onshore oil fields. "ADNOC is moving ahead with its long-term plans to lift capacity by 30%, to 3.5 mb/d, despite a recent dip in global oil demand." Three fields are slated for expansion, the Sahil, Asab and the Shah, and production is scheduled to increase by a total of 60 kb/d by 2012 and 400 kb/d by 2016. The emirate has pushed back the capacity increase plans several times over the years, in part because several concessions to Western oil companies are nearing expiration, meaning that they have little incentive to invest in field capacity increases at this time. Meanwhile, Platts reports that a collapse in palm oil prices has produced a remarkable 520% increase in Malaysian biodiesel exports in December 2008 from a year earlier.

6. Keith Johnson at Environmental Capital reports that Halliburton has announced on its website that it expects to pay $559 million to settle charges it violated the Corrupt Practices Act as it pursued the contract to build the Bonny Island liquefied natural gas plant in Nigeria. The post includes a link to the plea agreement made by the former head of Kellogg Brown & Root for orchestrating over $180 million in bribes to Nigerian officials.

7. Keith Johnson at Environmental Capital reports that Todd Stern, chief climate negotiator in the Clinton Administration, will be "climate envoy." In his remarks, he spoke of how American exceptionalism in this arena was over, but the details of his approach seem to illuminate a certain continuity with the old approach.
"Mr. Stern’s expressed frustration with the 'maddeningly cumbersome' UN-sanctioned process that puts almost 180 countries together at the bargaining table. His preferred venue for hashing out new climate accords is the 'E-8,' a group of eight developed and developing countries that together account for 70% of global greenhouse-gas emissions. He says that would be different from President Bush’s 20-country group of major emitters because it wouldn’t just be a talk shop, but a place to take concrete steps."
I think that there is much merit in the notion of an E-8 to discuss these issues as opposed to a huge unwieldy parliament mostly composed of nations whose efforts will have little to no practical effect upon global climate. That said, as Johnson concludes,
"China is clearly the joker in the global struggle to contain emissions. For all of Team Obama’s ambitious policies, what happens in Beijing may be a lot more important than what happens in Washington."
Worth reading.

8. Yves Smith notes that several nations are involved in bilateral discussions for barter for food, given the difficulty in finding reasonable credit terms.
"[Countries] including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil.

The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up."
Energy security is one thing. Food is another--it's all about calories, but some calories are really more equal than others.

9. Frank Jack Daniel at Reuters reports that Caracas has signaled that it is not ready to invite back an American ambassador to Venezuela.

10. Free Exchange notes that India has decided to ban imports of toys from China for six months.

11. Jane Macartney at the Dublin Independent reported yesterday that a secret meeting was recently held between Communist Party leaders and leaders of the banned underground Protestant leaders in Beijing.
"Officials privately estimate the total number [of Christians in China] at 130 million -- far outstripping the 74 million members of the Communist Party. Most are Protestants and are affiliated with unofficial house churches.

No representatives of the underground Catholic Church were invited -- the Vatican is still viewed by the Communist Party as a rival force and tentative talks yielded little progress."
Meanwhile, on Friday the Vatican launched its own youtube channel. I would imagine that this would be regarded as a serious issue in Beijing if Christians really represent 9.8% of China's population--especially given Pope John Paul II's affect on the Solidarity movement in Poland. (Timothy Garton Ash allegedly once said, "Without the Pope, no Solidarity. Without Solidarity, no Gorbachev. Without Gorbachev, no fall of Communism.")

This savvy is contrasted with the news that Pope Benedict XVI, reported Sunday by Rachel Donadio at the New York Times, has revoked the excommunications of four bishops associated with the St. Pius X Society. The Society had been formed in opposition to the Vatican II reforms, and the bishops had been consecrated by its founder, archbishop Marcel Lefebvre, in 1970 via unsanctioned ritual. They were excommunicated by Pope John Paul II after this consecration. One of them--British-born Bishop Richard Williamson--is a holocaust denier. From what I have gleaned via a short overview of St. Pius X Society materials, they take their cue from St. Pius X, Pope from 1903-1914, because he argues that church teaching cannot change, and that revelation was completed with the apostles. (Though if any readers have insight into some of the deeper intricacies of the movement, I would be obliged if they would enlighten me.) The conservative take is consistent with Benedict XVI's outlook, but seems especially indifferent to the question of husbanding the church's moral authority in the eyes of the world and likely to lose the church some followers. Worth keeping an eye on.

12. Barry Ritholtz at the Big Picture reports that the Case/Shiller report showed a 18.2% annual decline in November in the 20 city Home Price Index. Since August 2006, both the 10 city and 20 city composites have declined each and every month.

Real Time Economics published the data for each of the 20 cities here.

13. John M. Broder at the New York Times has a very useful article on how competing energy concerns are dividing Democrats in Congress. States which have large coal reserves are not especially keen on legislation which would kill its competitiveness. This is especially true of states that also have a substantial portion of their power generated by coal burning power plants. Here is a map illustrating the dilemma courtesy of the New York Times:

I would only add that this divide extends to other energy sources as well, like corn based ethanol and oil, and was one of the means by which the Bush Administration controlled the US Congress. Worth reading.