Daily Sources 1/14

1. Lucian Kim and Ben Farey at Bloomberg report that Russian President Dmitry Medvedev called for an emergency summit in Moscow to resolve the dispute, tentatively scheduled for Saturday, January 17.

"Russia is prepared to compensate Ukraine should it agree to ship gas to Europe from underground storage reservoirs near its western border, Medvedev said. Russia is also ready, together with the EU, to provide Ukraine with loans to pay for gas “at market prices,” he said."

Allegations that Moscow had barred EU monitors from gas dispatching centers were not repeated in the press, and I have been led to understand that the accusation has been withdrawn accompanied by apologies, though I have found no reporting on the matter. Gazprom CEO has told the media that Ukraine has demanded 1.5 billion cubic meters of gas for free in the first three months of the year to resume transit to Europe. Ukraine in turn has accused Gazprom of providing supply in such a way that would force Naftogaz to cut supply to its own domestic constituency. Platts reports that the European Commission has already shifted its focus to energy security for 2009 in response to the current crisis. Key issues include increased oil stocks and data coordination, gas supply diversification, and a review of nuclear power strategy. Reuters reports that European Commission chief Jose Manuel Barroso has told the media that he would advise EU firms to sue Russian and Ukrainian firms were supply not resumed shortly. Obviously, the threat of taking the state gas companies to court is unlikely to resolve the crisis in a timely fashion, suggesting that the EU has run out of ideas on how to approach the crisis.

2. Ellen Barry at the New York Times reports that violent protests took place in Riga late last night in which some protesters threw molotov cocktails at police. From the photographs the protests appear pretty serious, and President Valdis Zatlers said today that he might call for a referendum which would allow voters to dissolve parliament, should they so choose. Some members of parliament suggested that foreign influences--presumably meaning Moscow--were responsible for the violent nature of the protests.

3. Olesya Varanyan and Ellen Barry at the New York Times report that a deal struck last month which gave Russian state energy company Inter RAO joint control of the Inguri hydroelectric plant for ten years has created a bit of a row in the Georgian parliament. The plant, on the Georgian border with breakaway region Abkhazia, provides Georgia with half of its electricity requirement. Inter RAO will pay $9 million a year to co-manage the plant, previously electricity supplied to Abkhazia and the Russian north Caucasus simply went unpaid for.

4. Ariana Eunjung Cha at the Washington Post reports that China became the third largest economy in the world in 2007, with a GDP of $3.38 trillion versus Germany's GDP that year of $3.32 trillion. China's statistics bureau released revised figures today showing larger growth than previously estimated. "In 2007, the United States remained the world's largest economy with a GDP of $13.8 trillion and Japan the second-largest with a $4.38 trillion GDP, according to calculations based on an annual average of daily exchange rates by Merrill Lynch."

5. Carter Dougherty at the New York Times reports that German GDP shrank by 2% in the fourth quarter of 2008, apparently from falling exports. For 2008 as a whole the economy grew by 1.3%, down from the 2.5% growth rate seen in 2007.

6. Peter Mandelson, the UK secretary of state for business, has an op ed in yesterday's Wall Street Journal which argues that the Doha round of world trade negotiations should be President-elect Obama's top priority. Key excerpt:

"Inevitably, President Obama and his trade representative, Ron Kirk, will ask why this is worth their valuable political capital. The answer comes in two parts.

First, the global economic downturn has made a world trade deal more important rather than less. G-20 leaders in Washington in November recognized that securing the open trading system is an integral part of reforming and strengthening the governance of economic globalization after the banking crisis. This remains true even if their trade negotiators subsequently came up short in Geneva.

Second, US leadership is the only way to make it happen. It is not sufficient, but it is indispensable.

The importance of a Doha deal is that it would freeze global tariffs at today's levels or lower, which is an insurance policy against future protectionism. It would reform farm supports in the rich world, which is a good thing in itself, especially if you're a farmer in the developing world. It would see the big emerging economies pay into the global trading system, which has served them so well, with proportionate tariff cuts -- the kind of responsibility that goes with their overdue presence around the G-20 table. By establishing the parameters for the next decade of trade growth, just as the Uruguay world trade deal did back in 1994, it would be a signal of confidence in our shared global economic future at a time of immense strain.

The reality that waits for President Obama is that Doha now cannot be done without a fresh drive from the US. A new sense of commitment from Washington has to encourage the emerging economies back to the table on the basis of a clear sense of global equity."

Worth reading in full.

7. Rattaphol Onsanit at Bloomberg reports that the Thai central bank cut its benchmark interest rate by 0.75% to 2%, deeper than most economists had expected.

8. Reuters reports that the Qatari oil minister, Abdullah al-Attiyah, suggested in New Delhi today that $70/b was a reasonable price for oil, as it would ensure further investment. Al-Attiyah said he was against prices above $100/b. He also said that indications so far were that the OPEC members were complying with their production allocations. Platts reports that Saudi oil minister Ali Naimi told the conference in New Delhi that the fall in oil prices will play a major role in aiding the recovery of the global economy. Naimi does not think the current price levels reflect fundamentals, however:

"This price decline is partially due to the cooperation of producers and consumers, and as such demonstrates the ameliorating effect that can be achieved when stakeholders work together... With collaboration, combined with the Kingdom's moderate pricing policies, this aided price moderation for a short period. However, because of the current worldwide economic and financial downturn, price deceleration is to levels not reflective again of market fundamentals."

Meanwhile, Kate Galbraith at the New York Times reports that several states are considering raising gasoline taxes in order to meet some of their budgetary requirements. Bills have been drafted for approval in the California, Massachusetts, New Hampshire, Illinois, and Oregon legislatures. Both houses in the Iowa legislature would reportedly support an increase and a state task force in Ohio last week recommended raising the gas tax there by 13 cents. (Galbraith's article is well worth reading in full.) People are driving much less these days, which has reduced the volume of monies entering state coffers. That said, some argue that each $0.10 fall in the price of gasoline equals a $12 billion tax cut nationally, and raising gas taxes would be regressive, especially hurting low income consumers, who are already the most responsive to changes in price.

9. Ambrose Evans-Pritchard at the UK Telegraph reports that freight rates for containers via ship from Asia to Europe have fallen to zero, with brokers charging only operating costs for South China cargoes and North China cargoes at below cost. (h/t Yves Smith at naked capitalism)

10. Winnie Zhu at Bloomberg reports that China cut petroleum product prices for the second time in a month, bringing prices closer to world market rates.

"'Today's move shows the government will adjust domestic fuel prices more frequently and bring them closer to global markets,' said Qiu Xiaofeng, an oil analyst with China Merchants Securities Co."

Maybe, but it doesn't mean the government is allowing the price to float, which had been suggested earlier.

11. Juan Cole at Informed Comment reports that the conflict in Gaza is undermining the previously blossoming security relationship between Israel and Turkey. Prime Minister Erdogan has defended his criticism of the actions in Gaza saying "Some say my criticism is harsh, I assume it is not as harsh as phosphorus bombs or fire from tanks ... ." Yesterday at 11 am all students in schools were ordered to observe a minute of silence for the victims in Gaza. A consumer boycott of Israeli goods has been launched in the country.

12. Barry Ritholtz reports that retail sales fell 9.8% year over year in December. Gasoline and auto sales led the decline. He links to a Barron's graph which tells the story well:



13. The EIA's This Week in Petroleum reported today that crude oil stocks grew by 1.2 million barrels for the week ended January 9 to 326.6 million barrels altogether. The numbers are well below the analyst expectations via a Bloomberg survey of a 2.5 million barrel build, but the total is well above the historical range. Gasoline stocks grew by 2.1 million barrels, somewhat more than analyst expectations of a 1.85 million barrel build, and are in the middle of the historical range. Distillate stocks grew by a whopping 6.4 million barrels and are well above the historical range. Inventories at Cushing, Oklahoma, are reportedly now at 33 million barrels, not far from capacity. Taken in isolation, the report should put downward pressure on price.

Martyn Wingrove and David Osler at Lloyd's List report that brokers and ship owners estimate that as much as 80 million barrels of crude is either in storage or en route to a storage destination on supertankers and some suezmaxes. "Rising storage requirements helped boost charter rates for VLCCs operating on the Middle East to Asia routes to around W75 – a time charter equivalent of up to $80,000 per day."

The EIA's Short Term Energy Outlook forecasts that US total oil consumption fell to 19.51 mb/d in 2008, down from 20.68 in 2007. The EIA predicts consumption will fall further in 2009 to 19.12 mb/d.