Daily Sources 1/19

1. David Jolly at the New York Times reports that the Brown Administration announced a new bailout for British banks today. The new plan would increase controls over lenders, offer banks insurance on troubled assets as well as other steps to restore the offering of credit. The government is also revising its assistance to the Royal Bank of Scotland, now taking 70% of the company's shares, up from 58%.

"The British Treasury said the latest steps would cost taxpayers another £100 billion, or $147 billion, on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November."

Pan Pylas at the Associated Press reports that European stock markets have responded to the news by falling and with financial stocks in "free fall."

2. Eurointelligence reports that the Der Spiegel ran the story this morning that German banks have about €300 billion ($398.4 billion) in toxic assets, which is much worse than previously estimated. The FD Deutschland has the story that the EU is pushing ahead with regulation which would force all credit default swaps to be traded through a central clearing system.

3. Platts reports that the German Parliament is set to have a final vote on legislation proposed by the Merkel Administration which would ban the importation of biofuels derived from soybeans or palm oil that benefit from foreign tax relief. Even though this is consistent with WTO regulations, I believe you will see more aggressive attempts to prevent dumping generally.

4. Chris Bryant at the Financial Times reports that the conservative coalition of the Christian Democratic Union (Chancellor Angela Merkel's party) and the Free Democratic party won big in the election in the western German state of Hesse. It is interesting that the German voter would reward the party of free markets over the Social Democratic party, given the current situation. Apparently the election being regarded as a bellwether of German politics going forward in the European press generally.

5. Edward Hugh at Fistful of Euros reports that S&P cut the rating for Spanish long term sovereign debt to AA+ from AAA.

6. Platts reported yesterday that Gazprom and Naftogaz began drafting documents for the resumption of supplies to Ukraine and via Ukraine to the rest of Europe. Kiev has apparently agreed to the European pricing formula for the gas. In 2009, "Russia will grant Ukraine a 20% discount on gas imports as long as Ukraine keeps its tariffs for the transit of Russian gas to Europe at the 2008 level." In 2010, Ukraine will switch to the full European price. Andrew E. Kramer in the New York Times reports that European gas prices are tied to oil prices, but on a six month delay. NYMEX sweet light was trading at $134.60 on July 16, which on a Btu basis roughly translates to $23.20/MMBtu or $819.20/tcm. European customers were reportedly paying an average of $450/tcm at the beginning of the year, so we still don't have enough to suss out the terms.

"Gazprom ... has projected the average price in Europe next year to be between $260 and $300 for 1,000 cubic meters of natural gas. The prices are pegged to oil prices with a delay of six months. Thus Ukraine would pay between $208 and $240."

Daryna Krasnolutska and Stephen Bierman at Bloomberg report that the contract signed today is a contract for 10 years of supply. Mathew Carr and Kateryna Choursina at Bloomberg reported that in an official statement the European Union expressed some skepticism as to whether the deal is really done, and that no more fireworks were forthcoming. The statement read in part: "We have seen many false dawns in this dispute. The ‘test’ in this case is whether or not the gas flows to Europe’s customers. Until that point, the wait goes on." Laura Cochrane at Bloomberg reports that the gap in yields between Ukraine's bonds and treasuries tripled to 25.1%, signaling that the market now expects default. The long bonds now yield 9.6% more than comparable debt sold by Argentina. Meanwhile, Emma O’Brien at Bloomberg reports that Russia has allowed the ruble to devalue against a currency basket of dollars and euros (55% dollar, 45% euro) for the sixth time this year. Toni Vorobyova at Reuters reports that Vladimir Putin has advised the cabinet that the 2009 budget should be reviewed with the assumption that oil will average $41/b this year. $41/b is roughly $7.06/MMBtu on a Btu basis or about $249.53/tcm. Edward Hugh--yes the same Catalan economist who writes at Fistful of Euros--at Russia Economy Watch writes that Russia's GDP contracted by a full percentage point in December.



7. Brad Setser at Follow the Money argues that, in terms of China, what we should be worrying about is them importing less, not purchasing less US treasuries. As imports slow, China's trade surplus will grow, which will likely draw the People's Bank of China to sell yuan in order to prevent a rise against the dollar. But, even if dollar demand inside China grows to the point that the government does not need to defend against a rise in the yuan, then at least a portion of that dollar demand will likely translate into purchases of US treasuries. Meaning that they will be purchased willy-nilly, even if by the private sector instead of the public. Thus:

"A big fall in [economic] activity [in China] also means less Chinese demand for the world’s products — as well as less Chinese demand for China’s products, which frees up capacity to export. That adds to the deflationary forces in the world economy.

And right now, the risk of a shortfall in global demand strikes me as the bigger risk than a shortfall in demand for Treasuries. The last thing the US should want is a larger Chinese current account surplus, even if a larger surplus would increase China’s capacity to finance the US deficit."

Setser's proposes to Beijing stimulus spending. (But I have to wonder if private Chinese demand for US treasuries would really make up for a lack of demand from the People's Bank of China due to a need to finance a social net. As Setser has pointed out in the past, the vast majority of treasuries purchases in 2007 appear to be by central banks.)

8. Winnie Lee at Platts reports that CNOOC plans to bring its greenfield 240 kb/d capacity Huizhou refinery in Guangdong province online in March.

"The Huizhou refinery is designed to process high-acid heavy crude from CNOOC's offshore blocks in China's Bohai Bay. The plant is capable of producing 7.3 million mt/year of gasoline, gasoil and kerosene meeting Euro III and Euro IV standards, 1.5 million mt/year of ethylene and 800,000 mt/year of paraxylene."

9. Platts reported yesterday that on Saturday Algerian oil minister Chekib Khelil told journalists that OPEC might cut production again in March if prices continue to fall. He went on to say,

"I think that prices will stabilize around current levels of $45-$46/barrel before rising again during the third quarter of this year as a result of adherence by OPEC members with agreed output cuts."

Platts reports that Venezuelan oil minister Rafael Ramirez also indicated on Saturday that Caracas would back further cuts in the March meeting.Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Angola announced it will increase crude shipments by 1.8% in March. Angola is the current holder of the presidency of OPEC. Xinhua yesterday reported that in a meeting in Luanda, the Chinese Minister of Commerce Chen Deming told the prime minister that China would provide assistance in reviving the Angolan agricultural sector. (China is a net importer of basic foodstuffs.)

10. Shashank Shekhar at Emirates Business 24/7 reported yesterday that Gustavo Soares, a senior commodity strategist with Merrill Lynch, thinks that given current oil prices plans to switch to cleaner fuels for power generation by the Gulf countries may face roadblocks. However,

"'Nuclear power is more of a policy-driven market,' Soares said and added the Gulf states can sustain their nuclear energy projects if the governments so decide it as a policy."

Arif Sharif at Bloomberg reports that the Saudi Arabian Monetary Authority cut its benchmark rate to 2% and that the UAE will cut its benchmark lending rate to 1%.

11. Reuters reports that Iranian oil Minister Gholamhossein Nozari told the state media that "In the opinion of the Oil Ministry, taking into account predictions by various international institutes, the anticipated oil price in the year 2009 will be around $40." He also said that non-OPEC countries were not cooperating with the cuts so far, in a reference to Russia, which had suggested it might cut in cooperation with OPEC if it decided that the organization was making good on its quota reductions. Most analysis that I have seen so far suggests that Iran is supplying much more than it promised.

12. The Oil & Gas Journal reports that the Pakistani government has decided that it cannot afford to import gas from Iran, which would cost $500 million per month. That, I take it, puts the kibosh on the proposed Iran-Pakistan-India pipeline, which has been stalled for some time as New Delhi has been uncomfortable with the contract terms Tehran has proposed.



13. Ibrahim Barzak and Christopher Torchia at the Associated Press report that Israel began withdrawing from Gaza Sunday.

"Hamas Prime Minister Ismail Haniyeh claimed "a heavenly victory" in remarks broadcast on Al-Jazeera Arabic news channel."

"The Israeli military warned that the next few days were critical and that any Hamas attacks would be met with harsh retaliation.

'Right now the operation hasn't ended,' Maj. Gen. Amir Eshel said. "It has just transitioned to a new phase, to hold fire. To give a chance to a cease-fire to take over and end this operation.'"

14. James Taranto suggests in the Wall Street Journal that a way to disambiguate radical Islamists in a way which might have the effect of making them pariahs would be to introduce the term "Islamic Supremacists." There is a need to disambiguate Islam generally from Islamists, but I suspect the effect Taranto is looking for will take place more in the Western world than in the Islamic one.

15. Jorge Silva at Reuters reports that on Saturday Venezuelan president Hugo Chavez said,

"If Obama as president of the United States does not obey the orders of the empire, they will kill him, like they killed Kennedy, like they killed Martin Luther King, or Lincoln, who freed the blacks and paid with his life."

Rhetorical repositioning to be sure, for Chavez needs the US as an enemy. But, depending on the Obama Administration's approach, it may become more and more difficult to sustain.