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.