Daily Sources 2/27

1. Agnes Lovasz at Bloomberg reports that The World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank released a joint statement today stating that they will lend as much as €24.5 billion (~ $31 billion) to help central and eastern Europe weather the financial crisis.

"'We have a special responsibility for the region and because it makes economic sense,' EBRD President Thomas Mirow said in a joint statement issued by the international organizations today in London. 'For many years, the growing integration of Europe has been a source of prosperity and mutual benefit and we must not allow this process to be reversed.'

The EBRD will provide about €6 billion, the EIB about €11 billion and the World Bank about €7.5 billion, the statement said. The aid will take the form of equity and debt financing, credit lines and political risk insurance."

Meanwhile, Balazs Penz and Agnes Lovasz at Bloomberg report that the Hungarian Prime Minister Ferenc Gyurcsany is lobbying the EU to arrange an aid package of €180 billion (~ $230 billion) for eastern Europe.

2. Eurointelligence reports that French unemployment grew by 90,000 in one month.

3. Mark Landler at the New York Times reports that the US will hold regular three-way meetings with Afghanistan and Pakistan regarding the prosecution of the war against the Taliban. It is fairly amazing to me that this is a new process, though the Times assures us it is so:

"[T]his week’s meetings involved a much larger cross-section of military and government leaders — among them foreign ministers and the heads of the Afghan and Pakistani intelligence services.

'These were not just photo ops,' said Richard C. Holbrooke, the special representative for Afghanistan and Pakistan. 'Meetings in this configuration have not taken place.'"

From today's State Department press briefing:

"MR. WOOD: I think it’s pretty much understood by all parties that there is a link between Afghan and Pakistani security. The Taliban and al-Qaida are threats to both countries. And what we want to see is much closer cooperation between the United States, Pakistan, and Afghanistan, as we try to deal with these threats.

It was a good-–a good discussion. There were a number of issues that were dealt with at this trilateral meeting. There will be future meetings. I believe the Secretary said that probably either-–I think sometime in late April or May would probably be the next trilateral meeting. It was a very good forum for trying to deal with these very, very thorny issues of security. And you know, the Secretary thought it was very useful to have, you know, representatives from, you know, both Pakistan and Afghanistan here together so that we could really talk about this threat to regional security that’s posed by al-Qaida and the Taliban."

4. Taghreed el-Khodary and Isabel Kershner at the New York Times report that at a joint news conference in Cairo, "Ahmed Qurei of Fatah and Moussa Abu Marzouk of Hamas announced the establishment of committees to find formulas for a Palestinian unity government and new elections." Hamas and Fatah expect the organizations to complete their work by the end of March.

5. Richard Meade at Lloyd's List reports that EU legal teams are nearing a multilateral agreement which will provide a legal framework for the prosecution of pirates generally in the Gulf of Aden and off the Somalian littoral. Kenya, Tanzania, Ethiopia and Egypt all potentially could have jurisdiction under the agreement.

"According to [Rear Admiral Philip Jones, the British commander of EU naval forces operating in the region] an agreement with Kenya is now in its final stages, while separate negotiations with several other states are continuing.

The aim of the negotiations is to establish a legal mandate that will allow all EU forces operating off Somalia to detain pirates either on the high seas or within Somali territorial waters and subsequently land those suspects in a neighboring coastal state for trial and prosecution.

One key stumbling block has been a political desire within EU member states to avoid signing deals with countries that impose the death penalty."

6. Keith Johnson at Environmental Capital reports that Global Geo Services chief executive Knut Oversjoen told the media that a US company has expressed interest in purchasing its 'Persian Carpet' seismic study of Iran's offshore. "That data would be useful if US sanctions against Iran were dropped and US companies could bid for exploration leases."

7. Eric Watkins at the Oil & Gas Journal writes that Oil Movements reports that OPEC seaborne crude exports will fall to a five-year low by mid-March.

"However, the [consultancy] said that 'the reduction in sailings will (implicitly) still fall some way short' of the 4.2 million b/d in cuts that OPEC has decided upon in a bid to increase prices."

"'Over the next three months the normal seasonal direction for this series is northerly, and just holding on at current low levels would be a sizable departure from the normal pattern,' OM said.

Westbound sailings from the Middle East are 750 kb/d down on year ago at the furthest out date, and that difference will show up in arriving barrels heading into the second quarter.

But by implication, OM said, 'Hard volumetric evidence available from import and stock figures may not fully reflect supply changes that will still be working through the system by the time OPEC meets next month.'"

8. Platts reports that Abuja has announced it will fully deregulate the downstream sector, completely withdrawing the subsidy of petroleum imports.

"The government's decision is sure to elicit protests from labor unions and the public who see subsidized fuel as the only benefit they enjoy from the country's oil wealth.

The two powerful oil workers' unions, Pengassan and Nupeng, warned in 2008 that they would resist any attempt by the government to withdraw fuel subsidies."

As part of the same restructuring, Vincent Nwanma at Bloomberg reports that finance minister Mansur Muhtar and petroleum minister Rilwanu Lukman said on television last night that Nigeria will seek to sell its four refineries. The refineries have a total capacity of about 445 kb/d and are located in Kaduna, Warri and two at Port Harcourt. EIA estimates that Nigeria consumed about 271 kb/d in oil in 2007--the refineries, due to a variety of issues, have been running at about 214 kb/d.



9. Eliana Raszewski at Bloomberg reports that Buenos Aires is considering a plan to nationalize the grain trade in order to ensure that the domestic market requirements are met before basic foodstuffs are exported.

"Any such move would set back negotiations between the government and farm leaders, who are pressing for reductions in export taxes and fewer restrictions on shipping their produce abroad, said Nestor Roulet, vice president of the Argentine Rural Confederation. Last year, the country’s farm groups withheld grains and blocked highways during a four-month protest against planned tax increases and a ban on beef exports."

10. Catherine Rampell at the New York Times reports that the Bureau of Economic Analysis revised its GDP growth numbers for the fourth quarter down from a 3.8% decline to a 6.2% annual rate of decline. (For the initial estimates, which were widely regarded as way too optimistic at the time, see Daily Sources 1/30 #18.)

11. Margot Habiby at Bloomberg reports that the US rig count is down to the lowest seen since January 2005 to 1,243 according to Baker Hughes.

Daily Sources 2/26

1. Stefan Wagstyl at the Financial Times has an analysis of the financial crisis's effect upon Central and Eastern European nations which argues that analysis is unjustly grouping them all as one.

"Pavol Demes, a former Slovak foreign minister and head of the CEE office of the German Marshall Fund, a US think-tank, says: 'People are questioning liberal democracy, the markets and the EU. They see countries like France going for national solutions when international solutions are needed. They feel excluded.'

He and others applaud the Czech Republic, holder of the EU’s rotating presidency, for challenging Nicolas Sarkozy, the French president, over suggestions that aid to France’s carmakers might be tied to preserving French jobs rather than those the marques provide in central Europe. Mirek Topolanek, Czech prime minister, spoke for many in the CEE region when he said the response of eurozone countries 'has deformed the joint project of the euro more than any other imaginable event'."

"Whatever happens, different countries are likely to go through the crisis with widely differing results. At one extreme are nations under particularly severe financial pressures, headed by Hungary, Latvia and Ukraine, which have secured IMF rescue packages. At the other stand Poland, the Czech Republic and Slovakia, a base of relative economic stability in the central European heartland. Manfred Wimmer, chief financial officer of Erste Group, the Austrian bank with big CEE operations, warns: 'What’s been lost in this crisis very often has been the ability of people to differentiate.'"

Well worth reading in full.

2. Romano Prodi, former prime minister of Italy and president of the European Commission from 1999-2004, has an opinion piece in the Financial Times which argues that the EU should offer sovereign debt, because "a euro spent to defend the EU as a whole has much more value then a euro spent to defend one individual country."

"[Two] decisions must now urgently be taken at the European level.

The first concerns the EU budget, which is today lower than 1 per cent of the European gross domestic product. This budget should be increased to 1.25 per cent when the 2008-09 budget is revised, targeting and binding the extra 0.25 per cent to extraordinary interventions aimed to reduce the tensions in the EU countries. This measure will greatly help in stabilizing European financial markets.

The second decision concerns the issuance of European public debt notes in addition to, rather than as a substitute for, the Treasury bills of the member states. How to issue, control and use these notes should be the sole responsibility of the finance ministers of the eurozone, in strict agreement with the European Central Bank.

These two tools should be used by Europe to ensure it is proactive and does not end up the passive victim of the financial storms afflicting individual countries."

Well worth reading in full.

3. The Associated Press reports that Naftogaz has asked Gazprom if it could renegotiate its gas contract to take delivery of 33 billion cubic meters, down from the original agreement to take 40. This follows the news last week that the Ukrainian company had posted on its website notice that it would likely have difficulty meeting its payment obligations to Gazprom given the financial crisis. (see Daily Sources 2/19 #6.) A reduction in imports would seem necessitated by the decline in industrial production seen in Ukraine of a startling 28.6% in November alone. GDP decline has also been reported in the double digits and it is unclear whether the IMF has canceled its loan facility to Kiev at this stage or not.

4. Lyubov Pronina, Torrey Clark and Ellen Pinchuk at Bloomberg report that Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev, told the journalists in an interview that Russia has sufficient oil fund reserves to make it through the rest of the year without selling debt. "If market conditions will improve, then the government will start borrowing."

5. Matthew Green at the Financial Times reports that Guy Maurice, managing director of Total Exploration and Production in Nigeria, told an oil and gas conference in Nigeria yesterday that it was ready to participate in the proposed Trans-Saharan natural gas pipeline. Maurice was quoted as saying:

"Total believes this is a long-term strategic diversification for Nigeria, which is quite interesting. I take this opportunity to mention publicly that Total is ready to become involved in this project."

Diversification away from the US, which is Nigeria's largest export market. A map of the proposed route for the pipeline is below, courtesy of the FT:



The pipeline would deliver between 20 and 30 billion cubic meters of natural gas a year to Europe from Nigeria, via Niger and Algeria, at a projected cost of €15 billion (~ $19.1 billion). No consortium has emerged to actually develop the pipeline so far, however, though in September Gazprom became the first international firm to evince interest in the project by signing a MOU with the Nigerian National Petroleum Corporation.

"Gazprom has [most recently] said it would start work in Nigeria by investing at least $2.5 billion to develop government plans to build a network of pipelines and processing plants to harness gas for local use.

'We’re continuing saying that though we are very interested in the Trans-Saharan pipeline, Trans-Saharan starts after the Nigerian gas grid is completed,' Vladimir Ilyanin, managing director of Gazprom’s subsidiary in Nigeria, told the conference."

In September, however, the African Union Commission and the European Commission formed an African-EU "energy partnership" which began the consideration of the trans-Saharan idea, which at the time it had put the potential cost at €7 billion (or ~ $8.9 billion in today's dollars)--see Daily Sources 9/22 #5.)

6. Vandana Hari at Platts reports that a 3E Information Development & Consultants report states that China added 800 kb/d in refining capacity in 2008 and looks set to add an additional 1.3 mb/d in 2009. The report states that total capacity will reach 11.2 mb/d by the end of 2009--a fair bit more than the EIA's latest forecast of Chinese consumption in 2009 of 8.225 mb/d.

"China's secondary refining capacity took an even bigger leap last year, to meet the growing need for light-ends and higher quality fuel in the domestic market, the report said.

Catalytic cracking capacity rose 12.5%, hydrocracking 26.2%, coking 21.3%, reforming 16.8% and hydrotreating 21.3%, 3E said, but did not offer details."

(Catalytic cracking maximizes gasoline production; hydrocracking maximizes diesel and jet fuel production.)

"The Chinese government's stimulus plan for the petrochemicals sector supports refining capacity expansions, 3E noted. 'Quite a few large joint-venture refining and petrochemical projects and giant petrochemical centers with refining capacity of 400,000 to 600,000 b/d each that were previously under early-stage discussions are now officially listed in the state petrochemical rescue plan,' it said."

Given the tremendous amount of additional refining capacity coming online generally all over the Asia Pacific, cracking margins are likely to be very tight--and it will be very unlikely for crude to chase the Asian prices for petroleum products any time soon.

7. Reggie Le at Platts reports that the China Iron and Steel Association (CISA) revised upwards its forecast of steel consumption in 2009 on the back of the stimulus program to 430 million tonnes (or a 5% annual decline) from 390 million tonnes (about a 13.9% decline).

8. Henry A. Kissinger has an opinion piece in the Washington Post which argues that the US cannot expect the political environment in Afghanistan to evolve (toward Western norms) at the same rate at which the military situation does.

"Military strategy should concentrate on preventing the emergence of a coherent, contiguous state within the state controlled by jihadists. In practice, this would mean control of Kabul and the Pashtun area. A jihadist base area on both sides of the mountainous Afghan-Pakistani border would become a permanent threat to hopes for a moderate evolution and to all of Afghanistan's neighbors. Gen. David Petraeus has argued that, reinforced by the number of American forces he has recommended, he should be able to control the 10 percent of Afghan territory where, in his words, 80% of the military threat originates. This is the region where the 'clear, hold and build' strategy that had success in Iraq is particularly applicable."

A must read.

9. Peter Leonard at the Associated Press reports that Kazakhstan announced today that it has withdrawn from the Central Asian power grid, which has forced electricity rationing in northern Kyrgyzstan required to keep the country from overloading its domestic grid. Kazakhstan indicated that it was forced to withdraw by Tajikistan's continual "siphoning" off the grid.

"'As of Feb. 26, Tajik state energy company has made unscheduled use of 84 million kilowatt hours of electricity,' the state-owned Kazakhstan Electricity Grid Operating Company said."

10. The Associated Press reports that the UAE will cut supply in April by an additional 15-17% of various crude streams, including Murban. Murban represents about 60% of UAE total production capacity of about 2.55 mb/d. This cut comes on top of the cut announced in December of 15% (see Daily Sources 12/26 #5) which may put the volume of Murban ADNOC is supplying at about 1 mb/d and total UAE volumes near 1.6 mb/d, though only an educated guess.

11. Elzbieta Rabalska at Platts reports that some traders argue the market for sour crudes--dominated by the Middle East--is tight, and that the price of sweet crudes is chasing price increases in the sour market.

"'It's a very tight market led from sour [crude],' one trading source said Thursday. 'It would be tighter if we weren't seeing product come out of storage. It emanates from the East where there is no production and which relies heavily on OPEC production.'"

12. Lilian Karunungan and Shanthy Nambiar at Bloomberg report that Indonesia's issue of $4 billion in dollar denominated 5 and 10 year sovereign debt was oversubscribed by at least $500 million today.

"'Countries are trying to tap debt markets as quickly as possible in case the situation deteriorates further in the second half,' said Paul Biszko, a senior emerging-markets strategist with RBC Capital Markets in Toronto. 'It doesn’t surprise me that Indonesia is trying to issue.'"

The five year debt is yielding between 10.5-10.75% and the ten year debt 11.75-12%.

13. Janet Porter at Lloyd's List reports that the latest Drewry Container Freight Rate Insight report states that container shipping could see as much as a $68 billion decline in global revenues in 2009, or a fall of a third. The report says that container freight rates are at their lowest levels ever.

"The 42% collapse in all-in rates from South China to Europe since November has been so shocking that Drewry is asking whether the market has veered out of control."

14. Shobhana Chandra and Timothy R. Homan at Bloomberg report that first time unemployment claims rose to 667,000 last week, and the number of people still receiving unemployment benefits rose to 5.112 million.

"February payroll figures, due from Labor next week, may show job cuts exceeded half a million for a fourth consecutive month, according to a Bloomberg survey. The unemployment rate probably climbed to 7.9%, the highest level since 1984."

15. Agence France-Presse reported yesterday that Toshiba won a contract to build two Advanced Boiling Water Reactor (ABWR) nuclear power plants in Texas. If true, I believe the two plants would be the first nuclear power plants built in the US in 40 years, and the first ever ABWR reactors.

16. Keith Johnson at Environmental Capital has an interesting post on the efforts of researchers in New Zealand and Australia to reduce the aggregate flatulence of its sheep and cow herds.

"Globally, however, livestock emissions outweigh emissions from the entire transport sector. Add in emissions from deforestation—which is often a consequence of razing trees for fresh pasture land—the plant and animal world makes up about 40% of global greenhouse-gas emissions."

Vegetarianism does more, therefore, for reducing your carbon footprint than driving a Prius. Short and well-worth reading.

Daily Sources 2/25

1. Michiyo Nakamoto at the Financial Times reports that Japanese exports fell by an astonishing 45.7% in January as compared to January 2008.

"Exports to Asia sank by 46.7%, the fourth straight month of decline, with shipments to China falling by 45.1%. ... Automobile exports, which comprise about 20% of all exports, suffered a particularly large decline, falling 66% year-on-year."

MacroMan provides a helpful illustration:



Imports fell more slowly than exports, leaving Japan with a trade deficit for the fourth straight month. Japan's prime minister, Taro Aso, is in Washington DC today and gave an interview with the Washington Post in which he had the following to say about the likelihood that China will seek other currencies for their foreign exchange reserves:

"I do not think such a thing would happen. First of all, the reserves of foreign currency that China holds are almost entirely in dollars. I believe they would not take action that could risk devaluation of the dollar. ...

In the case of the US, as long as the [Federal Reserve's] balance sheet is clean, as long as you are able to maintain confidence in the dollar, there's no chance of the US dollar going into a critical situation; I'll guarantee that. . . . Compared to the dollar, the only foreign currency that is strengthening right now is the yen. All the other currencies have only weakened versus the dollar."

His remarks are well worth reading in full.

2. Andrew Batson at China Journal has posted a translation of excerpts from the People's Bank of China's quarterly monetary policy report published this week. Some excerpts of the excerpts:

"China has a problem of high savings and low consumption. For a long time our country’s economic growth has been mainly driven by investment and exports, and the ratio of final consumption [in gross domestic product] has been in a gradual declining trend. The share of investment [in GDP] has steadily risen from 36.6% in 1992 to 43.5% percent in 2008, while the share of consumption has dropped from 62.4% in 1992 to 48.6% in 2008, well below the world average. The high share of investment and exports and the low share of consumption are not conducive to the healthy and stable development of the economy.

The significant slowdown in global economic growth and the great downside risks for the future will directly affect China’s exports and investment in the tradable [goods] sector. Since external demand is inadequate, the driver for economic growth must come from increasing investment or consumption."

"Therefore it is necessary to, in accordance with the requirements of the 'scientific outlook on development,' speed up the transformation of our economic development model, and strengthen consumption as a driver of economic growth, in order to achieve a balanced growth pattern based consumption, investment and exports."

Worth reading in full.

3. Der Spiegel reports that a new report authored by a commission headed by former governor of the Bank of France Jacques de Larosiere was submitted to the European Commission today. The report recommends the establishment of two new "watchdog" groups--the "European Systemic Risk Council" (ESRC), to be chaired by the European Central Bank, and the "European System of Financial Supervision" (ESFS) to "coordinate the transfer of information and supervision throughout the 27-member bloc." The report states:

"The group believes that the world's monetary authorities and its regulatory and supervisory financial authorities can and must do much better in the future to reduce the chances of events like these happening again."

Worth reading. NRC Handelsblad carries an informative interactive map describing the financial situation throughout the EU. An example image showing the debt load of each EU nation:



4. Ambrose Evans-Pritchard at the UK Telegraph reports that credit default swaps on German five-year sovereign debt touched 90 basis points (0.9%) yesterday and looks ready to become more expensive than CDSs on French sovereign debt. The spreads widened partially in response to a warning by Deutsche Bank that the German economy will likely contract by 5% in 2009.

"'The entire Landesbanken system is rotten,' said Hans Redeker, currency chief at BNP Paribas. 'Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.'

'German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill.'"

5. Pawel Kozlowski and Katarzyna Klimasinska at Bloomberg report that the Polish treasury minister, Aleksander Grad, told the journalists that Warsaw plans to accelerate the scheduled sale of state assets in response to the financial crisis. The government will try to raise 2 billion zloty (~$3.4 billion) from the sales, the proceeds of which will go to the corporations as opposed to the central government.

"'One could always wait for better times, but the market is what it is, and companies need funds for investment now,' Grad, 46, said in an interview in his Warsaw office late yesterday. 'Some companies may lose value in two years if they stop investments or fail to acquire a private investor.'"

Worth reading in full.

6. Edward Hugh at Fistful of Euros reports that in the latest statement by the Russian economic minister he indicated that the economy had contracted by an annual rate of 8.8% in January.

7. Jane Perlez at the New York Times reports that the Pakistani Supreme Court barred the largest opposition party's leader--former prime minister Nawaz Sharif--from ever holding elective office, on the premise that he had been convicted of a crime. The court also banned Sharif's brother, Shahbaz Sharif, from staying in office as chief minister of Punjab Province--Pakistan's most important province and the only province not administered by a member of president Zardari's party. However, the legitimacy of the Supreme Court's rulings are in dispute as the government has yet to reinstall Iftikhar Mohammad Chaudhry as Chief Justice, despite the role that the lawyers' revolt had in removing General Musharraf from power. (This is presumably because the former Chief Justice had ruled against Zadari in the past.)

"Mr. Sharif ... has ... pledged to join protesting lawyers in a long march from Lahore to Islamabad next month, and to take part in a planned sit-in in the capital. The lawyers are campaigning to restore Chief Justice ... Chaudhry."

8. Shashank Shekhar at Emirates Business 24/7 reports that the CEO of the Dubai Mercantile Exchange, Thomas M Leaver, told the journalist that he was sure that Saudi Aramco would move the pricing benchmark of its crudes to the Oman contract sooner or later:

"I don't know whether it will happen soon, but it will definitely happen. ... We believe that if Saudi Aramco incorporates the DME price into its pricing methodology, other national oil companies in the region will follow."

The credit crisis and the fall in oil prices from the Summer of 2008 have served as a catalyst for national oil companies in the Gulf to look at the DME as a pricing option.



The settlement price of the Oman contracts is somewhat exotic, with the price being settled not by the last sales price but rather by the weighted average prices in the "nearby contract month" between 4-4:30 pm Singapore time.

9. Reuters reports that Saudi Aramco shipped its first cargo of crude to the Fujian refinery recently upgraded in its joint venture with Sinopec and Exxon. The cargo was 900,000 barrels of Arab Extra Light. Fujian is currently running at 80 kb/d and should begin running at 240 kb/d later this year. Sinopec hopes to further expand the refinery to a capacity of 480 kb/d between 2010 and 2015.

10. Carlos Camacho at Platts reports that Venezuelan finance minister Ali Rodriguez today said in a television interview that Caracas would push for a further supply cut in the March 15 meeting in Vienna.

11. Eric Watkins at the Oil & Gas Journal reports that Bolivian president Evo Morales has accused the national oil firm--Yacimientos Petroliferos Fiscales Bolivianos [YPFB]--of having been infiltrated by the CIA. YPFB has been subject to a corruption investigation which has embarrassed Morales because one of his major political collaborators was more or less caught red handed receiving half a million in kickbacks from the company.

12. Lester Pimentel at Bloomberg reports that Jakarta plans to sell dollar denominated bonds to mature from 2014 and 2019 on the international markets in order to fund the stimulus plan passed by the parliament yesterday.

"Indonesia’s parliament yesterday approved a 73.3 trillion rupiah ($6.1 billion) stimulus package and endorsed the 2009 budget, paving the way for the country to sell as much as $4 billion of dollar-denominated debt to finance a budget deficit of 139.5 trillion rupiah, or 2.5% of gross domestic product."

13. The New York Times carries a transcript of President Obama's speech last night, which was optimistic in tone. Extremely long, but worth reading if you have time.

14. Courtney Schlisserman at Bloomberg reports that the National Association of Realtors said today that sales of previously owned homes fell by 5.3% to an annual rate of 4.49 million.

15. Rebecca Wilder at News N Economics has an analysis of the latest consumer confidence survey, which hit a record low for the fifth consecutive month in a row of 25. Her graph of the survey's performance over time:



Worth a look.

16. The EIA reports that crude oil stocks grew by 700,000 barrels in the week ended February 20 to 351.3 million barrels. The stock levels are well above the historical range and the build was below Wall Street expectations, as per a Bloomberg survey, of a 1.25 million barrel build. Gasoline stocks fell by 3.4 million barrels versus analyst expectations of stocks staying at the same level. Distillate stocks rose by 800,000 barrels and are well above the historical five year range for this time of year. Taken in isolation, the news is mixed, and the draw in gasoline stocks should be more than compensated for by the unusually high stock numbers.

Daily Sources 2/24

1. Ralph Atkins at the Financial Times reports that German business confidence fell from 83.0 in January to 82.6 in February, according to the Munich-based Ifo Institute's index.

"Germany is particularly exposed to eastern European economies, where the economic deterioration has gathered pace recently. German exports to the region, including to Russia, accounted for a higher proportion of the total than to the US, Mr Köbel said.

Hans-Werner Sinn, Ifo’s president, added that, 'overall the [Ifo] survey results do not point to a turn [around] in the economy.'"

2. Keith Johnson at Environmental Capital reports that Italy's industry minister Claudio Scajola told the media yesterday that Rome would sign a nuclear cooperation agreement with France on all aspects of nuclear power. "Scajola says Italy needs eight to 10 European Pressurized Reactors (EPR), known as improved third-generation plants." In October, Scajola indicated that Rome estimates that it paid €50 billion to phase out nuclear in the first place, and now plans to meet 25% of it power requirement from nuclear by 2030. At that time Scajola had complained that Italy's electricity prices were 30% above the European average and 80% above the French average. (see Daily Sources 10/17 #3.)

3. Jane Perlez at the New York Times reports that the Taliban unilaterally announced a cease fire in Swat. Army units in the valley have returned to their barracks, and the government has agreed to the introduction of sharia courts, but will not do so until peace in fact prevails. Islamabad would not confirm that an official agreement had been made, though the Taliban gave as "indefinite" the cease-fire's duration.

4. Charles Lee at Platts reports that Iraqi president Jalal Talabani--in the first state visit by an Iraqi leader to South Korea since the two nations established relations in 1989--signed a $3.5 billion oil for aid deal with South Korean president Lee Myung-Bak today.

"'With this agreement, [South Korea] can now acquire rights to develop oil reserves in Iraq's Basra region, where most Iraqi oil is produced,' the [energy] ministry said in a statement. In return, Seoul will help build social infrastructure such as power plants."

5. Helene Cooper reports that the Obama administration intends to provide Gaza with $900 million in aid. The aid would reportedly be funneled through non-governmental organizations as opposed to through Hamas, ie, the government. It will likely be difficult to get such a proposition through Congress, even as majority party, even with the monies not being sent through Hamas.

6. Platts reports that Shell is planning to lend Nigeria $3 billion at favorable terms to finance Abuja's side of its joint venture projects.

"The Financial Times reported last week that Shell has cut flaring in half but needs a further $3 billion of investment to stop it altogether. To fill that gap, Shell is offering Nigeria $3.1 billion in bridging loans at very low interest rates and project finance.

Some $1.1 billion of the loan has already been agreed, and the remaining $2 billion is expected to be confirmed soon, the UK paper said."

7. Jack Healy at the New York Times reports that the Case-Shiller home price index for December was released today showing that nationally home prices fell 2.5% from November to December. Real Time Economics carries a chart of the numbers for the 20 metro areas individually covered by the index.

"As of December, 18 of the 20 metro areas are in double digit declines from their peaks, with half posting declines of greater than 20% and four of those (Las Vegas, Miami, Phoenix and San Francisco) in excess of 40%."

Barry Ritholtz at the Big Picture provides an illustrative chart of the decline:



8. Melanie Tatum at Platts reports that Ron Denhardt, vice president of natural gas services for Strategic Energy and Economic Research, in his most recent report predicted that natural gas "prices are likely to average below $3.50/MMBtu during April through October and it is quite possible that prices will decline below $2.00/MMBtu."

"Among heavy gas-consuming
industries, primary metals output has fallen 36% [year over year in January], while agricultural chemicals have fallen back 20% and total chemicals production has fallen by 12%."

"Assuming normal weather, Denhardt projects storage levels at the end of March to reach 1.666 Tcf--well above the 1.247 Bcf reached last year and the five-year average of 1.486 Tcf. As a result, he said, unless producers take steps to substantially shut in production, working gas in storage could reach 4.4 Tcf by the end of the traditional injection season on October 31."

9. Juliet Eilperin at the Washington Post reports that the EPA is considering implementing national rules regulating greenhouse gas emissions from automobiles.

"For weeks, administration officials have been meeting with car companies as well as green groups and representatives from California--which is awaiting word on whether it will receive a federal waiver to regulate greenhouse gas emissions from vehicles -- to try to broker a deal on the issue. On Sunday, Carol M. Browner, assistant to the president for energy and climate, said she and others backed the idea of a single standard for cars and trucks.

'The hope across the administration is that we can have a unified national policy when it comes to cleaner vehicles,' Browner said at the Western Governors' Association meeting in Washington."

Daily Sources 2/23

1. Edward Hugh at Fistful of Euros reports that IMF director Dominique Strauss-Kahn indicated his support for European Union-wide bonds this weekend. Growing support for the idea appears to have lifted the market's view of the prospects of economies generally across Europe. Finance ministers of European G20 countries (plus Spain, the Netherlands and the Czech Republic) in Berlin expressed their support on Sunday for for more transparency and regulation of all financial markets, products and investors, including hedge funds, per MarketWatch.

"Leaders also reportedly proposed increasing to $500 billion the International Monetary Fund's financial resources for crisis management, in light of problems recapitalizing banks in Central and Eastern Europe. The IMF now has $250 billion in resources and already used $50 billion."

Chancellor Merkel indicated that Berlin was willing to shore up the IMF as necessary.

2. P O Neill at Fistful of Euros reports that Belgrade is reportedly preparing to appeal to the IMF for a $2 billion program loan.

3. Brad Setser at Follow the Money reports that China provided, per his reading of the most recent TIC data, nearly $500 billion in financing to the US in 2008.

"That is a stunning sum. It should go without saying that I — like many in China — believe China now has more exposure to the US than is in its long-run interest."

Well worth reading in full.

4. Shamim Adam and Seyoon Kim at Bloomberg report that Japan, China, South Korea and ASEAN agreed today to form a $120 billion pool of foreign-exchange reserves which contributing nations can use to defend their currencies, expanding the Chiang Mai Initiative which only allowed bi-lateral currency swaps. The new arrangement was first signaled in late January when anonymous Japanese finance ministry officials told the media they were scheduling an emergency meeting to do just that--see Daily Sources 1/30 #4.

"'There remains the need for more foreign exchange cooperation and coordination' to bolster regional stability, Asian Development Bank President Haruhiko Kuroda told the ministers in Phuket, according to the text of his speech obtained by Bloomberg News. 'A multi-lateralized and expanded Chiang Mai Initiative is a critical first step only if it is operationalized quickly.'"

Some have argued that Beijing's decision to make the swap lines available in renminbi as opposed to the dollar is a first step in establishing the renminbi as a reserve currency in the Asia Pacific--see Daily Sources 2/6 #6.)

5. Former presidents of Brazil, Colombia, and Mexico, respectively, Fernando Henrique Cardoso, César Gaviria and Ernesto Zedillo, have an opinion piece in the Wall Street Journal today which outlines the conclusions of a panel the three chaired which were published two weeks ago in Rio. (for the story on the conference see Daily Sources 2/12 #5.) In short, the former presidents conclude that US drug policy exports instability to Latin and South America:

"The revision of US-inspired drug policies is urgent in light of the rising levels of violence and corruption associated with narcotics. The alarming power of the drug cartels is leading to a criminalization of politics and a politicization of crime. And the corruption of the judicial and political system is undermining the foundations of democracy in several Latin American countries."

The bare outline of their proposal:

"In this spirit, we propose a paradigm shift in drug policies based on three guiding principles: Reduce the harm caused by drugs, decrease drug consumption through education, and aggressively combat organized crime. To translate this new paradigm into action we must start by changing the status of addicts from drug buyers in the illegal market to patients cared for by the public-health system."

Specifically, they propose that the nations of the Western Hemisphere seriously consider the decriminalization of marijuana consumption. Well worth reading in full.

6. Thomas Erdbrink in the Washington Post reports that the Bushehr nuclear plant will begin test operations on Wednesday before fully commissioning later this year.

7. Mark McDonald at the New York Times reports that the Tamil Tigers announced today that they are willing to accept an internationally-brokered ceasefire if they were not required to surrender their arms. The government immediately rejected the offer.

"Government troops have cornered the principal group of rebel fighters in a small strip of land on the country’s northeastern coast. The government says the Tamil Tigers, fighting from their last remaining enclave, now control less than about 33 square miles.

Earlier this month, the United States, the European Union, Japan and Norway called on the Tamil Tigers to consider surrendering. They urged the rebels to disarm, accept a governmental amnesty and reformulate themselves as a political party."

8. Eric Watkins at the Oil & Gas Journal reports that Russia's Vice-Premier Igor Sechin has indicated that Moscow is preparing to discuss a memorandum on cooperation with OPEC at the cartel's next meeting in March. Foreign minister Sergei Lavrov was also quoted as saying that it was critical to make the market "really stable and unsusceptible to sharp zigzag-like fluctuations that are in many ways triggered by speculative activity. Our interests are fully identical in this sphere. We'll continue coordinating our actions in a variety of formats." [Emphasis mine.] The two indicated that Moscow was not ready to join the organization, but foresaw taking an observer status while coordinating supply cuts.

9. Zainab Fattah and Haris Anwar at Bloomberg report that shares in Dubai's stock market "surged" after the UAE central bank bought $10 billion of Dubai bonds, "easing concern that the emirate’s companies will be unable to refinance debt." Worth reading in full.

10. Vandana Hari and Mriganka Jaipuriyar at Platts report that Vietnam has officially inaugurated its first refinery at Dung Quat, with a ceremony attended by the Prime Minister Sunday. The refinery has a throughput of 130 kb/d, was successfully fired up on February 9, and will initially run at 50% capacity, ramping up to 100% by the end of the year.

11. Lies Sahar at Platts reports that Chakib Khelil, oil minister of Algeria, told reporters that there was a strong possibility of a further OPEC supply cut come March 15. Khelil was quoted as saying:"

"We don't yet see the end of the crisis and we don't know when the [world economy] will stabilize. However, we do believe that demand will pick up around the summer and we will see prices recover also."

12. Real Time Economics carries the full text of a joint statement of the Treasury, FDIC, OCC, OTS and the Federal Reserve today announcing that the Capital Assistance Program will begin Wednesday:

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands."

Well worth reading in full.

13. Pedro Nicolaci da Costa and Juan Lagorio at Reuters reports that George Soros on Friday effectively said that the financial system has collapsed, that current market turbulence is greater than that seen in the Great Depression, and compared the current situation to the collapse of the Soviet Union. At the Columbia University dinner where Soros made his remarks, Paul Volcker said, "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."

Spot Life CL Mar 09 pt 2 (entire)

The fundamental reported causes for price were almost all dire for demand, as nation after nation reported dismal economic performance. The news came both from the developed world--which consumes about half of the world's oil requirement--and from the developing world, which was where nearly all the additional incremental demand had been coming from in the last five or so years. This was most especially true of China, where the China Electricity Council announced that power consumption grew by 5.23% in 2008, after growing by 14.8% in 2007. (5.23% seems considerable, but analysts appear especially dubious of the numbers coming out of Beijing, and apparently all of that demand was added in the household consumption sector, as opposed to industry.) The Chinese Producers Manufacturing Index (PMI) rose slightly to 42.2 in January from 41.2 in December, which is, of course, still indicative of a contraction and may well be the result of New Year's celebrations activities. Chinese exports fell by an annualized rate of 17.5% in January while imports fell by 43.1%. This was on the back of similarly dismal export numbers from Taiwan, Japan, and South Korea. The news was so grim that OPEC went further than the IEA--which had forecast demand growth in China slowing to 0.7% in 2009--and predicted that the Asia Pacific in general, and China in particular, would experience demand destruction in 2009. OPEC is in a really good place to know, given that its Middle Eastern members provide the region with the vast majority of their imports. Temasek Holdings, Singapore's sovereign wealth fund, reported that it had lost 31% of its value between March and November of 2008.

The news from Europe was also especially grim, with many analysts beginning to fear a redoubling of the financial firestorm precipitated by hard currency loans made to Eastern Europe of as much as $1.7 trillion which have likely gone bad as the debtor nation currencies have gone south. The OECD released its leading indicators report indicating a "strong slowdown" in China, the US, the eurozone, Canada, France, Japan, Germany, Italy, UK, India, and Russia. Industrial production numbers from eastern Europe were staggeringly bad--double digits bad--as was the decline reported for Spain in December of 19.6%. Ukraine's GDP, for example, fell at an annualized rate of 20% or fully one fifth in January. Unsurprisingly, Naftogaz recently announced that it might have trouble staying current with its payments to Gazprom for its gas deliveries, potentially reigniting the European gas crisis via a new shutting off of supply (though that is fairly unlikely, I would guess.) The most recent flash eurozone PMI readings for manufacturing fell to a record low 33.6 in February, the service PMI fell to a record low 38.9, and the composite index fell to 36.2 (where any number below 50 indicates a contraction.)

The numbers from the US were bad as well, with natural gas prices falling to $4/MMBtu on the back of declining industrial demand--GM alone closed most of its 22 plants last month. Unemployment data continued to be grim and reportedly employment law firms expect as many as 3 million layoffs in the first quarter. The port of Long Beach reported a 23% decline in container traffic in January from the year before. Stocks of crude continued to build, and build, and build some more on the back of the giant contango of 2008 which is, remarkably, still with us. Indeed, there is more oil in storage in Cushing, Oklahoma, than there is known storage space. The stocks situation has depressed the price of WTI (CL) to numbers far below what it traditionally trades versus other crudes which has caused a minor uproar (again) in the oil community, which complains that the landlocked Cushing prevents CL from being a useful global price benchmark for oil.



The last report from the EIA on stocks disposition for the week ended February 6 was 350.6 million barrels, well above the historical average range for the last five years, but still below the last peak seen in July 2007 of 352.6 million barrels. The giant contango continues apace, helped along, arguably, by the throughput limitations of pipelines out of Cushing, Oklahoma. Either way, the full curve contango (ending with the December 2016 contract) got steeper, at close of trading Friday with oil for delivery in December 2016 trading at a $33.64/b premium to the March 09 contract. The differential between oil for delivery in March 2010 and March 09 closed at nearly the exact same differential (a $12.08/b premium) as it saw when March 09 became spot on January 21st of $12.06/b premium. That said, the spread deepened dramatically from February 5 to February 12 before it recovered, and on February 12 you could have bought March 09 oil for $21.97/b less than the price of sweet light oil to be delivered in March 2010.



Crude and the euro both fell against the dollar during the course of CL Mar 09's spot life, with crude losing 10.6% of its value against the dollar and the Euro losing 2.7%.



Below you will find the substitutable product differentials. As you can see, spreads on March delivery heating oil and RBOB gasoline spiked to February 12, after which they fell just a bit below where they were when CL Mar 09 became spot. This is an indication that the furor over WTI price relationship to Brent is just a bit out of place. CL/WTI was never designed as a global price benchmark--after all, it is illegal to export crude oil from the US (except for some small very heavy sours from California which earned an exception in the export control statutes). The reason it is a global benchmark is because the US consumes a quarter of the world's oil--and it is a benchmark for US oil prices. In fact, most international term contracts are priced to Brent, or more particularly BWAVE (an average of Brent prices over time.) But contracts of oil imported to the US are often linked to CL, which is why it serves as an idea of global prices. The more meaningful complaint is that CL is trading at ahistorical differentials to other US crudes, but since there is no daily open source data on other US crudes, I will have to leave it at that.



At expiry, forward month substitutable product differentials are still healthy, though not as healthy for heating oil (which is nearly identical to diesel) as it was. Gasoline seems to have a relatively healthy premium to CL through September, when the driving season ends. Natural gas, which was trading at near parity to CL not so long ago, closed at at least a $15/b discount to CL on a Btu basis all the way through December 2011 delivery. (It traditionally trades at a pretty steep discount, so the differential itself is not evidence of a drop in industrial demand.)



The commitment of traders report for the February 17 suggests that the market is bullish, given that commercials are hedging against price declines and non commercials are net long. The percentage of traders net long or short has receded from the highs seen at the year's end to numbers much more typical historically, however.

Daily Sources 2/20

1. President Obama and Canadian Prime Minister Stephen Harper agreed yesterday to establish a senior-level U.S.-Canada Clean Energy Dialogue which will focus cooperation on several issues including:

"- Expand clean energy research and development
- Develop and deploy clean energy technology
- Build a more efficient electricity grid based on clean and renewable generation"

The two leaders also announced that they would work in tandem at the G-20 summit in April in Trinidad and Tobago to ensure it "contributes to restoring confidence in financial markets." (h/t Rachel Ziemba at Follow the Money.)

2. Edward Hugh at Fistful of Euros reports that the initial Markit euro-zone manufacturing index fell to a record low of 33.6 in February from 34.4 in January. (Readings above indicate growth; below 50 indicates contraction.) Services PMI also fell to a record low of 38.9 from 42.2 in January. The composite PMI fell to 36.2 from 38.3 in January. This is how well the flash PMIs have tracked actual GDP in the past, courtesy Fistful of Euros:



Christian Reiermann at Der Speigel reports that Peer Steinbrück now believes that the several members of the EU and, more specifically the eurozone, will require bail outs similar to the financial and auto sector rescues:

"But now Steinmeier is creating the impression that some euro zone members may ultimately require the same kind of bailout already seen in the banking industry and manufacturing. It could come at the cost of billions to taxpayers. "The euro-region treaties don't foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty," Steinbrück said.

For German taxpayers, this would be no small sum. If Germany were to pay into a bailout based on its size relative to other euro zone countries, it would be forced to cover one-fourth of the entire tab."

Helful explanatory illustration from Der Spiegel:



Long, but well-worth the read.

3. Edward Harrison at Credit Writedowns reports that Citibank has cut all lending in Denmark. "Citigroup has sold its German operations to a French bank and I understand they are cutting credit lines in the UK as well." (h/t Yves Smith at Naked Capitalism.)

4. Sarah Schafer at the Washington Post reports that the Kyrgyz Parliament voted Thursday to end the lease of the Manas air base to the US, leaving the decision in the hands of the President, who, today signed the bill, giving him the power to serve the US with an eviction notice with 180 days to end operations there. The vote was 78 to 1 in favor of the bill. Baktybek Abdrisaev, Kyrgyz Ambassador to the US and Canada from 1997 to 2005, has an opinion piece in the Washington Post which states that the base's closure is not primarily due to Russian pressure. Abdrisaev says the primary reason for it's establishment in the first place was Kyrgyzstan's conflict with the Islamic Movement of Uzbekistan and sympathy for the US following 9/11. I suspect the notion of US dollars flowing into the nation and the signal it would send to nations with which it has boundary issues (ie China) were also primary concerns. Abdrisaev suggests, however, that a primary reason for the ouster is that the US subordinated support for democratic institutions and procedures to its prosecution of the wars in Iraq and Afghanistan, allowing authoritarian elements to grab hold of the tiny mountain nation. There is some truth to this, though I suspect Kyrgyzstan's interests calculation has changed more from events outside the nation than its new government.

One: If the war in Afghanistan is calculated to be more destabilizing than allowing whatever Islamist organization to become its sovereign, then it is in the interests of Moscow and Bishkek to end the NATO presence there.

Two: Bishkek is a poor country in a world without a lot of largesse to spread about just now. Its GDP is $5 billion. Russia's offer of aid was almost half of Kyrgyz GDP--$150 million in aid, forgiveness of $180 million in debt, and $2 billion in loans.

5. Linda Gradstein at the Washington Post reports that Israeli President Shimon Peres formally asked Likud leader Binyamin Netanyahu to form the next government. Although Kadima leader Tzipi Livni won more seats in Parliament than Likud, apparently more members of Parliament support Netanyahu for Prime Minister. Livni indicated that she would not join a Netanyahu-led government. Netanyahu had previously indicated that he will not form a coalition with the far right Yisrael Beitenu party led by Avigdor Lieberman, reportedly because Lieberman supports civil marriages in Israel which is anathema to Orthodox support for Netanyahu. All of which is to say that it is unclear whether Netanyahu can at this stage form a governing coalition without Livni or Lieberman and, thus, it might be some time before we see one. Until then, it is unlikely to see a formal cease fire agreement with Hamas.

6. Reem Khalifa at the Associated Press today reports that Bahrain has halted talks over a natural gas import deal with Iran after former Iranian speaker of the Majlis was quoted in the media saying that Bahrain was Iran's 14th province until 1970. Bahrain's Foreign Minister Sheik Khalid bin Ahmed al-Khalifa said that the remark was an "infringement of sovereignty" and a "distortion of historical fact."



7. Henrique Almeida at Reuters reports that Angolan national oil company Sonangol is close to a deal with Sao Tome for producing oil from the tiny island's waters.



8. Sharon Schmickle at the Washington Post reports that the re-emergence of the stem rust fungus is threatening wheat production throughout East Africa. A must read.

9. Andre Soliani and Joshua Goodman at Bloomberg report that Brazil's unemployment rate has jumped to 8.2% in January from 6.8% according to the national statistics agency.

10. Paul Krugman of the New York Times highlights the following passage from the minutes of the last FOMC meeting:

"All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation."

11. Shobhana Chandra at Bloomberg reports that the Department of Labor announced today that the consumer price index grew by 0.3% in January. "Excluding food and fuel, the so-called core rate, prices advanced 0.2%, due to autos, clothing, and medical care. The CPI was unchanged on an annual basis--the first time it hasn’t risen since 1955."

12. Reg Curren at Bloomberg reports that natural gas prices in the US have fallen below $4/MMBtu on the drop in industrial demand, which accounts for about 29% of total natural gas consumption. GM alone closed most of its 22 plants last month.

Daily Sources 2/19

1. Andrew Batson at Real Time Economics posted last night a translation of parts of the remarks made by Fang Shangpu--the deputy director of China's State Administration of Foreign Exchange--in a press conference. Some excerpts of the excerpts:

"Regarding the issue of purchases of US treasury bonds, Premier Wen Jiabao in his February 1 interview with the UK’s Financial Times explicitly stated that whether China continues to buy, and how much it buys, will be decided in accordance with China’s needs, as well as the requirement to preserve and increase the value of the foreign exchange reserves."

This appears to be official boilerplate as he repeats the same idea just a bit later.

"With the current international financial crisis still continuing, spreading and deepening, we firmly oppose trade and investment protectionism. We also hope that the major reserve currency countries can take active measures to effectively deal with the financial crisis and economic recession, in order to recover economic growth and financial stability as soon as possible, effectively protect the interests of investors and strengthen investor confidence."

"Investors" here means Chinese government investments in US sovereign and agency bonds. "Investment protectionism" is a barrier to China's external resources policy, like the US Congress's decision to block the acquisition of UNOCAL by CNOOC and probably meant as a direct reference to Canberra's recent decision to review Chinese investments in Australian mining companies. That said, Fang seems to say that Beijing will continue to purchase dollars in pursuit of domestic stimulus:

"For the next step, we will actively support the nation’s need for foreign-exchange funds to expand domestic demand and increase imports, and provide financing support and facilitation to companies’ foreign investments to help build the national economy."

Well worth reading--and if you have Mandarin, the post includes a link to the full Chinese transcript. Chen Deming, China's minister of commerce, has an opinion piece in today's Wall Street Journal Asia which reiterates SAFE's warning against protectionism. He stresses how much demand China added over 2008 and Beijing's commitment to stimulate it in the face of the crisis:

"Today's unprecedented financial crisis has inflicted a severe impact on China and other countries as well. China's economic growth has slowed, exports have plunged and unemployment pressure has mounted. Yet even so, China still firmly believes that trade protectionism isn't a solution to the world's problems. In 2008, amid a contraction in global trade, China imported $1.133 trillion worth of goods from countries around the world -- an 18.5% increase over the prior year. These imports are boosting the economic development of China's trading partners. Since the crisis broke out, the Chinese government has decisively put forward a series of measures aiming at stimulating domestic demand. Given the size and openness of our country, the growth in China's domestic markets can be translated into greater market potential and investment opportunities for other countries. This year China will continue to increase imports and send buying missions abroad for large-scale purchase of equipment, products and technology."

Well worth reading in full. Nadia Rodova at Platts has a follow up story on the news of Beijing's loan agreement with Rosneft and Transneft which reports that Rosneft has made clear that the oil contracted for under the agreement will be paid for at the market rates prevailing at the time of deliveries. Deliveries--of 300 kb/d for 30 years--are slated to commence in 2011. (for the story a few days ago, see Daily Sources 2/17 #5.) Meanwhile, Dale Crofts at Bloomberg reports that Petrobras announced it had signed a $10 billion loan agreement with China’s Development bank today. This comes after raising $1.5 billion in 10 year bonds via the capital markets on February 4th, just a week after stating that credit on the international markets was too dear (see Daily Sources 2/5 #8). I imagine the terms of this most recent agreement are generous.

2. Yves Smith quotes at length from a Lloyd's List article--not made free to the public--which throws cold water on the notion that recovery in the Baltic Dry Index is an indicator that global trade has bottomed.

"Box throughput at Singapore, the world’s largest container port took a 19% dive in January this year to 2m teu compared to 2.4m teu for the first month of 2008.

Singapore’s sharp drop in volumes in particular reflect the collapse in the Asia- Europe trade where it is a key relay port transhipping exports from surrounding countries to Europe and the Middle East.

... Hong Kong, saw January throughput plunge 23% in January..."

"At Malaysia’s largest port, Port Klang, the picture was not much better. Port Klang Authority general manager Lim Thean Shiang told local press that the port had seen a 16% drop in volumes in the first month of the year compared to January 2008."

"China’s Ministry of Transport said throughput of the country’s coastal ports has fallen for three consecutive months on a month-on-month term. China coastal ports handled 8.2m teu in January, down 15% from the same month last year and 10% from December.

The country’s third largest port, Shenzhen, saw throughput fall by 18% to 1.5m teu in the first month of this year. The proportion of empty boxes at east Shenzhen’s Yantian port district has risen from 60% to 80%, according to the city government....

The picture was equally grim for one of Southeast Asia largest exporters with the country’s [Indonesia's] trade minister Mari Pangestu forecast that its exports could fall by at least 20% this year."

The explanation of the recovery of the BDI so far--an increase of iron ore imports by China's steel industry--seems insufficient to explain the rise in the index, but the port traffic data is especially grim.

3. Hiroko Tabuchi at the New York Times reports that the Bank of Japan said today it would purchase ¥1 trillion (~$10.7 billion) in corporate bonds, extend its purchases of commercial paper and maintain its benchmark lending rate at 0.1%. Ron Harui and Kim-Mai Cutler at Bloomberg report that Barclays Capital analyst have noted that credit default swaps have risen to as much as 120.7 this week, in what they argue is a sign that the markets are reassessing their valuation of the yen as the best fiat store of value.

4. Eurointelligence reports that Poland has entered into talks with the European Central Bank regarding entering the European Exchange Rate Mechanism II. In brief, ERM-II establishes a band within which the adopting country's currency will trade against the euro. Yesterday, P O Neill at Fistful of Euros posted that the European Commission released its economic assessment of EU member states and announced it had begun "excessive deficit procedures" for six member countries whose deficits exceed 3% of GDP. They are Ireland, Greece, Spain, France, Latvia, and Malta.

5. Meanwhile, Lynnley Browning at the New York Times reports that UBS, the largest bank in Switzerland, had agreed to turn over the names of investors suspected of using the bank to avoid taxes. The bank has admitted to conspiring to defraud the IRS and agreed to pay $780 million to settle the case.

"But to some, turning over any names at all heralds the end of the secret Swiss bank account, whose traditions date to the Middle Ages.

'The Swiss are saying that this is the end of Swiss banking as they knew it,' said Jack Blum, an offshore tax specialist. 'Nobody will trust the security of the Swiss bank account.'"

To me, this is a better indicator of the stresses the international financial system is under than much of the news we get. When institutions abandon customs over 500 years old, "once in a century" is rendered an understatement. (The second, by the way, seen from Europe, given that the Bank of England cut rates to the lowest seen since its inception 315 years ago. see Daily Sources 1/9 #2.) The credibility of the argument that Switzerland will have to join the monetary union has just gone up considerably.

6. RIA Novosti reports that Naftogaz announced today via its website that it will likely be unable to keep current on its payments for Russian natural gas. The statement reads:

"The national joint stock company Naftogaz of Ukraine is giving notice of the possible deterioration of the situation with payments to Gazprom following a disastrous growth in utility companies' debts to its structures."

7. Steve Bryant at Bloomberg reports that the Turkish central bank cut its benchmark interest rate by 1.5% to 11.5%, "the lowest since Turkey began inflation targeting in 2002."

"The bank’s fortnightly survey of businessmen and economists on Feb. 9 showed expectations for inflation falling to 7.16%, below the bank’s goal of 7.5% at the end of this year."

8. Ayesha Daya, Haris Anwar and A. Craig Copetas at Bloomberg report that the United Arab Emirates is preparing a plan to stabilize its financial sector.

"'If we want the banks to lend again to real estate, then obviously governments will have to put a plan,' Sultan Ahmed bin Sulayem, who also sits on a committee studying the effects of the global credit crisis on Dubai’s economy, said in a Feb. 17 interview in his office. 'I know, I am aware, that the central bank and the federal government are taking steps to lend money.'"

9. Geoff King at Platts reports that Norwegian E&P company DNO said today that tie-in operations connecting the Tawke oil field to Iraq's northern pipeline are nearly complete and that the company is set to substantially increase production. "The company said in September that output from Tawke was averaging 11 kb/d but that this could be increased to 90 kb/d." Meanwhile, Juan Cole at Informed Comment reports that Iraqi-Kurdistan Prime Minister Nechirvan Barzani is stoking fears of an Arab-Kurdish civil war should the US withdraw prior to a final agreement on the region's status. In late November, Kurdistan received a shipment of arms from Bulgaria without seeking approval from Baghdad while complaining that al-Maliki was attempting to establish a praetorian guard answerable only to him. (see Daily Sources 11/24 #7.) Prof. Cole also reports rumors that several factions upset with the centralizing policy of al-Maliki are conspiring to set up a vote of no confidence.

10. Pamela Constable, Karen DeYoung and Haq Nawaz Khan at the Washington Post report that neither the Pakistani government nor their Taliban counterparts in Swat are willing to formalize the accord announced Monday. (see Daily Sources 2/17 #4.) The reaction in the press to the potential deal has been something close to incredulous. However, I think that Secretary Clinton had the right idea when she refused to comment on the issue more than to say that she was waiting to find out what the notion behind the deal was before making a conclusion.

From my far remove I regard the problem that Pakistan faces--and which the Taliban addresses--as lawlessness. If there is no sheriff in Swat who will obey the decisions of Islamabad without some sort of ratification by the local Islamicist political leaders, then there is, in effect no law. If the appeals process established by the accord were to be governed by the national judicial system, then the Sharia courts would be re-incorporated into the central government. (Also, if I understand correctly, Pakistani law already gives some jurisdictional precedence to Sharia and Sharia Courts in some instances--family law, for example. Given that my understanding is correct, that would mean that the move was entirely consistent with the Pakistani Constitution.) Secretary Clinton is absolutely right to have been so circumspect with regard to the accord--it may provide Islamabad with some needed breathing room in the current strongly centrifugal environment.

11. Steven Bodzin at Bloomberg reports that according to a confidential document obtained by the wire service that Venezuela's plans to boost crude production by 12% in a joint venture would cost $18.4 billion as opposed to estimates given in June by the Energy and Oil Minister, Rafael Ramirez, of $8 billion.

"'It will be very tricky for companies, big or small, to get that level of funding,' said David Thomson, a Latin America energy analyst for Wood Mackenzie in Edinburgh. 'Even if there wasn’t a credit crunch on, raising $10 billion to $20 billion for Venezuela wouldn’t be the easiest.'

Given past nationalization moves by Chávez, a self-avowed revolutionary socialist, Thomson said, 'Banks aren’t going to touch it with a bargepole.'"

Given that Chávez looks to be President for life, I suspect that even given the long term perspective of the oil and gas industry, even policy-driven investments would be few in number. That said, Total recently indicated that it would turn to Venezuela in preference to Brazil (see Daily Sources 2/17 #6) and they may be convinced that they will receive preferential treatment because Chávez's movement is modeled in part on the Fifth Republic and there are few state companies with the requisite technical capabilities for developing the Orinoco belt. (see Venezuela vs ExxonMobil.) Still, $18.4 billion would be an awfully big bet on historical sympathy.

12. Robert DiNard at the Barrel reports that President Obama will make his first visit abroad--for six hours--to Canada today, where he will meet with Canadian Prime Minister Steven Harper. Canada is America's largest trading partner and our largest source of crude oil--and an important part of the Obama Administration's energy strategy going forward. That said,

"Beyond oil sands development, the future Canada-US energy relationship will also hinge on how well the countries bilaterally handle their shared power grid. The US will not be able to get to its ultimate goal of a far more energy efficient grid without Canada, and it is uncertain how much money and effort Ottawa is willing to spend on this, or other energy infrastructure.

The newly minted US economic stimulus package contains around $11 billion in spending on the transmission system, while Canada's stimulus plan contains C$0 (US$0) for smart grid development. Canada is leaving the matter to each province, hardly a promising framework for a continent-wide solution."

Well worth reading in full, though I am unclear on how long Harper will be the primary point of contact, considering that he shuttered the parliament to put a stop to a no confidence vote in December. Keith Johnson at Environmental Capital notes that Jeff Rubin, chief economist at Canada’s CIBC investment bank, argues that the suspension of investment in Canada's oil sands due to the low price environment will in due course create another supply side shortage:To wit:

"Rather than growing by close to 400,000 barrels per day, due to rapidly expanding oil sands production, total Canadian production is likely to rise by only a third of that by 2010. Hardly an auspicious picture for the Canadian oil sands, a region that the IEA expects will be the single largest source of new crude supply, almost three times as important as Saudi Arabia over the next two decades […] If oil prices were to stay at current levels, [global] production, instead of plateauing around 88 million barrels per day by 2012 as we had previously forecast, would decline at an accelerating pace between now and 2015. By 2015 production would decline to around 76 million barrels per day, a level roughly 10% lower than last year’s level."

I do not think that this forecast, however, will persuade many financial authorities to pursue policies which would destroy the significant economic stimulus (a progressive one at that) rendered by cheap oil in the near term. In related news, John M. Broder at the New York Times reports that the EPA is expected to regulate carbon emissions for the first time.

"The environmental agency is under order from the Supreme Court to make a determination whether carbon dioxide is a pollutant that endangers public health and welfare, an order that the Bush administration essentially ignored despite near-unanimous belief among agency experts that research points inexorably to such a finding.

Lisa P. Jackson, the new EPA administrator, said in an interview that she had asked her staff to review the latest scientific evidence and prepare the documentation for a so-called endangerment finding. Ms. Jackson said she had not decided to issue such a finding but she pointedly noted that the second anniversary of the Supreme Court decision, Massachusetts v. EPA, is April 2, and there is the wide expectation that she will act by then."

Oil sands production emits considerable carbon--at levels similar to coal.

13. Calculated Risk posts on the recent unemployment numbers from the Department of Labor.

"The four week moving average is at 619,000, the highest since 1982.

Continued claims are now at 4.99 million--another new record--above the previous all time peak of 4.71 million in 1982."

14. Jack Healy at the New York Times reports that the producers price index rose by a seasonally adjusted rate of 0.8% in January. "Producer prices excluding volatile food and energy costs rose 0.4 percent"

15. The EIA reported today that crude oil stocks fell 200,000 barrels to 350.6 million barrels for the week ended February 6. According to a Bloomberg survey, analysts had expected a 3.2 million barrel build. The stock level is well above the five year historical average for this time of year, but still below the recent high seen in July 2007. Gasoline stocks grew by 1.1 million barrels, in the upper range of the historical average, and in contrast to analyst expectations of 500,000 barrel draw. Distillate stocks fell by 800,000 barrels and are still above the historical range. Taken in isolation, the news is mixed, given that the stocks level for crude is still historically high and the reduction of refinery utilization is matched by a build in gasoline--as the price of gasoline climbs, crude may follow until European arbitrage opens up. That said, considered alone the build in gasoline stocks should presage a drop in price.