Daily Sources 4/8

Chag Pesach Sameach or Happy Passover!

1. V. Phani Kumar at Marketwatch reports that Japan's current account surplus shrank by nearly 56% in February from the year prior.

"Japan's exports tumbled more than 50% to ¥3.31 trillion [in February] as demand for Japanese products was hit sharply. At the same time, imports slowed 44.9% to ¥3.11 trillion, resulting in a trade surplus of ¥202.1 billion for the month, compared to a deficit of ¥844.4 billion in January."

2. In an op ed in the Wall Street Journal, Alexandros Peterson, a fellow at the Atlantic Council, reports that Gazprom recently signed a memorandum of understanding which would slate the production of two new Azeri natural gas fields for Russian consumption--even though the fields are "required" for the planned initial throughput of the Nabucco pipeline. Peterson's tone is just a tad alarmist, which perhaps is what is required to get his piece picked up by the papers, but, as he notes, the MOU is hardly binding.



Baku's interests still include becoming a key source of natural gas for European consumption, though perhaps the MOU is a way of maintaining their options--and reminding Europe that they have them. Beyond that, Azerbaijan is not required for alternative natural gas routes to Europe in any case. If Iran is ultimately to be a source for Nabucco, the Pars pipeline, which could bypass Turkey altogether, is another source. The South Pars/North Dome natural gas field is the largest in the world with an estimated 51 trillion cubic meters of natural gas in place.



Qatar owns the southern section of it, and is fairly amicable with the West. Iran clearly would like to become a critical source of Europe's energy supply. Peterson seems argue that Europe has no options, and this should push it to admit Turkey to the union. But he ignores the obvious:

a) Under any foreseeable scenario, Europe will not become independent of Russian natural gas ... it will be vulnerable for at least the long term to a cut off, should Moscow decide--for unfathomable reasons short of war--to.

b) There are alternatives to Turkish transit for natural gas--not least being LNG.

c) Natural gas supply is a long term issue in Europe, to be sure, but presently demand is down. Indeed, at £0.3062/therm, ICE natural gas for delivery in May is only trading at $0.99/MMBtu premium to NYMEX Henry Hub for delivery in May, which yesterday closed at $3.562/MMBtu. Consider that Europe is vulnerable to a supply cut off in the way that the US is not--and that US is facing a huge surplus, on December 24, 2008 same month natural gas sold at a just a $1.02/b discount to front month WTI on a Btu basis. Yesterday it closed at a $28.49/b discount to front month WTI on a Btu basis ... and much of the curve is selling at a $30/b or more discount on a Btu basis. (Indeed, today Platts reported that GDF Suez released data showing that French LNG injections for the week ending Sunday were down 32.4% year over year.)

d) His arguments would do little to convince the European public that entry of Turkey into the union is an encouraging option given that it is pitting a nationalistic aversion to a future compromise versus nationalistic disgust with a current compromise (with an entity with which most of Europe has a closer identification).

3. Borzou Daragahi at the Los Angeles Times reports that the managing director of the National Iranian Oil Company [NIOC]--Seyfollah Jashnsaz--said in remarks broadcast on state radio that the company had found several huge new oil fields, and that "Billions of barrels of oil will be added to the country's existing oil reserves."

"Even if we make calculations based on the minimum 12% recovery rate, it means that 1 billion barrels of oil can be recovered from this field alone."

Very important if true.

4. Aluf Benn at Haaretz reports that the Obama Administration is preparing for a confrontation with the government of Benjamin Netanyahu over his refusal to accept a two-state solution for Palestine by "briefing Democratic congressmen on the peace process."

"In recent weeks, American officials have briefed senior Democratic congressmen and prepared the ground for the possibility of disagreements with Israel over the peace process, according to information recently received. The administration's efforts are focused on President Barack Obama's Democratic Party, which now holds a majority in both the Senate and the House of Representatives. The preemptive briefing is meant to foil the possibility that Netanyahu may try to bypass the administration by rallying support in Congress."

(h/t Michael Collins Dunn at the MEI Editor's blog.)

5. Seth Mydans and Mark McDonald at the New York Times report that "tens of thousands" of supporters of former Thai Prime Minister Thaksin Shinawatra have massed in central Bangkok, demanding the resignation of the current administration which had been put in office after demonstrators had toppled Thaksin's government last year. Reports are of as many as 100,000 demonstrators, though they have not moved to stop all travel by occupying the air ports and roads, which is what precipitated the government's fall last time.

6. Sudeep Reddy at Real Time Economics reports that Richard Fisher, the head of the Federal Reserve Bank of Dallas, delivered a speech in Japan today where he forecast that US unemployment "could surpass" 10% by the end of the year. Fisher indicated that the key risk the Fed was addressing was "deflationary job destruction." He also dismissed the argument that the US was preparing for a sharp devaluation, saying,

"[D]emand for Treasuries and other official paper of U.S. government issuers will be determined by their attractiveness relative to alternatives, and they may well be judged more, rather than less, attractive under most reasonable future scenarios."

Worth reading.

7. Brad Setser's most recent post at Follow the Money includes a graph which plots the fall in industrial production in the current financial crisis versus that of the average of the other post-war recessions:



8. Hui-yong Yu at Bloomberg reports that vacancies at US retail centers--malls and shopping centers--rose to the highest level seen in 10 years.

"More empty stores and lower rents are ahead 'unless conditions change dramatically,' said Victor Calanog, director of research at the New York-based real estate research firm. He forecast the declines would last through next year.

'This outlook assumes positive job growth and an increase in consumer spending beginning in early 2010,' Calanog said in a statement."

9. Keith Johnson at Environmental Capital reports that the Future Combat System, a program to reinvent the way the military fights wars one thrust of which would be to utilize lighter transport vehicles which require less fuel, has been effectively killed by recent comments by Secretary of Defense Gates.

"I am ... concerned that, despite some adjustments, the FCS vehicles–-where lower weight, higher-fuel efficiency and greater informational awareness are expected to compensate for less armor–-do not adequately reflect the lessons of counterinsurgency and close-quarters combat in Iraq and Afghanistan."

10. Nassim Nicholas Taleb in the Financial Times points out what every engineer, quartermaster, and military planner has known since the inception of their professions: you must create redundancies to make something structurally sound, efficiencies often make systems especially vulnerable to complete breakdown. Thus unfettered markets are especially efficient and their efficiencies are based on structures especially vulnerable to catastrophic breakdowns. I suppose it bears repeating, but how many times must it be repeated? That, I suppose, is a question of how much repetition a meme requires before it is just felt instinctively to be true. Are there instances where certain memes are so unpleasant--and defer rewards for too long--for them to ever prove cultural bedrock even if they are indisputably true?

11. The EIA reported today that for the week ended April 3 commercial stocks of crude grew by 1.7 million barrels to 361.1 million barrels, the most recorded since 1993. The number is well above the historical average in the last five years and were fairly close to analysts expectations of a 1.5 million barrel build indicated in a Bloomberg survey. Gasoline stocks build by 600,000 barrels and are above the historical average for this time of year. Distillate stocks fell by 3.4 million barrels, but are still 20 million barrels above the historical average at this time of year. Taken in isolation, the news is mixed to bearish on the price of crude.