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.

Daily Sources 1/9

1. Ben Hall at the Financial Times reports that at a Paris "conference on capitalism and ethics" President Nicolas Sarkozy and Chancellor Angela Merkel both signaled that the US should not seek to impede European efforts at tighter financial regulation.

"Ms. Merkel told the conference that she would "react very strongly" if the financial community tried to block government efforts to tighten regulation. "We must not repeat the mistakes of the past," she said."

Tony Blair, who was co-hosting the conference, called for "complete review of . . . global financial supervision."

2. Eurointelligence points out that when the Bank of England cut rates to 1.5%, it was to the lowest number seen in the history of the bank itself. That means in 315 years! The Bank of England was chartered in 1694.

3. Peter Hirschberg and Saud Abu Ramadan at Bloomberg report that Israel and Hamas have each rejected the terms of the cease fire ordered by the UN Security Council. The Security Council voted yesterday 14-0 for a resolution immediately demanding a cease fire. The US abstained. Hamas fired a set of rockets into Israel a few hours later.

4. Philip P. Pan at the Washington Post reports that Russia has agreed to begin supplying the Ukrainian natural gas pipeline network provided that supply is monitored by the EU.

"'Our impression is that the Ukrainian side fears that such a mechanism will be created, because we very well know that thefts of Russian gas did not start yesterday. This practice has continued for many years,' Gazprom chief executive Alexei Miler told reporters in the Black Sea resort of Sochi after meeting with his Ukrainian counterpart."

Vladimir Putin responded to accusations about the crisis being the result of maneuvering inside middleman company RosUkrEnergo by acknowledging that Gazprom owns half of the organization, but stating that Moscow was unaware of who on the Ukrainian side owned the other half! Nick Comfort and Kateryna Choursina at Bloomberg report that the breakthrough came "talks in Brussels yesterday involving Miller, his counterpart at NAK Naftogaz Ukrainy, Oleh Dubina, and EU Energy Commissioner Andris Piebalgs." James Kanter and David Jolly at the New York Times warn that the deal is not a done deal quite yet--Ukraine has yet to sign the agreement.

5. Eric Watkins at the Oil & Gas Journal reports that the Medgaz consortium has completed the subsea pipeline connecting Algeria to Spain. Medgaz is comprised of Sonatrach 36%, Cepsa 20%, Iberola 20%, Endesa 12%; and GDF Suez 12%. The pipeline has a capacity of 8 billion cubic meters/year and should come onstream in mid-2009.



You can take a virtual tour of the submarine pipeline here. (Heh, I love this stuff.)

6. Platts reported that CNPC began filling its 6.29 million barrel crude oil reserve at Shanshan county in Xinjiang province December 22 a CNPC official indicated on January 7. The reserve is being filled with crude from the Tarim oil field and the 10 million mt/year (200,000 b/d) Sino-Kazakhstan pipeline.

"[China's] current SPR storage capacity of 19.7 million cubic meters, or 136 million barrels, is equivalent to around 42.5 days of the country's import demand, based on the November data.
...
The State Council said in 2007 that China should build up its SPR to an equivalent of 120 days' import demand.

The International Energy Agency in November 2006 suggested the equivalent to 90 days' import demand."

Below is a slightly outdated map of the Central Asian energy pipelines network. (By outdated, for example, China's "West-East Pipeline" was completed a few years ago if I remember correctly. The Russian pipeline to the Pacific would now follow a different route.)



This map shows where the Tarim Basin is and the main route of the West-East Pipeline.



7. Brad Setser reports that Taiwan's exports in December were down 40% year over year and that South Korea's exports were down 17.4%. Taiwan's imports were down 45%; South Korea's fell by over 21%.

8. William Sim at Bloomberg reports that the Bank of Korea cut its benchmark lending rate by 0.5% to 2.5% today.

"The government said yesterday it will provide an additional 50 trillion won in loans and credit guarantees to small businesses.

It has allocated about 140 trillion won, or 15 percent of GDP, in tax cuts, extra spending and liquidity injections."

Meanwhile, Seyoon Kim and David Tweed report that the deputy finance minister, Shin Je Yoon, told the journalists that South Korea was seeking to increase the size of the $30 billion swap agreement with the Fed and extend the maturity.On October 29 the Fed established dollar swap lines with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore (see Daily Sources 10/30 #4.)

"The won has gained 12% since reaching its decade low versus the dollar on Nov. 21.

The US arrangement 'was a turning point' for the won, Shin said. 'The swap line showed that the US cares about the Korean market.'"

9. Christian Schmollinger at Bloomberg reports that Saudi Aramco will cut shipments in contracts with refiners in Taiwan and Japan by 10%.

"'This shows that they are really serious since this, I think, actually puts them below their quota,' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. 'As OPEC cuts back on their term, it means buyers will have to come back to the spot market.'"

10. Vandana Hari, Pradeep Rajan and Sharmilpal Kaur at Platts report that the Indian union Oil Sector Officers Association have called off part of their strike. The rest are expected to follow suit shortly. The total refining capacity of IOC and BPCL is about 1.4 mb/d--India's total, after the commissioning of the new Jamnagar facility--is around 2.8 mb/d. My back of the envelope estimate is that the strike took a little less than 400 kb/d of capacity offline, or about 14% of total capacity, which, I believe, is substantially more than India's surplus refining capacity.

11. Gregory Viscusi at Bloomberg reports that the US Navy has told the media that it appears that a ransom has been paid for the Sirius Star supertanker and is about to be released. $3 million has allegedly been paid to the hijackers.

12. Dow Jones reports that Ecuadorian Mining and Oil Minister Derlis Palacios told the journalists that Quito is asking Tehran for a $280 million line of credit to invest in its oil infrastructure. The minister said the money was needed mostly for expanding the country's pipeline network and that he was confident that Iran would make it available to them. It certainly would be interesting if they did, but all signs point to Iran facing a budget crisis of its own given the low oil price environment and I am not sure how the administration would justify such an outlay to a country which had just defaulted on its debt to the Majlis.

13. Stephen Power at the Wall Street Journal reports that the Bush Administration is preparing to issue a final directive to federal agencies which would order them to determine how much of the Arctic Circle the US can claim sovereignty over.

"'The purpose of the Arctic policy is to recognize that the U.S. has important and strategic interests in the Arctic region,' [White House spokesman Gordon] Johndroe said. 'Many countries have been aggressively pursuing their interests in the Arctic . . . The US, as an Arctic nation, has competitive interests in the region, and we need to be a player there along with all the other arctic nations.'"

The US Geological Survey estimates the Arctic Circle contains estimated 1,670 trillion cubic feet of natural gas and 90 billion barrels of oil.



At 2008 rates of consumption, 90 billion barrels of oil would last the US 12.3 years. It would meet the oil needs of the world for 2.9 years. Global proven reserves of natural gas stand at about 6,046 trillion cubic feet just now. Last year there were some international grumblings about Russian explorations and claims in the Arctic.

14. James Morgan at the BBC reports that Prof. David Battisti at the University of Washington and Prof. Rosamond Naylor, director of Stanford University's Program on Food Security and the Environment, have collaborated on a report published in Science Magazine which calculates "there is greater than 90% probability that by 2100, the average growing-season temperatures in the tropics and subtropics will be higher than any temperatures recorded there to date." Such higher temperatures in the tropics would cut yields on staple foods like maize and rice by 20 to 40%. 2100 is some time away, but, for example, record temperatures experienced in Europe during the Summer of 2003 cut the crop yields of France and Italy by one-third. Meanwhile the AP reports that the credit crunch will lower the rice yield in Asia as food prices fell, but the food was produced by previously high cost fuel and fertilizer, thus causing farmers to take a bath. Since they did not do well, they are looking for credit to plant new crops, but cannot find it, which should push up prices for rice given lower production. The Philippines has just lowered its rice production estimates by 4% for 2009 given the difficulty farmers are having in obtaining credit.

15. Sudeep Reddy reports that in absolute terms the unemployment report was the worst seen since WWII with employers cutting 524,000 jobs in December and the November job losses revised upwards to 584,000 from the 533,000 reported earlier. However, the Minneapolis Federal Reserve Bank has data showing that in relative terms jobs losses so far are considerably less than 1981, 1960, 1957, 1953, and, yes, 1948. (Man, I thought the 50s were full employment Beaver Cleaver days that everyone except for non-conformists yearn for! Sure doesn't look that way from those numbers.)



16. Barbara Sard at the Center on Budget and Policy Priorities published a report yesterday which argues that" the number of people in 'deep poverty'--with incomes below half of the poverty line--will rise by an estimated 4.5 – 6.3 million if unemployment reaches 9%," which is what Goldman Sachs has forecast for 2009. That would mean between 900,000 and 1.1 million families which would be put at housing risk and potentially made homeless. She cites data from a number of areas:

" * In July - November 2008, compared with the same period in 2007, the number of families entering New York City homeless shelters jumped by 40 percent.
* Massachusetts reports a 32 percent increase between November 2007 and November 2008 in the number of homeless families residing in state-supported emergency shelters.
* In Connecticut, family homeless shelters turned away 30 percent more families due to lack of bed space in September 2008 than in September 2007.
* Hennepin County, Minnesota (Minneapolis) reports a 20 percent increase between the first 10 months of 2008 and the comparable period in 2007 in the number of homeless families in emergency shelters.
* Los Angeles County reports a 12 percent increase between September 2007 and September 2008 in the number of families receiving welfare assistance who are known to be homeless."

1.1 million families made homeless, if I understand correctly, would translate into an additional 3.5 million people made homeless, or 1.2% of the population. This would not be good for political stability. The full report is here.

17. Tara Siegel Bernard at the New York Times reported yesterday that average mortgage rates have fallen to 5.01% for the week ended January 8. That is down from a high of 6.7% over the Summer and 5.87% a year ago. "'Refinance activity continues to be strong, but purchase inquiries are relatively static,' said Cameron Findlay, chief economist at LendingTree."

18. Rebecca Wilder has a nice graph at her blog--News N Economics--illustrating monthly changes in vehicle miles driven versus the average price of gasoline:



Wilder cites a Gallup poll which indicates that 64% of Americans changed their driving habits in response to the high cost of gasoline. The poll also confirmed that people with lower incomes are more responsive to price changes:

" * 69% of Americans making < $30k/year drove less when gas prices were surging, while 19% drove more when gas prices fell.
* 56% of Americans earning > $75k/year drove less when gas prices were surging, while just 8% drove more when gas prices fell."

It is a piece worth reading in full.

19. Liam Denning at the Wall Street Journal reports that people who want to get in on the oil contango profits might do so by purchasing tanker futures, and paper trades spiked 40% to WS63 yesterday. I'd be awful reluctant to do so given the demand numbers, however.

Spot Life CL Feb 09

Well, I got to this a bit later than I would have liked, but below you will find the reported causes table for the first twelve days of CL Feb 09's spot life.

The big stories have been Gaza and the potential for a new Arab oil embargo ... and a sharp crescendo (from nearly zip) in the drums for war with Iran. OPEC may in fact actually abide by its new production quotas, though Iran does appear to be cheating so far. Considerable tension between Pakistan and India following the Mumbai terror attacks, though both have gone some ways to reassure the world that they do not want war. 26 or so VLCCs have been chartered for storage to capture profits from the giant contango, and as many as 10 more are being negotiated for. And Gazprom makes the New Year's resolution that it will be paid the market rate for its natural gas from Ukraine, sending a nice belated Christmas gift to Eastern Europe as winter temperatures fall below 0ºF. India's oil workers effectively cripple the countries state-owned refining business, taking four of IOC's seven refineries offline and cutting BPCLs production (at its two refineries) in half. Premiums for diesel in Europe spark cross-Atlantic arbitrage, with traders seeing as much as 3.6 million barrels being booked from the US.

That would seem enough to put a lift in oil's life, no?

No. Because there was more dismal, plus tons of abysmal, data about the world's economies--most especially the US, where banks have been recapitalized to lend to credit-worthy debtors, but there just are not that many credit-worthy debtors to lend to and China, which is hoping to export it's way out of this mess, but to whom, exactly, given that everyone that buys is broke and everyone who sells wants to export out of this mess?

But the politics do seem to have provided some resistance to the downward slide.



The giant contango of 2008 has continued apace, but now the differential between the front and second month contracts has widened considerably to $4.81/b at the close of trading January 8 or 11.5% of the front month price. The differential between Feb 09 and Jun 09 is $11.13/b or 26.7% of the front month price. The differential between Feb 09 and Feb 10 is $18.28/b or 43.8% of front month. The differential between Feb 09 and Dec 16--nearly at the end of the curve--is $35.54/b or 85.2% of front month. As you can see from the graph below, the differential seemed to be in the process of narrowing some from Christmas eve to January 6, after which is promptly stretched right back out.

On January 7 the EIA report showed that crude stocks were full well beyond the historical range for this time period and had grown by a whopping 6.7 million barrels--meaning that there are not a lot of places you can put oil if you want to store it. Thus, it has become difficult to take advantage of the future price unless you can either afford to rent a supertanker or happen to have one of your own. Thus many speculators cannot, well, speculate (even though profiting off the contango isn't speculation so much as simple arbitrage.) Hence the steepling of the contango.



Crude doesn't seem to be following the euro dollar exchange rate, nor does the euro appear to be following crude. (I've always thought this was a bit of correlation causation confusion myself, but just to keep track the euro lost 3.8% against the dollar at interbank rates for the period considered--December 22-January 8--and crude gained 4.5% during that time.)



Substitutable product differentials are below. As you can see for a moment on Christmas eve natural gas was trading at near parity to crude oil on a Btu basis--but it didn't last for long. The heating oil (which is pretty much interchangeable with diesel) contract shows a healthy spread over crude. The Russo-Ukraine dispute and Gaza conflict probably gave it a bit of a boost after January 1, but if the storage tanks for diesel are to the brim in Europe and the Russo-Ukraine dispute is resolved, then it might well narrow again. (Heating oil is a substitute for natural gas.) Gasoline was less expensive than crude until the New Year's too, and probably got a boost for similar reasons as diesel, though it's still hard to see how you could make a profit off of making gasoline from sweet light crude in the US at these prices.



And the CFTC commitment of traders report would, as far as I can tell, be bullish, given that commercials are hedging against a fall in the price of oil and non-commercials are betting it will go up. 5.54% of traders were net long or short for the December 30 reporting date, and we have seen similar shares in the last two commitment of traders reports as well. I have been led to understand that this is especially unusual, and that the only other times we've really seen that sustained in the past is early this year and late April - early May.



I took another look at price volatility and had to amend my graph slightly, but the conclusion remains the same. In terms of the number of days where you have seen the price of oil go up or down five or more percent 2008 was not unprecedented. 1986 and 1990 were both years with a similar number of spikes and troughs in price. In fact, on average price volatility for crude oil was significantly greater than it had been in the past from 1996 on--which I suppose means that the "great moderation" never took place in terms of oil derivatives.



However, in absolute terms we haven't seen fluctuations like this since 1984. I plotted out price volatility in terms of average $/b change in both nominal and in 2008 dollars and found that 2008 had twice as much $/b change as any year previous. (I'd like to check this against the great oil shocks of 1967, 1973, and 1979, but I don't have access to daily spot prices going back that far.)



You can see that from this graph, courtesy of Wikipedia, derived from the BP data for average yearly price going back to 1861 in 2007 dollars and nominal dollars that there is some reason to want to test this claim.

Daily Sources 1/8

1. Ralph Atkins at the Financial Times reports that the European Central Bank does not look set to cut the benchmark interest rate any further.

2. The Bank of England cut its benchmark lending rate by 0.5% to 1.5%. Real Time Economics carries the full text of the bank's statement. Excerpts:

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
...
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.
...
[T]he Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate."

3. Kevin Rudd, the Prime Minister of Australia, has an opinion piece in the Financial Times which argues that the need to coordinate monetary policy and fiscal stimulus internationally is unprecedented.

"The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation."

Well worth reading in full.

4. Jann Bettinga and Oliver Suess at Bloomberg report that Commerzbank will receive a second bailout from Berlin, less than three months after the first. The bank, Germany's second-largest, will receive €10 billion (~$13.7 billion) from the government in return for 25% of its shares, plus one. It received €8.2 billion last November (~$10.4 billion at that time.)

"The capital injection will boost the combined Commerzbank- Dresdner Bank’s core capital ratio, a key measure of solvency, to about 10 percent, Commerzbank said. Germany’s bank-rescue fund, called Soffin, will buy 1.8 billion euros of Commerzbank shares and provide the rest of the money as a loan."

5. Edward Hugh at Fistful of Euros reports that German exports in November fell "12% year on year, while imports fell 5.6% on the month and 0.9% from a year earlier."

"And problems with indutrial output, emplyment and exports are not the only difficulty facing Germany, since a sale of 10-year bunds yesterday lured the least demand in six months as investors began to show increasing nervousness in the face of the coming flood of government securities, raising the prospect of increased borrowing costs across the European economies.

Investors bid a total of 5.2 billion euros for the bonds on offer, illustrating a reluctance to purchase which prompted the Bundesbank to retain some 32 percent of the securities."

The problem of selling sovereign debt will not be unique to Germany, and likely more critical for emerging markets selling US dollar denominated debt. (see Daily Sources 12/31 #9) Hugh's analysis is helpful, as usual.

6. David Yong at Bloomberg reports that Pacific Investment Management Co. (PIMCO) managing director and co-head of emerging-market investment, Curtis Mewbourne, wrote in a note on the company's website that "Default probabilities for countries like Brazil, Korea, Mexico and Singapore remain very low." Yong summarizes the analysis thus:

"Debt sold by countries with large enough financial reserves to stimulate economic growth and access to support from the Federal Reserve’s $120 billion of currency swap lines will outperform ....
...
Pimco is most bullish on countries that have the resources or can borrow to stimulate their economies as exports slump, according to Mewbourne. He highlighted China’s $585 billion stimulus package and Russia’s $186 billion program."

Meanwhile, Lilian Karunungan and Kim Kyoungwha at Bloomberg report that Asian currencies are falling in the face of dropping US demand.

"'The export numbers were shockingly weak,' said Mitul Kotecha, Hong Kong-based head of global currency strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. 'In an environment where exports are under significant pressure, the authorities will be content to see some depreciation, as long as it’s not a rapid fall.'"

7. Brad Setser at Follow the Money believes that Chinese appetite for US debt has not disappeared but has shifted from a basket of Agencies and US Treasuries to just US Treasuries.

"Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero."

Well worth reading in full. Meanwhile, Tao Wang of UBS argues that the unemployment situation facing China is unlikely to cause civil unrest, suggesting that it is hardly unprecedented.



Wang argues that these job losses are cyclical and not structural as they were in 1998 and that actual unemployment in the early 2000s was in excess of 10% in addition to an estimated 20 million migrant workers returning to the agricultural sector between 1998 and 2002, for lack of jobs elsewhere. He also thinks Beijing is more prepared to face the problem head on now.

Shanghai Stakes reports that vacancy levels for A-level commercial buildings in Shanghai have risen from 5% at the beginning of 2008 to 15.4% now.

"In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
...
Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer."

Meanwhile, Nisha Gopalan at the Deal Journal reports that Hong Kong billionaire Li Ka-shing's charitable foundation sold 2/5s of its entire stake in the Bank of China Wednesday. This is just a few days after UBS sold its stake in the company and as the Royal Bank of Scotland looks set to sell its 4.3% holding. (h/t Sky Canaves at China Journal for these last three items.)

Meanwhile, Li Yanping at Bloomberg reports that Chinese exports probably fell by the most in a decade in December, dropping by 5.3% from a year earlier using the median prediction of a survey of economists carried out by the wire service.

8. Winnie Lee at Platts reports that China's Ministry and Land and Resources said that the country's dependence on oil imports is likely to rise to 60% by 2020. Currently imports account for about 50% of China's oil requirement. The ministry expects the country to consume about 500 million metric tonnes of oil annually by 2020, or 10 mb/d. Of that 300 million metric tonnes will need to be imported, or 6 mb/d.

"To enhance supply security, the country has set a goal of discovering about six oil fields with reserves of 100 million mt and between six and eight gas fields with reserves of 100 Bcm.
During the 2011-2015 period, China is targeting a discovery of another 10 oil fields with reserves of 100 million mt and eight to 10 gas fields with reserves of 100 Bcm, the ministry said in the forecast document."

The story also reports that the Ministry suggests the establishment of strategic oil reserves, by which it is likely meant that the Ministry suggests the establishment of more strategic oil reserves.

9. Shiva Lingam at Platts reports that the strike by India's Oil Sector Officers Association, a union of mid-level oil industry employees, is in its second day and having a significant effect upon petroleum product supply in the country, creating fuel shortages in southern India and for the airlines. Indian Oil Corp. has been forced to shut four out of its seven refineries and military personnel have been sent to "man major oil installations." Production is down 30% at IOC and 50% at Bharat Petroleum Corp. Ltd.--state-owned refiners. This is extremely interesting because India's energy supply security strategy is now fundamentally based on importing more crude than required to produce the domestic petroleum product requirement and then exporting the surplus product. India consumes about 2.5 mb/d of oil, and this strike, if it continues, could have a considerable effect upon global oil prices.

10. Tim Johnston at the Washington Post reports that Kaing Khek Iev, aka Duch--the head of the Khmer Rouge's Tuol Sleng torture center in Phnom Penh, will likely go on trial starting March. Other Khmer Rouge leaders are unlikely to be tried until 2010.

11. Graham Bowley at the New York Times reports that the UN has suspended food shipments to the Gaza strip after a delivery driver was killed in an Israeli attack. Also rockets were fired into northern Israel from Lebanon in response to the Gaza offensive. The UN Security Council is reportedly close to a resolution calling for a cease fire in the strip.

"The break-through was reached after a delegation of high-ranking Arab ministers overcame the reluctance of the United States, Britain and France in calling for the cease-fire, the diplomats said."

Israel welcomed international efforts to secure a "durable" cease fire.

12. The BBC reports that the president of the Vatican Council for Justice and Peace, Cardinal Renato Martino, "accused both sides [in the Gaza conflict] of only thinking of their own interests while innocent people paid the price." In remarks made online, the Cardinal said:

"Defenseless populations are always the ones who pay. ... Look at the conditions in Gaza: more and more, it resembles a big concentration camp."

Relations between the Vatican and Israel have reportedly been strained recently as the Pope has made clear that he wants to beatify Pope Pius XXII. Pius XXII was Pope during WWII and is widely accused of having turned a blind eye to the holocaust. Meanwhile, Sameer N. Yacoub at the Associated Press reports that Muqtada al-Sadr has called for reprisals on US forces in Iraq in response to the Israeli offensive in Gaza. Al-Sadr is a Shi'a Islamist populist which some link to Iran, though the cleric has explicitly rejected the Khomeini vision of "the guardianship of the Islamic jurist." I regard him as a real threat to the legitimacy of the Iranian government, as I have explained in Law and Revolution in Iran. (h/t Informed Comment for both of these stories)

Former US President Jimmy Carter has an opinion piece in the Washington Post entitled, "An Unnecessary War."An important excerpt:

"[In April 2008, w]e knew that the 1.5 million inhabitants of Gaza were being starved, as the U.N. special rapporteur on the right to food had found that acute malnutrition in Gaza was on the same scale as in the poorest nations in the southern Sahara, with more than half of all Palestinian families eating only one meal a day.
...
Palestinian leaders from Gaza were noncommittal on all issues, claiming that rockets were the only way to respond to their imprisonment and to dramatize their humanitarian plight.
...
We were unable to confirm [that a truce had been agreed upon in June] in Jerusalem because of Israel's unwillingness to admit to any negotiations with Hamas, but rocket firing was soon stopped and there was an increase in supplies of food, water, medicine and fuel. Yet the increase was to an average of about 20 percent of normal levels."

Well-worth reading in full.

13. Pamela Constable and Candace Rondeaux at the Washington Post report that Mahmud Ali Durrani, the Pakistani National Security Adviser, was fired by Islamabad after admitting in a CNN interview that the evidence provided seemed to show that all 10 gunmen in the Mumbai attacks had roots in Pakistan. Meanwhile, in an interview with Der Speigel,

"[Foreign Minister Shah Mahmood] Qureshi and Pakistan's intelligence chief, Lt. Gen. Ahmed Shuja Pasha, said Wednesday that the country's security forces are subservient to civilian authority and committed to supporting democratic rule. 'It is completely clear to the army chief and I that this government must succeed,' Pasha said of Zardari's administration. 'I report regularly to the president and take orders from him.'"

The intelligence chief had also said that Pakistan has no desire to fight a war with India, wants cooperation with New Delhi, and views terrorism as the real enemy of both. In Afghanistan, Pakistan's foreign minister unequivocally denied that Pakistani government agencies had been involved in the attacks on Mumbai. Well worth reading in full.

14. David Osler at Lloyd's List reports that the US Navy plans to dedicate a task force--to be known as Combined Task Force 151--to anti-piracy duty in the Gulf of Aden. Initially this should mean that some of the ships in Combined Task Force 150, which is part of "Operation Enduring Freedom" or the invasion of Afghanistan and later anti-terror efforts, will be redeployed to CTF 151. Osler quotes a CTF 150 spokesman as saying,

"The primary role of CTF 150 was not to chase pirates, in a nutshell... There are nations who would prefer to stick with CTF 150 and not step outside those paramaters, and there are other nations who would be happy to step outside those parameters, but cannot."

Keith Wallis, also at Lloyd's List, reports that the Aso Administration is working on legislation to change the Japanese Constitution so as to allow it's armed forces to join the anti-piracy effort off the Somalian littoral. The government plans to submit the language to Parliament by March. (Sadly, you need a subscription to read the entire article, but the big news is linked, or so I imagine, given that I have not subscribed.)

15. David Jolly at the New York Times reports that a tentative solution may have been found to the Russo-Ukrainian gas dispute. Alexei Miller, CEO of Gazprom, has agreed to a proposal whereby the company would begin supplying natural gas via the Ukrainian pipeline infrastructure once EU monitors were in place to independently verify the volumes so as to ensure that Ukraine would not siphon off supply. Naftogaz CEO Oleh Dubyna told Reuters, "Naftogaz guarantees it will pump in full the volumes received, on the condition that Gazprom will guarantee and supply technological gas for Ukraine’s gas transit system to function." A certain amount of gas is required to keep the pipeline compressors functioning. Jolly reports that EU monitors could be in place by Friday. José Manuel Barroso, the president of the European Commission, has said that both Prime Ministers Putin and Tymoshenko have agreed "in principle" to the deal and

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem. So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

16. Marianne Stigset at Bloomberg reports that Norway's Petroleum Directorate expects crude output to fall to 110.8 million cubic meters, or 1.9 mb/d, in 2009 from 122.7 million cubic meters, or 2.11 mb/d in 2008. Production is expected to fall to 94.4 million cubic meters in 2013, or roughly 1.63 mb/d.

"Norwegian fields 'have a robust economy at $50 to $70 a barrel of oil,” [Bente] Nyland, [head of the Directorate,] said in an interview. 'Should prices fall below $50, without production costs going down, projects may be postponed.'"

17. Ian James at the Associated Press reports that Citgo announced it would continue its program of donating heating oil to the poor in American urban centers Wednesday, after it was announced that the program would be suspended. (see Daily Sources 1/5 #8) I am certainly pleased to hear that Chavez has decided to use Venezuela's oil wealth to continue his aid program to the American poor, but have to wonder how the Venezuelan poor are taking the news.

18. Alexander Kwiatkowski and Alaric Nightingale at Bloomberg report that Citigroup's Phibro LLC has hired a one million barrel capacity tanker to sit off Scotland as storage in order to capture profits from the current giant contango in the oil futures markets.

19. Paula Dittrick at the Oil & Gas Journal reports that ExxonMobil's recent annual Outlook for Energy: A View to 2030 forecast global energy demand to increase at an annual rate of 1.2% through 2030. Two key findings include:

a) "Transportation, currently responsible for more than half of total oil demand, is expected to expand substantially globally. From 2005-30, demand in developed countries is expected to be relatively stable because efficiency improvements will offset demand from an increasing number of vehicles. In contrast, demand for transportation fuels in developing countries will likely more than double." and
b) Oil, natural gas, and coal will continue to provide about 80% of the world's energy needs through 2030 because of their abundance, affordability, and availability."

I must get myself a copy.

20. In other foreboding news about the global economy, Janet Porter at Lloyd's List reports that the shipping industry is still being bogged down by inability to secure letters of credit.

"A great deal of cargo is stuck on the quayside unable to move, according to Inchcape Shipping Services chief executive Claus Hyldager."

Worth reading in full, though the article isn't entirely convincing as to why banks would be so leery of something as fundamental as a letter of credit.

21. Jon Kamp and Jessica Hodgson at Real Time Economics have another gloomy indicator for the prospects of the global economy, Intel's second warning this quarter that it will have received $8.2 billion in the fourth quarter, a 20% drop from the third.

"'If you’re an individual or a corporation, chances are you’re an Intel customer,' BMO Capital Markets analyst Brian Piccioni said. 'The fact that they’re not doing well is a good indicator of broader economic weakness.' ... The fact that a company with the size and reach of Intel has been unable to predict the scale of its problems or to swerve the worst of the downturn, has prompted broader concern about the rest of the economy."

22. Stephanie Rosenbloom at the New York Times reports that December sales in stores that have been open for at least a year--known in the retail industry as "same-store sales"--were down at an annual rate of 0.9% according to Ken Perkins, president of Retail Metrics. (The story does not make explicit whether this is year over year or from the month previous percentage changes.) Retail chains experienced a 2.7% year over year decline in sales in November.

"Sales in November and December are closely watched because they account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group."

23. The AP reported that the Labor Department announced that initial jobless claims fell by 24,000 to the seasonally-adjusted number of 467,000 for the week ended January 3. This was less than most economists had expected. However, the number of people who continued to claim jobless benefits grew 101,000, to 4.61 million--the highest number seen since 1982.

24. Nancy Trejos at the Washington Post writes that the American Bankers Association reported yesterday that delinquencies on auto loans and home equity lines of credit rose to 3.25% and 1.15%, respectively, in the third quarter.

"James Chessen, ABA chief economist, said. 'With one million jobs lost in the first three quarters and 2 1/2 million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters.'"

The Association also found that delinquencies on credit card debt dropped 0.34% to 4.2%, which might be because the credit card companies increased the amount of debt they have simply written off. (see Daily Sources 1/7 #17)

25. Andrew Taylor at the Associated Press reports that the Congressional Budget Office estimates the deficit for the 2009 budget will reach $1.2 trillion.

"The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1."

The CBO estimate does not price in Obama's stimulus proposals.

Spot Life CL Jan 09 (Entire)

CL Jan 09 expired today, below is the reported causes table for the last six trading days. Most of the news was about the OPEC meeting, which announced a very large allocation cut on the 17th, and the potential that Russia, Azerbaijan, and Kazakhstan all might join in on restricting supply. The market did not respond in the expected fashion, but rather dropped. That appears to be because there is no available storage for oil, so no one will take delivery to carry, which put even more downward pressure on front month today. Monday, the price of oil looks to jump by about $10/b, as February 09 becomes front month. (The price of Feb 09 went up half a buck or so today as the price of Jan 09, the front, fell about two and a half bucks.) The rest of the news, which appears to have been the determining factor in price for the most part, is a sharply slowing global economy.



The contango narrowed a bit from December 5 to 11, but apparently the absence of any on ground storage available combined with traders trying to exit the contract before expiry, combined to push Jan 09 down as the contract moved to closure. But if you look at Feb 09's differential to Dec 16, it still looks narrower than what we saw between Jan 09 and Dec 16 a month ago. That said, the contango is still steep as all hell.

For the record, the differential between Jan 09 and Dec 16 is $41.58/b, or 122.8% of the price of front month. The differential between Jan 09 and Jan 10 is $22.10/b, or 65.2% of front month!



Below is the price of crude (left-hand side) versus the interbank exchange rate of the euro and the dollar and sterling and the dollar (both of which are right-hand scale). As has been suggested, crude should become more expensive as the dollar loses value relative to world economies. Lack of storage and financing troubles are apparently preventing the realignment. The Euro has appreciated 15.3% versus the dollar since November 21; Sterling has appreciated 3.4% in that time.



For the hell of it, I've added a chart on the yen dollar interbank exchange rate (right hand scale) vs Jan 09 CL (left hand scale). Since CL Jan 09 became front month, on November 21, it has lost 32.2% of its value. (If you think that Feb 09 better represents the price of light sweet crude today, crude has lost 15.2% from November 21.) The yen has appreciated $0.000859 since November 21, or 8.2%.



The commitment of traders report for the week ended December 16 should indicate that prices will rise. Commercials are net short, which suggests they are hedging against a fall in price, and non commercials are net long, which suggests that they are betting on a rise in price. 5.49% of open interest held is held by traders net long or short--percentages we haven't seen since April and May. Historically, these percentages are very unusual in any case, although we have seen a lot of them this year.

Daily Sources 12/17

1. OPEC announced a large cut in production quotas today.

"[OPEC] agreed to cut 4.2 million barrels a day from the actual September 2008 OPEC-11 production of 29.045 mb/d, with effect from 1 January 2009, with Member Countries strongly emphasizing their firm commitment to ensuring that their production is reduced by the individually agreed amounts."

OPEC always strives to make it difficult to understand what it is they are doing, exactly. In any case, the numbers cited above give a 24.845 mb/d production quota. The implied target from November 1 was 27.306 mb/d, sdo that is a cut of 2.461 mb/d. (The reason the November 1 target is referred to as an "implied" target is because we only had the numbers for how much the organization wanted to cut, not the previous OPEC allocation numbers. Those numbers had to be deduced by various methods with competing results.) As it stands, the OPEC has given no idea of how the members will split up the cut, though the bulk of it would likely have to come from Riyadh.

2. Maher Chmaytelli and Fred Pals at Bloomberg report that Russian Deputy Prime Minister Igor Sechin told the media today that Russia will consider cutting crude exports by 350 kb/d if the OPEC cut does not prove sufficient to arrest the price decline. Sechin indicated that Kazakhstan may also cut supply. Azerbaijani Oil Minister Natig Aliyev also told reporters today that Baku is willing to cut supply by as much as 300 kb/d. If you add just the Russian and Azeri potential cuts to OPEC's cut of 2.461 mb/d, you would get a reduction in supply of 3.061 mb/d or about 3.6% of daily global oil demand (assuming 85 mb/d.) The delay on the part of Russia, Kazakhstan, and Azerbaijan to see the effect on price may have something to do with the opacity of OPEC's data and cuts--though one shouldn't rule out the possibility that they were privy to details in Oran. I definitely suspect that the delay in changes to their reserves accounting is related to this issue.

That said, unless and until Russia announces a cut in coordination with OPEC, so far my talk about a major realignment of Russian interest calculations has been much ado about nothing. ITAR-TASS reports that Sechin told journalists that Russia is seeking "permanent observer" status at OPEC.

3. Emma O’Brien at Bloomberg reports that Roland Nash, the chief strategist at Renaissance Capital, told her in an interview that Bank Rossi will allow the ruble to fall whenever the dollar is weakening.

"'It’s pretty clear that every time there is dollar weakness they will allow a devaluation now,” Nash said in an interview today. “They don’t want instability in the ruble- dollar rate because that’s what defines economic stability in Russia.'"

The Yen is at historic highs versus all currencies and the dollar has weakened some versus the euro of late.

"Banks including Germany’s Commerzbank AG and Troika Dialog, Russia’s oldest investment bank, are calling for a one-off depreciation of as much as 20% to prevent speculators from continuing to bet on further ruble weakness."

4. This Week in Petroleum reports a 500 kb build in crude oil stocks for the week ending December 12, near the top of the five year historical average. (Platts did not make their survey of analyst expectations freely available to the public this week--which is too bad, given that they were helpful for understanding the way the market reacted, despite chronic mis-prediction on the part of Wall Street analysts.) Gasoline stocks built by 1.3 million barrels and are at the bottom of the five year historical average. Distillate stocks jumped by an impressive 2.9 million barrels, putting them in the middle of the historical average--stocks have leapt up from historically very low levels in recent weeks, the build for the week ending December 5 was a striking 5.6 million barrels, so the reported over the last two weeks was a combined 8.5 million barrels! (see Daily Sources 12/10 #9) Considered in isolation, stock builds should have a depressing affect on market prices. Furthermore, the way these data are behaving is making me suspect that all or nearly all easy on-ground crude oil storage is taken, though we are still below the top of the five year historical average. If there is no place but tankers to place crude in storage, very few market participants will purchase crude in anticipation of future prices or to capture the current contango, which is way steeper than cost of carry. That also would put downward pressure on front prices as it makes the market shallower as a percentage of buyers are out of it for the time being.

Moreover, Katharine Fraser at Platts reports that US gasoline demand fell by 3.5% to 8.91 million b/d year over year in November, according to the American Petroleum Institute. That decline is substantially more than the 2.1% decline reported by MasterCard advisers on December 3 for the four week period ending November 28. (see Daily Sources 12/3 #14)

5. Lester Pimentel and Matthew Walter report that various analysts think that Rafael Correa's decision to default on Ecaudor's debt will inevitably lead to Ecuador abandoning the dollar, which it adopted as its own currency in 2000 (along with Panama and El Salvador) in order to curb inflation. It is not clear to me how much a new fiat currency from Quito would fetch on markets, though perhaps both scenarios for the dollar--inflation or deflation--would prove unpalatable for Ecuador in any case.

6. The China Daily, an official publication of the government of the People's Republic of China, ran an editorial today entitled "Keys to the Treasury" which warned:

"China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis."

But then it goes on to say:

"With few options to invest its increasing reserves safely and profitably, China may thus have to buy more US Treasury securities in spite of growing domestic skepticism that such purchases may incur huge losses later.

Besides the undesirable consequences that reducing purchases of US Treasury bills will have on global markets, it is also a bad idea to sell them before the world economy can restore stability.

If creditors stop recycling the dollars they accumulated back into US, interest rates in the US would rise to undermine that government's efforts to bailout distressed financial institutions and companies.

In a time of crisis, expanded government spending financed by foreign capital may be necessary to prevent the worst from happening.

Yet, as more and more creditor countries introduce their own stimulus packages to boost domestic demand, the US government should not expect continuous inflow of more cheap foreign capital to fund its one-after-another massive bailouts.

The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds.

Instead, it should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon."

Worth reading in full.

7. Andrea Dudikova and Yon Pulkrabek at Bloomberg report that the Czech central bank has cut its benchmark lending rate by 0.5% to 2.25%.

"'The Czech economy is slowing sharply and needs looser policy conditions,' Michal Brozka, an economist at Raiffeisenbank in Prague, said in a note. 'We continue to see the rate dropping to 1.5 percent by mid-2009.'"

8. China Daily reported that a "military source" told them on Tuesday that Beijing is set to send ships, and perhaps troops, to support the international piracy suppression effort off Somalia. The China Daily story emphasizes that Beijing is being lobbied by Somali representatives to do just that:

"'We hope China joins the efforts of the international community in supporting the Somali government,' the Somali Ambassador to Beijing, Mohammed Awil, said on Monday."

(h/t Information Dissemination)

9. Laurie Goering and Alex Rodriguez at the Chicago Tribune write about a report dated October 2008 by Grain--a non-profit based in Spain--which shows that food security concerns are driving several nations to purchase overseas farmland.

"Important grain producers like India, Vietnam and Indonesia within the last year cut off exports of key crops such as rice and wheat to ensure supplies at home, boosting prices worldwide and raising concerns about potential shortages.

Now countries like Saudi Arabia say they would prefer to be in charge of their own grain production rather than relying on their vast cash reserves to buy what they need, particularly when cutting out the middleman can reduce costs by 20 percent or more, experts say. Fast-developing countries like China, in turn, see demand for food at home outstripping their ability to produce it in years to come and want to line up supplemental supplies with some of their huge foreign currency reserves built up through trade surpluses."

The Chicago Tribune report is well worth reading in full. (h/t Gregor MacDonald) The Grain report can be found here. It identifies China, India, Japan, Malaysia, South Korea, Egypt, Libya, Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates as nations that are seeking overseas farmland in an attempt to improve their food security situation. Grain provides a detailed breakdown of these investments in the categories of both state and private investments here. Though the alarmist tone of the report can be irritating, the annex is a pretty good summary of the manifestation of this food security strategy worldwide and worth reading.

An important caveat to their conclusions of course is that as of now few of the countries pursuing these strategies have the military reach to enforce the export of foodstuffs from the nations where they have purchased farmland. (As opposed to, say, England's capability vis-a-vis Ireland during the Great Potato Famine.) Should one of those countries face a food shortage, an accountable government will ensure that the food produced there stays there. The trouble, of course, is that there are plenty of unaccountable governments, especially in Africa and central Asia where much of the farmland is being purchased. The Sudan, for example, is a target for farmland purchases even as it chronically seeks international food relief.

Daily Sources 12/16

1. Maher Chmaytelli and Ayesha Daya at Bloomberg report that Saudi Arabian Oil Minister Ali al-Naimi told journalists today in Oran that "there will be a cut in production of about 2 million barrels." To borrow a phrase, the Saudis are the "deciders." The question now, it seems, is just how will Russia coordinate a production cut with whatever the cartel announces tomorrow. Platts reports that Igor Sechin, Russia's First Deputy Prime Minister in charge of oil, will meet with OPEC governors later today in Oran, Algeria. Energy minister Sergei Shmatko is with Sechin, as well as a coterie of senior executives from Lukoil, Rosneft, Surgutneftgaz, TNK-BP and Gazpromneft.

If Russia coordinates with OPEC, together they represent a little over 50% of total world crude supply. Eric Watkins at the Oil & Gas Journal reported yesterday that the current President of OPEC, Algerian Oil Minister Chekib Khalil, said "We always wanted [Russia] to join OPEC." He went on to say that "We expect concrete support from [Russia.]"

In this context Platts has the fascinating story that Russia will delay the introduction of a new reserves methodology to 2012. The new methodology would have more closely synchronized reserves accounting with Western methods which account for things such as whether or not, given the prevailing price environment, it would be profitable to develop any given oil deposit. These accounting methods "shrink" reserves in low price environments and "grow" them in high price environments. The Russian natural resources ministry spokesman indicated that the agency expected valuations of reserves held by Russian companies to grow under the new methodology. However, given cooperation with OPEC--and the potential decision at the top that Russian interests are more closely aligned with commodity exporters than the developed world--it looks like decisions about increasing transparency will be put off. Synchronizing Russian reserves accounting with the West would have clearly been in the interests of consumers as opacity is one of the central difficulties plaguing the oil markets.

Also today, Alexander Kwiatkowski at Bloomberg reports that OPEC, in their monthly oil market report, predicted that global oil demand would fall by 150 kb/d to 85.68 mb/d in 2009. The organization predicted that the call on OPEC, or demand for crude produced by the cartel, will fall by 700 kb/d to 30.22 mb/d. It also forecast that non-OPEC supply would fall by 170 kb/d in 2009.

Anthony DiPaola and Camilla Hall at Bloomberg report that the Saudi Arabian Monetary Authority reduced its main benchmark lending rate to 2.5% from 3% today.

"The step was taken 'to ensure adequate system liquidity to meet genuine domestic credit demand and in view of evolving global developments,' the central bank said in a statement."

The Saudis peg the Riyal to the dollar and have seen inflation slow somewhat recently from an annual rate of 10.9% in August to a rate of 10.4% in September. (Edmund Andrews at the New York Times reports that the Federal Open Market Committee cut the federal funds rate by between 0.75 and 1%, bringing it to a range of between 0-.0.25%.)

Hector Igbikiowubo, Yemie Adeoye and Victor Ahiuma-Young at the Nigerian Vanguard report that there is a crisis brewing as petroleum products marketers are refusing to import product given the current exchange rate at which the central government is making payments via the subsidization program. The government owes marketers a huge sum on backdated subsidization payments, but appears to be ready to pay that debt at an old stipulated rate of $1 to 118 Nigerian Naira. The problem is that today on free exchanges the dollar--which is what oil and oil products contracts are generally denominated in--fetches from 127-135 Naira. The marketers are also worried that prices may be set to rise given the upcoming OPEC decision and that the debt repayment at the old rate would further erode their ability to purchase product at prices inflated by the OPEC decision.

In the meantime, Alaric Nightingale at Bloomberg reports that Jens Martin Jensen, interim CEO at Frontline Ltd, told her in a telephone interview that oil companies have booked about 25 VLCCs to store crude. Although all may not be fully loaded, the 25 VLCCs can potentially hold 50 million barrels of oil, or about 59% of a day's worth of global consumption. 25 vessels account for 5% of a global fleet of 502 vessels. The companies are using the tankers to store the crude so they can take advantage of much higher forward prices on the futures markets--an unusual phenomenon known as "super contango."

2. Joellen Perry at Real Time Economics has a brief analysis which reports that the policy of the European Central Bank looks to now diverge from US Fed policy. It now sounds as if ECB governors want to see how the easing policy so far will pan out--do I hear echoes of Peer Steinbrück?--and wants to focus on jump starting bank lending again. Perhaps this is a case of prisoners' dilemma given that there is no certainty as to what the incoming US Administration will do. Short post worth reading in full.

3. Nipa Piboontanasawat and Kevin Hamlin at Bloomberg report that China's central bank governor Zhou Xiaochuan indicated at the Financial Stability Forum in Hong Kong today that the bank was likely to reduce benchmark lending rates again this month.

4. Eurointelligence reports that the Frankfurter Allgemeine has a scoop this morning, having obtained an internal memo from the German economics ministry containing a forecast which was intended to be made public in its annual economic report due January of a contraction in 2009 of 3%. That would be the worst economic showing for the country since the end of WWII. The memo estimates an 1.25-1.75% contraction will have taken place in the fourth quarter 2008.

5. In an interesting story given Ecuador's decision to default on its sovereign debt yesterday, Takeo Kumagai at Platts reports that Japan's Inpex took at 40% stake in onshore Block 18 in that country from a subsidiary of Petrobras. "The 1,138 square km block is located in Oriente Basin in eastern Ecuador and pumps 30 kb/d of crude oil with an average API of around 28."

6. Xinhua reports that the China Natural Resource Committee announced on Sunday that a major natural gas field containing about 100 billion cubic meters was recently discovered in northern Xinjiang.

7. Bret Stevens suggests in an opinion piece that the US ought to purchase Pakistan's nuclear arsenal and the industrial support complex for it for $100 billion to be dispersed over 10 years. The money would only be discharged if Islamabad remained democratic and secular government and would be supplemented by military aid and the explicit extension of the US nuclear umbrella to Pakistan. The idea is unworkable, but the piece is well worth reading in full nonetheless--it gives a pretty good account of the role the bomb plays in the national consciousness (there is a national holiday dedicated to it), what strategic dilemmas possessing it resolves, and the situation general all over Pakistan.

8. In odd news, the Associated Press reports that Kenya has decided to impose sanctions upon the UN-backed leadership of Somalia as its control of the country crumbles in the face of Islamist insurgents. In the meantime, the United Nations Office on Drugs and Crime [UNDOC] published a press release today suggesting that "ship riders" from countries neighboring Somalia should be placed on naval assets policing the sea lane, so that pirates could be delivered over to them as authorities who would then take the suspects to trial in their home country. The organization also points out that the piracy problem will ultimately need be tackled by making their hold on land impossible. You might be somewhat skeptical as to whether nations like Yemen, Kenya, Ethiopia, Eritrea, Djibouti, and Tanzania are all that interested in spending considerable sums trying and punishing Somali piracy suspects. Furthermore, you might doubt that the regional judiciaries would welcome the inevitable human rights criticisms that would follow from Western nongovernmental organizations. And I wouldn't blame ya.

In the meantime, Andrew Spurrier at Lloyd's List reports that Anne Sophie Avé, the head of the French shipowners organization, wrote:

"[O]nly co-ordinated and efficient action by states removes the temptation for foreign shipowners to outdo the violence of the attacks by embarking uncontrollable mercenaries whose commercial interest is that the situation should persist."

Yes, mais oui, shipowners should take the flags of states that do not have navies to protect them so that shipowners will not have to pay for the cost of those navies, but clearly shipowners should not be forced to pay for private protection even if unwilling to contribute to public protection, for private protection would have an interest in perpetuating the problem! Not for nothing they say that shipping is the most global market of em all.

9. Jack Healy at the New York Times reports that the Labor Department announced today that consumer prices fell at a seasonally-adjusted rate of 1.7% in November from October. The basket of prices was led by energy prices, which fell by 17%. Food and beverage prices rose by 0.2% and clothing prices were up 0.3%. Prices for finished goods fell by 2.2%. Excluding food and energy prices, producer prices grew at 0.1% in November.

10. Morton Abramowitz, former US Ambassador, career diplomat, and head of the Carnegie Endowment for International Peace, proposes that President-elect could make a significant change in American foreign policy if he simply decided to appoint mostly career diplomats to the post of Ambassador. Exceptions could be made for those non-diplomats who nonetheless are especially suited to the job. Typically 30-40% of US ambassadors are not career diplomats, but chosen for political reasons. A very reasonable suggestion--well worth reading.

11. Fouad Ajami in the Wall Street Journal delivers a critique of the international affairs school of realism, which is the position, it seems, of much of Obama's foreign policy team, ironically enough. My personal views are close to those of the so-called realists, but Ajami makes the important point that history, as it unfolds, may push the Obama Administration to undertake similar--idealist, or neo-con--overseas efforts. In particular, he points out that if you thought that Iraq's borders were "artificial"--in the sense of not representing the physical boundaries of the residence of a political unit bound together by ethnicity and language--then have a gander at Afghanistan. As events progress it will be difficult for calm humility to prevail with those who make the decisions.

I would add that there appear to me to be several neo-cons in his advisory team, and that the language of neo-conservatism appeals to the American notion of itself in a way that the cautious, and reluctant to commit, and fundamentally self-serving thought process of "realism" never will. In that sense, interventionists are fundamentally better equipped to exploit the news of the day to push their agenda in any Administration than are realists. Ajami couldn't be more right in thinking so.

Well-worth reading.