Daily Sources 9/23

1. Real Time Economics had the story that the Central Bank Governors and Finance Ministers of the G7 had a conference call yesterday and released a statement in support of the actions they had collectively taken to support the financial system. "We reaffirm our strong and shared commitment to protect the integrity of the international financial system and facilitate liquid, smooth functioning markets, which are essential for supporting the health of the world economy. We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilizing financial institutions. We also strongly welcome the measures taken by other G-7 countries." The G-7 is comprised of Canada, France, Germany, Italy, Japan, United Kingdom, and United States of America. Nota bene: Russia was not included, as that would be the G-8. Is this as punishment for Georgia or a sign that the Russian government really no longer supports the financial system as is?

2. The AFP has the story that the Russian Foreign Ministry released a statement today stating that the country has no intention to unilaterally determine the borders of the Arctic--"Russia strictly abides by the norms and principles of international law and is firmly determined to act within existing international agreements and mechanisms."

3. Brian Baskin at Dow Jones has the story that refiners in the US are not facing cut backs in crude allocated to them by Riyadh. Given that refiners in Texas and Louisiana take two thirds of the crude Saudi Arabia exports to the US, and that Hurricanes Ike and Gustav have shut down most of the refineries in those two states, the remainder of that allocation has either not been, in fact, produced or sold to refiners in Europe or Asia or sold on the spot markets. "The U.S. is often the last to feel the impact of a cut in Saudi production as refiners rarely purchase the full amount they are allocated each month." If it is being produced, where is the demand coming from? Somewhere, evidently, as Stefano Ambrogi at Reuters reports that Lloyd's Marine Intelligence Unit said today that "oil shipments from 11 OPEC producers, including Iraq, rose to 23.644 million bpd from Aug. 17 to Sept. 7, versus 23.485 million bpd in the previous four weeks." Gustav made landfall on September 1st. OPEC's meeting which produced promise to more closely hone to quotas took place on the 9th.

4. I wrote a few posts ago that it looked as if there was a change in official policy in Iran to recognize that the holocaust happened, in response to remarks made in New York by the Ambassador to the UN and to remarks on Friday by President Ahmadinejad. However, on Friday, as noted yesterday, the Supreme Leader, Khamenei, made clear that he regarded the Isreali people as an enemy. And today, in the Los Angeles Times, Ahmadinejad reiterated a position of at best ambiguity, at worst denial, of the holocaust. To wit,

"If we agree and accept that certain events had occurred during World War II, well, where did they indeed happen? In Germany, in Poland and in Great Britain. Now, what does this exactly have to do with Palestine? Why is it that the Palestinian people should pay for it?"

The companion article to the interview included the context around this statement:

"'Who are these people? Where did they come from?' he asked in reference to Jews who founded the state of Israel in the wake of the Nazi slaughter in Europe during World War II. He spoke in Persian through an interpreter, whose translation of his next sentence began: 'We've agreed. . . .' before she was cut off and corrected by Ahmadinejad: 'If we agree and accept that certain events had occurred during World War II,' came the next sentence, 'well, where did they indeed happen?'"

This comes on top of the news reported by Thomas Erdbrink at the Washington Post that Ahmadinejad has dismissed the Governor of the Iranian Central Bank, Tahmasb Mazaheri.

"Mazaheri's departure clears the path for Ahmadinejad to change the economy the way he wants," said Mohammad Atrianfar, a journalist, politician and critic of Ahmadinejad. "Mazaheri, who was much more professional than the president, would delay or alter government plans. Now the president has a free hand."

This would apparently eliminate all obstacles to Ahmadinejad's plan to stop subsidizing basic goods generally, and instead distribute money to the poor directly via individual bank accounts. Inflation in August in Iran was 27.2%. If Ahmadinejad succeeds in implementing this plan and it corresponds to a strengthening in Iran's economic situation generally, it could hugely strengthen his hand. If not ...

5. Nick Tattersall at Reuters reports that MEND said today that the Nigerian air force had launched an air assault on their encampments today. MEND said they will continue to respect their unilateral cease fire nonetheless.

6. John Kingston at Platt's blog "The Barrel" notes that production at Mexico's largest field--Cantarell--dropped below 1 mb/d in August (to 998 kb/d). He writes, "There's nobody who thinks the Mexican problem is a weak reserve basis. It's simply a mismanaged approach toward developing those reserves." In point of fact, there are some who believe that mismanagement has little to do with it, specifically some at the Oil Drum, who note that the production profile of Mexico looks quite similar to peak production profiles of oil fields. They argue that management or mismanagement would do little to change the picture. Mexico is in the process of re-examining its oil laws to allow for the participation of foreign majors in the hopes of increasing production and efficiency at Pemex.

7. Emma Graham-Harrison at Reuters has the story that Chinese oil consumption grew by 7% year over year in the month of August to cover Olympics-driven demand, but points to analysts who think that inventories are full to the brim, and that demand is dropping. (Which would be consistent with yesterday's story regarding Sinopec's announcement that they will import 239 kb/d less from September through December, or a reduction of about 3% in Chinese consumption from August.)

8. The African Press Agency reports that the Kenyan Association of Manufacturers warned Monday that 80,000 Kenyans were at risk of losing their jobs because of the high energy price environment. Electricity costs have gone up by 600% in the past year. There are about 37.9 million people in Kenya (est. July 2008), 42% (15.2 million) of whom are 14 years old or under (2008 est.). The labor force is estimated to comprise about 11.85 million people (or ~ 31.2% of the population as per 2005 est.) and the unemployment rate is estimated--as of 2001--to be 40%, or 4.7 millions. 73% of Kenya's power generation is met via hydroelectric dams, which are affected by changes in the climate, and there are limits to new capacity. (On September 11, Sinohydro was chosen to build a new hydroelectric dam at Sang’oro, which is hoped to mitigate the risks of changes in the weather to the power supply.) Low rainfall in late 2007 and early 2008 have reduced electrical while demand has grown rapidly, which probably accounts for some of the price issues. A quick search hasn't yielded what feedstock accounts for the rest of Kenyan power generation, but, for example, if it is produced by coal and/or diesel / fuel oil, that also would account for increase in costs if those inputs are passed through to consumers.

Spot Life of Oct 08 CL (wk 1)

AP Satellite Photo of Gustav, 6:55 am EST, 8/30/08, at which time it was category 3, it has apparently just strengthened to category 4.

Well, the life of CL Oct 08 so far has been at the mercy, mostly, of Gustav. It appears to have trumped all other news. Or did it? Prices haven't moved that much since Gustav formed on Monday. And, outside of Gustav, most of the data shows larger and larger declines in demand, reductions in economic growth, increases in supply, increases in capacity, and reduction--Georgia notwithstanding--of political risk. So my guess is that going forward the price is going to fall. (Of course, predicting oil prices is a fools' game, were there ever one. So caveat emptor.)



Oil prices still don't appear to be following the Euro, but, if anything, the reverse.



CL Oct '08 spent the entire 7 days of trading covered in contango, and not just any contango, but the spot month was cheaper than every single forward contract all the way through December 2016! (You can see this via the graph below very clearly as the CL Oct '08 line is far below all the other contract price lines.) This is very very unusual--and I have no idea as to why. It may be that the market believes that in the distant future the situation is such as oil prices must go up ... I believe that at least part of this is due to political risk worries, but I would be hard pressed to say just why. In any case, there is now, hypothetically, good economic reasons for stocks to build, we will see when the EIA report comes out next Wednesday.

Daily Sources 8/30

I am not going to do this every weekend, but given that I have the time (and inclination.)

1. Gustav swells to dangerous Cat 3 storm off Cuba by Will Weissert at the Associated Press. Although the site usually takes the worst case scenario prediction as a given, there is a lot of useful data, discussion, and links about the possible direction and consequences of Gustav at theoildrum.com. To put this in context, the prediction highlighted on the site for Eduard was dire and did not, in any way, come to fruition. Still, very worthwhile data, links and analysis ... just take with a grain of salt.

2. Thomas Erdbrink at the Washington Post writes that the Iranian Depty For Min Ali Reza Sheikh Attar stated in an Iranian television interview that Iran is using 4,000 centrifuges to enrich uranium, which is in the ballpark of the IAEA estimate. Not news, especially, but I guess the Post was looking to fill some space. The article does not note that the IAEA does not concluse that Iran is aiming to use this enriched uranium for the purpose of making nuclear weapons. At the end, the article mentions Putin's interview with CNN Thursday where he says that if the West refuses to take into consideration Russia's interests that the West should then resolve its issues with Iran without Russia's help. Reasonable enough. Sanctions don't have much chance of having the intended effect without being multilateral. Russia is a critical player with respect to Iran, not least because the nuclear power plant under construction in Iran is being built by a Russian consortium.

3. Ellen Knickmayer at the Washington Post gives an analysis of the general response in the Middle East to the Russia-Georgia conflict. Although it is burdened by the paradigm that most of the press has been approaching the conflict with, there are some decent data points. The most interesting bit is on how Turkey may be reappraising to what extent they can rely upon the US in the future. This process has been underway for some time, but I suspect it is mostly a tempest in a teapot. The primary issue is that populist Islam in Turkey--which is conservative, perhaps even revanchist--is growing in political significance. The US seems, at least from the open sources, to have ignored many of Turkey's interests in handling the conflict there, most especially the question of the Kurds. But the conflict in Georgia is likely to remind Turkey of one of the key reasons for its decision to join NATO in the first place--a long history of Russian aggression, nearly always framed as the liberation of oppressed ethnic groups in the Ottoman Empire. It is not lost on Turkey that Russia's most important ally in the Caucasus is Armenia. Still, I think that Turkey would support efforts to maintain Armenia's independence should Russia decide they wanted to reincorporate it--and I imagine that they would do so enthusiastically. What has been missing from the discussion overall is a definition of the parties' interests. Interests are always mentioned, as in Condoleeza Rice says "the reason Russia supports our efforts with Iran is because it is in their interests" ... but no one ever actually describes what they think those interests are. In any case, I think that the way most of the information is presented here is alarmist (minus the very last paragraphs) but that there is some good info, nonetheless.

4. Andrew E. Cramer at the New York Times writes that on Friday Georgia officially cut diplomatic relations with Russia and Russia responded in kind.

5. Robert Kagan has an op-ed in the weekend Wall Street Journal arguing that the realists have been proven wrong by events in Georgia, attributing to the realists the notion that economic integration will necessarily bring harmony. This piece is so wrong-headed and deliberately misleading that it is worth linking just to say this is total nonsense. "Realists," who, by the way, count Kissinger among their ranks, do not think that economics trump other considerations. They simply believe that Russia's economic interests are very intertwined with the West, which means that there is a strong disincentive to engage in a serious conflict with the West, as that will undermine their own position. They are in a debate with neocons--like Robert Kagan--who believe that use of force to export American morality to the rest of the world is not only ethically incumbent upon us, but strategically good sense. The problem is that the real reason the neocons are so successful in the public arena is because they agree, with the Idealists, that America should have a moral foreign policy. Realists certainly agree that morality is an important consideration in determining foreign policy, but, cold as this sounds, they think that it is mostly important in determining the staying-power of any given course of action. If it is clear to all that it is a moral course of action, most will stick with it. Otherwise, it is not likely to remain popular for long.

Realists argue, correctly in my opinion, that just because Americans think something is morally correct, does not mean that foreigners agree, and that American foreign policy should be based upon a careful consideration of American interests as well as careful consideration of how local histories will interact with contemporary actions in very foreign places. Certainly, the use of military force is on the table for realists, but they are reluctant to use it in complex situations unless the gains are very clear. They are reluctant to use force in situations on the basis of sentimental attachment to some supposed similarity with ourselves--a sort of narcissistic self-defense, which strings its way through the press. The problem with NATO expansion is not that it is provocative, it is: what American interests were served by such actions when it communicated to Russia--rightly or wrongly--the American understanding that they were still hostiles?!

Spot Life of CL Sep '08

I've been keeping close track of the oil markets for some time now and thought that the blog might be a good way to record the history of its movements and any market analysis that might come along the way. So here is the spot life of the September 2008 contract for CL (sweet light crude) on NYMEX. In order to make this task more manageable, I might decide to post these on a 7 days-trading basis instead of for the entire spot month.

September 2008 was an interesting contract insofar as it saw the price of crude come down about $10/b and included the lowest spot price seen in quite a few months, though it moved up a bit from that since. The following table tried to tabulate the daily reported reasons for changes in price (as well as some other public information I noticed that was important) and to categorize it, so that it's movement will be somewhat easier to follow. The file is way too large to show in this format, but I'm hoping you can click on it and you will see it in a readable size ... and perhaps print it out ... I will work on ways to make this easier to read in the future.




You will note that a popular explanation of the rise and fall of the price of oil has been to look at the Euro-Dollar exchange rates. Obviously, these must have some effect on the valuation of oil, but I suspect that oil has it's own influence upon both currencies and, from my observations, it looks as if the Euro has been following crude down, not leading it.














Below you'll see a chart for the CL NYMEX futures contract prices for spot and then various forward months. Generally speaking, the oil market is in backwardation, which means that the price that people will pay for oil further away from the present is less than the spot, or closest delivery contract date. Theoretically, backwardation should encourage producers and those who have product in storage to sell now, because why pay for storage in expectation of a future price that is less than the current one? (But it doesn't really necessarily work that way in practice.)

However, recently, CL has been in contango, which means that the price people will pay today for futures contracts for months beyond the spot month is higher than for spot. Theoretically, this should mean that there is incentive to store production and sell later, in expectation of a higher price then. Futures allow one to lock in the price, of course. But it doesn't really work that way in practice.

Still, it is an anomaly, which industry folks tend to talk about. Note that the Sep 08 contract goes into backwardation for the period of a single day--on August 7th--and then moves back into contango. On August 7th, BP announced it would take about two weeks for repairs of the BTC pipeline to be completed. Also, Shell announced that repairs on a major Nigerian pipeline were still underway.



Right now the current spot contract--for October--is in deep contango, meaning that the future prices are much higher than spot price, and that this is true of every single contract through December 2016. This is partially because of Gustav heading that way. Also probably because of increasing nervousness with respect to the Georgia / Russia conflict. I would point out that these are all political / meterological risks to supply, not directional supply and demand numbers.