Daily Sources 8/4

1. IEA WARNS THAT $70 OIL COULD UNDERMINE ECONOMIC RECOVERY

Kate Mackenzie at the Financial Times reports that the IEA's chief economist, Fatih Birol, told the newspaper in an interview that oil prices above $70/b would likely undermine any economic recovery.

"'If we go one step further, if we see prices go much higher than that, we may see it slow down and strangle economic recovery,' he said of oil prices on Friday, when the European benchmark was around $70."

2. CHINA MAY CHANGE RULES TO MAKE SUBORDINATED BONDS INELIGIBLE AS CAPITAL, WHICH SHOULD REDUCE THE VOLUME OF CREDIT

Wang Ming and Rose Yu at the Wall Street Journal report that the China Banking Regulatory Commission

"may deem subordinated bonds issued by a bank ineligible as capital if those bonds are held by another bank, the person said. The banking regulator estimates about half the subordinated bonds in circulation are held by other banks.

The amount that banks in China can lend is governed by technical capital ratios -- the more capital, the more room to lend. A big way banks have raised capital is by selling yuan-denominated subordinated bonds, or debt instruments that offer investors less protection in the event an issuer can't repay but also a higher yield than regular bonds."

"Analysts said any curb on how subordinated debt can be used would likely slow lending, because it would limit the appetite of the market's biggest investors, which are banks.

'If the regulator excludes cross-held subordinated bonds from being classified as part of banks' capital, banks will have to try to sell their bonds to nonbanking investors,' said Guo Tianyong, the director of the Finance Research Center at Beijing's Central University of Finance and Economics. That will be difficult, Mr Guo said, and 'as a result, banks will slow the pace of subordinated-bond issues, which would eventually lead to a slowdown in credit growth.'

She Minhua, an analyst at Haitong Securities, said, 'Changing the rules would effectively cause a further decline in banks' capital adequacy ratios, so the fastest way for them to maintain a healthy ratio would be to cut loans.'"

3. CHINESE SEABORNE OIL IMPORTS UP 26% IN JULY YOY

Bloomberg reports that preliminary data from the Chinese Ministry of Transportation indicates that Chinese seaborne imports grew by 26% in July from a year previous.

"Chinese ports unloaded about 16.27 million metric tons, or 3.8 million barrels a day, of imported crude last month ... ."

4. NORTH KOREA RELEASES US JOURNALISTS DURING FORMER POTUS VISIT

Heejin Koo at Bloomberg reports that North Korean leader Kim Jong Il pardoned and ordered the release of two American journalists who had been arrested after allegedly crossing into North Korean territory.

"By seeking an amnesty, the US appears to be conceding that the two reporters broke North Korea’s laws, Paik [Hak Soon, a researcher on North Korean issues at Sejong Institute] said.

'The visit indicates that the US and North Korea are willing to resolve this matter through dialogue,' he said. 'We’ll have to see if this expands to the nuclear issue.'"

"The former president and the North Korean leader 'had an exhaustive conversation' and a 'wide-ranging exchange of views on the matters of common concern,' [the] Korean Central News Agency said without giving further details. The country’s National Defense Commission hosted Clinton at a dinner in his honor, the agency said."

Pyongyang has been long seeking direct bilateral talks with the US regarding its disputes with the international community.

5. AUSTRALIAN CENTRAL BANK LEAVES BENCHMARK INTEREST RATE UNCHANGED AT 3%, RETAIL SALES ARE DOWN 1.4% IN JUNE FROM MAY

EcPulse reports that the Reserve Bank of Australia decided today to maintain their benchmark interest rate at 3%.

"[Reserve Bank Governor] Stevens said in his statement that the world economy started to show clear signs of stability, thanks for the global stimulus plans set by governments around the world that led to an improving outlook for the world economy. He added that the US economy reached a turning point, while the economy in the euro zone is still weak."

Meanwhile, Jacob Greber at Bloomberg reports that Australian retail sales fell by 1.4% in June from May.

"Today’s report suggests the impact from A$12 billion ($10 billion) in government cash handouts to households is waning after consumer spending helped Australia avoid a recession in the first quarter. Still, the economy may expand in the second quarter after retail sales rose 2% in the three months through June. Economists forecast a 1.3% gain.

'We still have retail sales at a very strong levels,' said Ben Dinte, an economist at Macquarie Group Ltd. in Sydney. 'With the strengthening consumer sentiment, we should see retail sales hold up.'

The quarterly retail sales figure accounts for as much as 25% of Australia’s gross domestic product, Dinte added."

6. RUSSIA AND TURKEY TO SIGN PACT TO BUILD OIL PIPELINE WHICH WOULD BYPASS THE BOSPHORUS

Ali Berat Meric and Stephen Bierman at Bloomberg report that Russia and Turkey will sign an accord to build a pipeline to send oil to the Mediterranean bypassing the Strait of Bosphorus.

"OAO Gazprom, Russia’s largest company, and Turkey’s Calik Holding AS will sign an accord to build a pipeline between the northeastern port of Samsun and a terminal at Ceyhan on Turkey’s Mediterranean coast, Russian Energy Minister Sergei Shmatko told reporters in Ankara today before a visit by Russian Prime Minister Vladimir Putin later this week."

7. GERMAN BIRTH RATE MAY HAVE DECLINED

Der Spiegel reports that a report released yesterday by Eurostat indicates that

"for every thousand inhabitants in Germany, only 8.2 children were born in 2008. Which indicates a decrease of 0.1% in the German birth rate and makes Germany the only EU member in which the crude birth rate did not increase between 2007 and 2008."

8. HILLARY CLINTON EXPRESSES CONCERN REGARDING HIKERS ARRESTED NEAR IRANIAN BORDER

Nada Bakri at the Washington Post reports that yesterday Secretary of State Hillary Clinton expressed concern about the welfare of three American hikers who were arrested after entering an area near the Iranian border. Of course, the incident will be used by elements in Tehran as evidence that the recent elections unrest is the result of foreign meddling.

9. MEXICO MAY INTRODUCE FUEL EFFICIENCY STANDARDS

Robert Campbell at Reuters reported yesterday that the head of the Mexican National Ecology Institute, Adrian Fernandez, said in an interview that Mexico is planning to introduce fuel efficiency standards for all new cars sold in the country.

"The government is currently studying which type of standards to impose but it is leaning towards a plan that would be similar to proposed fuel efficiency rules in California or other parts of the United States, ... Fernandez said in an interview.

'The standard will cut gasoline imports by as much as a new refinery.'"

Imprecise, but it would have a significant effect.

10. VENEZUELA TO NATIONALIZE COFFEE COMPANIES, LAUNCHES INVESTIGATION INTO SWEDISH ARMS FOUND IN FARC CAMP

Steven Bodzin and Daniel Cancel at Bloomberg report that Venezuelan President Hugo Chávez said today on state television that he was considering nationalizing two coffee companies after having seized their processing plants yesterday. He said,

"We’ve intervened in these big companies. Now we are conducting a study to expropriate them. They will become property of the nation."

Meanwhile, the Associated Press reports that Caracas has indicated it has launched a probe into how arms purchased from Sweden ended up in the hands of FARC guerrillas in Colombia.

"Justice Minister Tareck El Aissami said authorities had launched 'an internal investigation ... to determine the origin and destination of these weapons,' referring to Swedish-made AT-4 launchers that Colombia says were found in a cache belonging to guerrillas.

El Aissami gave no indication, however, that Chavez's administration was easing its stance toward Colombia amid a diplomatic fight that erupted last week after Colombian President Alvaro Uribe complained the weapons had been acquired by the Revolutionary Armed Forces of Colombia ... ."

12. RUSSIA SIGNS ACCORD WITH NICARAGUA TO EXPLORE FOR OIL AND GAS

Eric Watkins at the Oil & Gas Journal reports that the Nicaraguan government has signed accords with a Russian consortium allowing for oil and gas exploration and production in the country.

"'The concessions include the Caribbean and Pacific, both offshore and on land,' said Francisco Lopez, president of the Nicaraguan Petroleum Enterprise. He said a technical board would be installed to analyze implementation of the agreement.

Russia’s Deputy Prime Minister Igor Sechin said the proposed exploration in Nicaragua would be carried out by the Russian National Oil Consortium, created on Oct. 8, 2008, and comprising Rosneft, Gazprom, Lukoil, TNK-BP, and Surgutneftegaz."

13. ANTIGUA AND BARBUDA NAMES HIGHEST PEAK ON ISLANDS "MOUNT OBAMA"

Nika Kentish at the Associated Press reports that the Antiguan Prime Minister, Baldwin Spencer, today renamed the highest mountain in Antigua and Barbuda "Mount Obama." He said at the dedication ceremony:

"This great political achievement by Barack Obama resonated with me in a way that I felt compelled to do something symbolic and inspiring. As an emancipated people linked to our common ancestral heritage and a history of dehumanizing enslavement, we need to at all times celebrate our heroes and leaders who through their actions inspire us to do great and noble things."

14. HAVIV ARGUES 'SHADOW INVENTORY' LOOMS OVER US HOUSING MARKET

Julie Haviv at Reuters reports that so-called "shadow inventory" is hanging over the US home market.

"'The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg,' said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

According to Zillow's latest Homeowner Confidence Survey, 12% of homeowners said they would be 'very likely' to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8% said 'likely,' while 12 percent said 'somewhat likely.'

The survey of 2,123 adults aged 18 and older, of whom 1,357 are homeowners, was conducted online.

Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million US houses, condos and co-ops, Humphries said."

15. HURRICANE SEASON UNDERWAY IN US, GAO STUDY FINDS REFINERY OUTAGES HAVE VERY SMALL AFFECT UPON PRICE

Jesse's Café Américain notes that the hurricane season is underway, and that the peak is usually in mid-September. He notes that "Hurricanes offer a tempting opportunity for energy 'investment.'" I would note, however, that insofar as a legitimate reason for hedging goes, hurricanes are certainly one--and those who want to hedge will need counterparties. Meanwhile, Michael Giberson at Knowledge Problem has the fascinating news that the Government Accountability Office has released a report showing that refinery outages generally have a very small affect upon prices. The report, which I have not had time to read, can be found here.

16. WAL-MART LAST WEEK ISSUED $1.1 BILLION IN SAMURAI BONDS

In a story I missed last week, Lisa Twaronite at MarketWatch reported that Wal-Mart issued US$1.1 billion in yen-denominated bonds (¥100 billion).

"The market for samurai bonds--yen-denominated bonds issued by foreign institutions in Japan--evaporated in the global credit storm. But including Wal-Mart's offering, samurai issuances in July are expected to exceed 200 billion yen--the largest amount since June 2008, Japanese business daily Nikkei reported Wednesday."

Apparently the market is drowning in dollars. (h/t Chuck Butler's Daily Pfenning.)

Daily Sources 7/20

1. MORNINGSTAR OUTLINES US COMMITMENT TO EUROPEAN ENERGY SECURITY IN SENATE REMARKS

Richard Morningstar, the US Special Envoy for Eurasian Energy, emphasized the American commitment to European energy security in remarks made before the Senate Foreign Relations Committee on Friday. Key excerpt:

"There are three main components of our Eurasian energy strategy. First, we want to encourage the development of new oil and gas resources and also promote efficiency and conservation in the use of all energy resources. Because there is a world market for oil, new production can meet growing demand anywhere in the world, including in the US. When we are talking about new natural gas production in the Caspian region, it is unlikely that even one molecule of that gas will reach the US, but it is still important because it would add to international gas supply. Additional supply in one place naturally frees up supply in another. And as the market for liquefied natural gas grows, we can start to think about gas moving around markets in much the same way oil does.

Second, we want to assist Europe in its quest for energy security. Taking goods and services together, the EU27 and the US account for the largest bilateral trade relationship in the world. Europe is our partner on any number of global issues. We have an interest in an economically strong Europe. Of course, Europe is composed of many different states and energy security is a more pressing issue to some than to others. Some countries in Europe do not have a diverse energy mix and depend to a great degree on one supplier and one transport route. When that route is disrupted, as we witnessed in January 2009, the consequences can be severe. The populations of Bulgaria and Serbia and others who suffered in the cold can attest to that. So our aim is to encourage the development of multiple energy sources with multiple routes to market. This approach furthers competitive, efficient markets and the best prices for consumers.

Third, we want to help Caspian and Central Asian countries find new routes to market. We want to help foster economic growth and prosperity in these countries. By expanding export routes, they can increase competition for their resources and demand a higher price.

Some people have portrayed our energy policy and Russia’s as the next round in the Great Game in Central Asia. I reject this analogy. Energy security should not be a zero sum game. Zero sum games are too expensive and we need to find areas where we try to cooperate with Russia. In this spirit, on July 6, the White House announced a new binational presidential commission that will cover a host of different issues, including energy."

2. BERLIN CONSIDERS NEW MEANS OF JUMP STARTING CREDIT FLOWS AGAIN

Christian Reiermann, Christian Salewski and Michael Sauga at Der Spiegel report that Berlin, worried that a deepening credit crunch will undermine any recovery in the second half of the year, are considering various plans to restore the flow of credit to the country.

"[Finance Minister Peer] Steinbrück is now pursuing yet another plan. Officials at the Finance Ministry have prepared another version of an emergency financing plan, which calls for the government-owned KfW development bank to take action, instead of the Bundesbank. Before the crisis began, KfW and the banks through which it channels its loans onto the market each bore half the credit risk. In exceptional cases, KfW may assume 80 percent of the risk, while the other bank assumes the remaining 20 percent. In the future, however, KfW's share could be even higher, perhaps even 100 percent, according to the Finance Ministry's latest plans. The Economics Ministry is fashioning similar schemes.

Some plans are even more radical, including the possibility of KfW lending directly to businesses in the future. The funds for the new loans would come from the existing stimulus programs."

3. ADVISORY BOARD TO OUTGOING BULGARIAN GOV'T WARNS OF RUSSIAN INFLUENCE

The European Union Law blog reports that the Financial Times has acquired a report written by a six-member advisory board of Bulgaria's recently ousted Stanishev government, chaired by Dominique de Villepin, a former French prime minister, which argues that Bulgaria is at risk of falling under Russian economic and political influence. The blog quotes from the report:

"If Bulgaria fails in the fulfillment of this objective, different consequences could arise. First, the Bulgarian state could become more vulnerable, encouraging populist movements and planting the seeds of discouragement among Bulgarian civil society.

Second, the efforts undertaken to build up a stronger, more modern and efficient state apparatus could weaken, and so would the trust of the people in the state. Finally, it could undo the ties between the EU and Bulgaria, prompting a shift of Bulgaria towards Russian political and economic interests."

4. US AND INDIA ANNOUNCE END-USE MONITORING AGREEMENT, CITIBANK TO ADVISE ONGC ON GHANA ACQUISITION

Matthew Rosenberg at the Wall Street Journal reports that Secretary of State Hillary Clinton and Indian External Affairs Minister SM Krishna announced an "end-use monitoring" agreement which will facilitate sales of arms from the US to India. Meanwhile, Joseph Chaney and Narayanan Somasundaram at Reuters reports that Indian state oil company ONGC has hired Citigroup to advise it on a bid for Kosmos Energy's stake in the Jubilee oil field offshore Ghana. The deal is reportedly worth around $3 billion.

5. FORMER IRANIAN PRESIDENT CALLS FOR REFERENDUM ON ELECTION LEGITIMACY, SHIRIN EBADI NOTES ANTI-RUSSIAN AND ANTI-CHINESE SLOGANS IN FRIDAY PRAYERS

Robert F Worth at the New York Times reported that former president Mohammad Khatami called for a referendum on the legitimacy of the recent elections.

"Mr Khatami on Sunday praised Mr Rafsanjani’s speech and said a referendum would help achieve Mr Rafsanjani’s goal of restoring trust, reformist Web sites and the BBC’s Persian service reported. He said it should be carried out by an independent body, like the Expediency Council, an arbitration group that is headed by Mr Rafsanjani.

'If the majority of people accept the situation, we also will accept it,' Mr Khatami said, Web sites reported."

"Although some Iranian conservatives have criticized Mr Rafsanjani for his speech on Friday, more have made stinging criticisms of Mr Ahmadinejad over a controversial cabinet appointment made public on the same day. The president named as his first vice president Esfandiar Rahim Mashaei, who angered hard-liners by saying in 2008 that Iranians are 'friends of all people in the world--even Israelis.' Mr Mashaei, whose daughter is married to the president’s son, also angered clerics in 2007 when he attended a ceremony in Turkey in which women performed a traditional dance.

On Saturday, Ayatollah Ahmad Khatami, a prominent conservative, called the appointment of Mr Mashaei 'completely unbelievable' and said to promote him was to 'ridicule the highest religious authorities.'"

Der Spiegel carried an interview with Iranian Nobel prize winning human rights lawyer Shirin Ebadi in which she said the following:

"[The Friday prayers led by Rafsanjani and attended by Mir Hossein Mousavi and Mehdi Karroubi] was bordering on an historic event, not just for Iran, but for the entire Islamist world--because so many people from the protest movement participated in these Friday prayers. The slogans were also important. The crowd for the first time chanted 'Death to China' and 'Death to Russia!,' they attacked the two most important countries that have supported the leadership in Tehran--at the United Nations, for example. The people have seen just who has been on the side of this regime for decades--two countries that themselves massively violate human rights."

Worth reading in full.

6. RENEWED INTEREST IN KURDISH OIL CONCESSIONS, KURDISH MINORITY IN NINEVEH THREATENS SECESSION

William MacNamara at FT Energy Source reports that Gulf Keystone was awarded two Kurdistan oil licenses this weekend at Sheihk Adi and Ber Bahr.

"One of Gulf Keystone’s joint venture partners will be Genel Energy, the Turkish company leading the incipient consolidation of the Iraqi Kurdish concessions through its proposed merger with Heritage Oil."

Geoff King at Platts reports that

"The work programs for both blocks include the drilling of one exploratory well on each block using current, existing and to be acquired data, Gulf Keystone said, and both [production sharing contracts] PSCs are subject to a 20% KRG carry and no third-party back-in rights."

Meanwhile, Jamal al-Badrani at Reuters reports that Kurdish local councilors in a Nineveh--a northern province in Iraq--are boycotting all contact with the Arab governor of the region and threatening to set up their own governing body unless he successfully addresses their concerns about marginalization. Kurdish representatives hold 16 of 37 seats in Nineveh's governing council.

"The Kurds see parts of majority Arab Nineveh as part of their ancient homeland and want them included in Iraq's semi-autonomous region of Kurdistan. They complain that [Governor Atheel] Nujaifi has marginalized them in the provincial council since he was elected in January.

'If no solution is found, we will be forced to form the Nineveh council to run the 16 administrative units,' said Kurdish councilor Derrman Khitari, adding that he would ask the central government to divert part of its Nineveh budget."

"Nujaifi told Reuters he would come down hard on any local councilors who attempt to secede.

"Their demand is illegal and the constitution will not endorse it. It violates the provincial council law. If any local council within these areas violates the constitution, we have the authority to dissolve it and form a new one," he warned.

He said the door was still open to dialogue. A delegation of Shi'ite Arab politicians from the movement of cleric Moqtada al-Sadr is mediating, but have yet to produce results."

7. NIGERIA, NIGER, AND ALGERIA SIGN TRANS-SAHARAN PIPELINE AGREEMENT

The Wall Street Journal reports that the Nigerian national oil company signed an agreement with Algeria and Niger to create a $10 billion trans-Saharan pipeline to ship natural gas to Europe. On September 8, 2008, the European Commission and African Union Commission established an "African-EU energy partnership" and created an informal joint experts group on energy which was to first meet in October of that year--see Daily Sources 9/22 #5. In late February, Total SA indicated that it was interested in participating in any such project--see Daily Sources 2/26 #5. Gazprom announced late last month that it would begin construction of the pipeline late next year after having established a 50-50 JV with the Nigerian national oil company to handle oil, gas, gas processing and transportation projects--see Daily Sources 6/25 #10.



8. GAO REPORT DETERMINES THAT VENEZUELAN STATE SUPPORT FOR FARC MAKING VENEZUELA KEY HUB IN COCAINE TRAFFICKING

Juan Forero at the Washington Post reports that a GAO report commissioned by Sen. Richard Lugar (R-IN) in February 2008 concludes that state aid from Venezuela to FARC has turned Venezuela into a key source of cocaine being trafficked into the United States.

"Since 1996, successive US administrations have considered Venezuela a key drug-trafficking hub, the Government Accountability Office report says. But now, it says, the amount of cocaine flowing into Venezuela from Colombia, Venezuela's neighbor and the world's top producer of the drug, has skyrocketed, going from an estimated 60 metric tons in 2004 to 260 metric tons in 2007. That amounted to 17% of all the cocaine produced in the Andes in 2007."

9. ORTEGA CALLS FOR END TO TERM LIMITS

Reuters reports that Nicaraguan President Daniel Ortega--who accepted the results of elections after serving as the Communist leader of the country from 1979-1990--has called for a change in the law which now prevents presidents from serving two consecutive terms. In a speech yesterday he said,

"Congressman are re-elected all the time. Mayors are not allowed to be re-elected. If we are going to be just and fair, re-election should be allowed for all (public officials)."

Ortega was elected president in 2006--beginning his term in 2007; the next elections are scheduled to be held in late 2011.

10. WSJ STUDY SHOWS COMMERCIAL MORTGAGES BEING CHARGED OFF AT FASTEST RATE IN NEARLY 20 YEARS

Lingling Wei and Maurice Tamman at the Wall Street Journal report that commercial banks have been charging off commercial mortgages at the fastest rate in close to 20 years.

"At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.

The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.

The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc, JP Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions."

The commercial real estate market represents about 13% of US GDP.

11. PETROLEUM IMPORTS NOW REPRESENT LARGEST SHARE OF THE TRADE DEFICIT

Brad Setser notes that as of May the largest share of the trade deficit is due to petroleum imports.



And comments:

"Discussions about the policies that gave rise to imbalances typically focus on macroeconomic policy choices. That increasingly strikes me as incomplete. Energy policy should enter the calculus too. The US isn’t going to start exporting petrol--not on a net basis--anytime soon. But it certainly could do more to reduce its demand for imported energy."

Daily Sources 6/18

1. BANK OF JAPAN JUNE REPORT INDICATES NO SPENDING GROWTH, HIGH UNEMPLOYMENT, ALMOST CERTAIN DEFLATION

Rebecca Wilder at News N Economics notes that the Bank of Japan released its June report on economic and financial developments today. She notes that the economy is bedeviled by no spending growth and high unemployment ... the one bright spot is that exports appear to be leveling out--her graph:



Ms Wilder notes: "since there is no domestic demand, deflation is all but given." Well worth reading in full. Kyodo News notes that the Bank of Japan report showed that the outstanding balance of financial assets held by households at the end of March fell by 3.7% from the year previous.

"Individual assets held in cash and deposits rose 1.4% to ¥786.50 trillion (~ $8.18 trillion), increasing for the ninth consecutive quarter and underscoring that households favor having their money on hand or keeping it in banks rather than invested in capital markets."

2. WORLD BANK RAISES FORECAST FOR CHINESE GDP IN 2009 TO 7.2%

Liu Li at the Wall Street Journal reports that the World Bank has raised its forecast of Chinese GDP growth to 7.2% in 2009 on the back of the stimulus program. In March, the bank forecast that growth would come in at about 6.5%.

"'The current surge in government influenced investment is welcome, and more domestic demand in China is helpful for the world economy," the bank said in its report. 'However, it is unlikely to lead to a rapid, broad based recovery in China, given the current global environment and the subdued short term prospects for market based investment.'

World Bank senior economist Louis Kuijs said at a press briefing the stimulus is likely to have a smaller impact on the economy next year."

Bank analysts also think that the stimulus this year may constrain the ability of Beijing to respond to events as they develop next year, during which the bank expects GDP to expand by 7.7%. Both numbers are below the "magic eight." It may or not be important in considering this report that some think that the World Bank's next head will hail from China.

3. CHINA RUSSIA'S LARGEST TRADING PARTNER IN FIRST FOUR MONTHS OF 2009

The Wall Street Journal notes that Russia's economy ministry said yesterday that China was Russia's largest trading partner in the first four months of 2009.

4. BANK OF ENGLAND CHIEF MERVYN KING SUGGESTS LIMITING SIZE OF BANKS

Katherine Griffiths at the London Times reports that the head of the Bank of England has indicated in a speech that he supports limiting the size of banks.

"Mr King sought to apply pressure on the Government to award the Bank stronger powers to police lenders that had in the past regularly ignored his warnings. But he admitted that he did not know in what form the Bank would discharge such a responsibility. But such a move would belittle the Financial Services Authority, the official banking regulator, which has been accused of allowing lenders to behave recklessly while on its watch.

The Governor reinforced a suggestion he had made before that retail banks should be split from investment banks and added that there should be a plan for potential winding down of the largest institutions so that there could be an orderly process if they failed."

His suggestions are more radical than suggestions made in either Brussels, Westminster, or Downing St. There is a video report with part of Mervyn King's speech and commentary at the link. (h/t Eurointelligence.)

5. OECD FORECASTS ITALIAN GDP TO CONTRACT BY 5.3% IN 2009

Eurointelligence reports that the OECD yesterday forecast that Italy's economy would contract by 5.3% in 2009, followed by a weak recovery in 2010.

"It warns of a rise in unemployment to over 10% next year, the public-sector deficit will hit 10%, while the level of debt will be approaching 120%. The reports also laments the slow progress Italy has made introducing reforms to free up the service sector, and to reform the administration. The OECD was particularly critical of car subsidies to prop up the country’s ailing auto sector, as this would lead to a misallocation of resources."

6. RUSSIAN ENERGY MINISTRY DRAFTS NEW OIL AND GAS TAX PROPOSAL

Anna Shiryaevskaya at Platts reports that Russia's energy ministry has drafted a new tax proposal with the idea of making production from new oil and gas fields profitable.

"If Russia implements new tax measures to stimulate oil production, the country might increase output to 511 million mt/year (10.2 million b/d) in 2013. Otherwise, production might drop to 450 million mt/year in 2013, [Energy Minister Sergei Shmatko] said. In 2008, Russia pumped 488.105 million mt (9.735 million b/d) of crude, down 0.7% on the year.

Among other incentives, Putin called for a temporary cut in the duty to export Eastern Siberia crude because transportation from the region is expensive and had limited infrastructure."

7. NORGES BANK CUTS BENCHMARK INTEREST RATE TO 1.25%

Josiane Kremer at Bloomberg reported yesterday that the Norges Bank cut the benchmark interest rate by 0.25% to 1.25%. The bank

"said it expects [the benchmark interest rate] to remain between 0.75% and 1.75% until Oct. 28. The assessment that the rate "can remain close to 1 percent for a period ahead still applies,' the bank said in a statement, forecasting a 1.5 percent benchmark in 2010."

The bank forecast that the mainland economy, excluding shipping and oil, will contract by 1.5% in 2009, and expand by 2.5% in 2010. It expects inflation to average 2.5% in 2009 and 1.75% in 2010.

8. BOLIVIA'S LITHIUM RESERVES PRESENT CONUNDRUM TO MULTINATIONALS

Rory Carroll and Andres Schipani at the Guardian UK report on the conundrum facing multinationals that want to become involved in Bolivia's lithium market. Bolivia is thought to posses fully half of the world's total supply of lithium, a key component in batteries for a variety of products, including electric cars. The government of Evo Morales, however, is wary of the influence of multinational corporations.

"'The government of Bolivia will never give away control of this natural resource,' [Morales has] said. He acknowledges, however, that a foreign partner is needed.

The government is talking to France's Bollore Group, South Korea's LG Group and Japan's Sumitomo and Mitsubishi. Bollore has been asked to join the government's scientific commission on lithium, suggesting it has the edge.

The government said it would choose as a partner the company which will help Bolivian industry and not just ­mining."

Morales has strong ties to the government of Hugo Chávez and followed in his footsteps by nationalizing the oil and gas industry in the country in 2006.

9. PERUVIAN AMAZON PROTEST LEADER LEAVES FOR NICARAGUA

The Associated Press reports Peruvian Amazon protest leader Alberto Pizango has left the country for Nicaragua, where he has been granted political asylum.

"Pizango sought refuge in Nicaragua's embassy last week after Peru filed sedition and rebellion charges against him, accusing him of provoking violence when protests over Amazon development proposals turned deadly. The June 5 clash left 24 police dead. Indian leaders say at least 30 civilians died."

Peru granted him safe passage Tuesday.

10. TOTAL US UNEMPLOYMENT INSURANCE ROLLS FALL, BUT INITIAL CLAIMS RISE, RISING OIL COSTS LIKELY TO UNDERMINE US TRADE SITUATION, NORTH AMERICAN TRAIN FREIGHT CONTINUES TO SHOW STEEP FALL

The Associated Press reports that the Labor Department announced that total unemployment insurance rolls fell last week by 148,000 to 6.76 million, for the first time since January. Initial claims, however, rose by 3,000 to a seasonally adjusted 608,000. "The four-week average, which smooths fluctuations, fell by 7,000 to 615,750." Phil Izzo at Real Time Economics reports that Panjiva, Inc. remarked in a research note that there was a 2% uptick in manufacturers exporting to the US in May. But,

"'Looking forward, with the price of petroleum skyrocketing, it is likely that we will see a further deterioration in our trade situation and that will not help us as we try to get out of this recession,' Naroff Economic Advisors said in a research note last week."

The railfax report for total North American freight by rail volumes for the week ended June 13 were down 19.2% from a year earlier.

11. US TOTAL NAT GAS RESERVES ESTIMATION UP 35%

Jad Mouawad at the New York Times reports that the Potential Gas Committee released a report today showing that natural gas reserves in the US have increased by 35%.

"Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves."

The New York Times provides a helpful illustration.



The report calculates all gas that one could conceivably get out of the ground, however, not the amount that would be economical to get out of the ground (which is one reason, for example, why reserves calculated by oil companies can fluctuate rather wildly with price.) Near term this will prove an important difference, front month natural gas is trading at a $46.36/b discount to front month sweet light on NYMEX on a BTU basis.

12. SOUTHERN CALIFORNIA EDISON REACHES AGREEMENT FOR AS MUCH AS 726 MWs FROM SOLAR-THERMAL TROUGH GENERATORS

Dow Jones reports that Edison International's Southern California Edison utility has reached agreements

"with wind and solar power suppliers on four pacts for as much as 960 megawatts of power from renewable-energy sources ... include a potential 726 megawatts of power from solar-thermal trough generators."

All for the good, but the water requirements of solar-thermal trough generators may prove a problem in the future--see Daily Sources 6/8 #16.

Daily Sources 9/22

1. Salman Masood at the New York Times gives a short analysis of the political situation the new Pakistani government faces after the hotel bombing Saturday, described elsewhere as "Pakistan's 9/11." Evidently, many believe that the instigators were from the Federally administered tribal areas in the north, where there is plenty of sympathy for the Taliban and Osama bin Ladin. Some in the street think the US must be behind it. American help in the ongoing investigation has been rejected.

2. Mary Anastasia O'Grady has an editorial in the Wall Street Journal regarding the Cuban relief effort imbroglio that Daily Sources noted on 9/16. Rejecting outright aid relief, Raul Castro proposes that the US relax the embargo on Cuba to permit purchases with credit by Havana for reconstruction efforts after the hurricanes. O'Grady notes that "Cuba can already buy from U.S. producers all the food and medicine it can pay cash for." I would point out that this particular relaxation in the embargo--allowing sales of food and medicine to Cuba--is less than 10 years old and that it doesn't, in fact, address the issue of reconstruction. Still, if American citizens cannot get credit for buying homes or building small businesses in the US, I could see why the US government might be a tad leery of extending it to Cuba. O'Grady argues that Cuba has been forced by its credit history with European financiers to turn to the US. OK. Well, what do we have to fear? If Cuba's credit history is so bad, then surely US banks won't take Castro up on his offers. Unless the real fear is that the US bankers would ...

3. Itar-Tass reports that the Russian First Deputy Prime Minister, Igor Sechin, said today that Russian energy companies may form a consortium with PdVSA to explore and produce in Latin and South America. This followed his return from a working trip that took him to Cuba, Nicaragua, and Venezuela. Also today a Russian naval squadron of four--including one capital ship (a nuclear powered cruiser)--left Severomorsk for Caracas for maneuvers in November, as per the AP.

4. RIA Novosti reports that in a press conference with President Medvedev in Kazakhstan, the Kazakh President, Nursultan Nazarbayev, said that it was "very important that Kazakh oil should pass through Russia." He stated that Kazakh crude production should increase by 12 million tonnes (87.6 mb or 240 kb/d) in 2009.

5. Doris LeBlond at the Oil & Gas Journal had an interesting story today about the establishment, on September 8, of an Africa-EU energy "partnership" by the African Union Commission and the European Commission. The partnership has revived the idea of the trans-Saharan gas pipeline project--a 4,300 km (2,672 mile) pipeline with a 20 billion cubic meter/ year capacity linking Nigeria to Algeria at a cost of about €7 billion (~ $10.1 billion). (Currently Nigeria flares most of its gas.) An informal joint experts group on energy has been put together and will meet for the first time in October.

6. Ibanga Isine, Sola Adebayo and Mudiaga Affe at Punch report that MEND has unilaterally called a ceasefire, suspending Operation Barbarossa Hurricane, in the Niger Delta. Operation "Tropical Storm Vigilant" will replace Hurricane, with only International Red Cross staffers allowed into the region to collect the dead. The spokesman for the Nigerian military's Joint Task Force told reporters that the ceasefire was good for the militants, the region, and the country. MEND states that the oil war was ignited by an unprovoked attack by the military on one of their positions as well as indiscriminate attacks on civilian communities. Emma Amaize & Jimitota Onoyume at the Vanguard report that leaders of the various Niger Delta militant movements are sending separate delegations to Abuja for negotiations with the government.

7. Richard Holbrooke, R. James Woolsey, Dennis B. Ross and Mark D. Wallace have an op ed in today's Wall Street Journal entitled "Everyone Needs to Worry
About Iran." A pretty well-regarded and experienced bunch. Bipartisan, too. But the notion that Iran has no economic argument for nuclear power, whatever the merit of the charge that Tehran seeks nuclear weapons, is dead wrong.

8. Ramin Mostaghim and Borzou Daragahi at the Los Angeles Times had the story Friday that the Iranian Leader of the Revolution aka "Supreme Leader" Ayatollah Ali Khamenei said that Iran and Israel were on a "collision course," which would seem to negate the story in the New York Times that day where I argued that it was beginning to look like holocaust recognition had become official Iranian policy. In his remarks he explicitly contradicted Ahmadinejad, saying that Iran was an enemy of the "Israeli people," and not just their government.

9. Reuters reports that the head of the International Atomic Energy Agency, Mohamed El Baradei, said today that IAEA agents have been asked by North Korean officials to remove seals and surveillance equipment from the Yongbyon plant.

10. Blaine Harden at the Washington Posts reports that Japan's ruling Liberal Democratic Party has selected Taro Aso, a former foreign minister, to be the next Prime Minister. Aso's younger sister is married to a cousin of the Emperor and his family's cement business used slave labor during WWII. Aso competed in the 1976 Olympics in Montreal (as a marksman) and is a Roman Catholic. About 0.5% of Japanese are Catholics. He is also a nationalist that has repeatedly upset Japan's neighbors by allegedly whitewashing Japan's imperial past. Jesper Koll, the President of Tokyo-based investment firm TRJ KK, has an interesting op ed essentially endorsing Aso in Wall Street Journal Asia.

11. Samuel Sockol and Griff Witte at the Washington Post report that Israeli Prime Minister Ehud Olmert also resigned on Sunday. His term was marred by corruption probes. The current US-backed peace talks with Palestine were initiated by Olmert and may be kaput due to his exit.

12. Karin Brulliard at the Washington Post reports that in a television address Sunday South African President Thabo Mbeki announced his resignation. The ANC had voted to oust him the day prior.

13. Jad Mouawad at the New York Times has a story on the $16.37/b rise in the spot price for oil today. Of course, that's only part of the story ... tomorrow's spot contract "only" went up $6.62/b, or to $109.37/b as opposed to $120.92/b. Although the House passed the "anti-speculation" bill on Friday, the Senate has yet to take up the bill, and so traders are saying that the general rise is due to investors looking for a safe place to invest in.

Key "fundamentals" arguing for a higher price for crude include:

- the news from the EIA Wednesday that stocks were down the week previous and the unusual step it took of telegraphing Friday the likely stats report this Wednesday of a draw on gasoline of over 8 mb;
- the odd news, given the overall situation, that the US would not ask the IEA to supply emergency gasoline to American markets;
- the "oil war" in Nigeria, though a cease fire was unilaterally declared by MEND today;
- slight reduction in oil supplied to the market by Saudi Arabia in keeping with the September OPEC meeting's decision,
- Angola set to cut exports by 10% come November,
- a dollar possibly about to be "crushed" due to the worsening news on the financial front and worldwide government attempts to calm the markets
- two more months left in the hurricane season
- increase in tensions with Russia

Key "fundamentals" arguing for the drop in the price of oil include:

- the length and number of refineries in the US which remain shut down due to Hurricanes Ike and Gustav, amounting to around 20% of American refining capacity, thus to about 2 mb/d of imports, or about 2.4% of world demand;
- on top of this, demand appears to be sinking in the US as the price of gasoline becomes too expensive for many to afford. department of transportation data each month shows a decline, year over year, in vehicle miles driven;
- OECD demand down by 1 mb/d, or 1.1% of world demand;
- demand down in emerging markets which have been the main source of demand growth over the last five years, including the story from Jim Bai of Reuters that Sinopec will import 1 million tonnes less crude per month from September through December, or about 239 kb/d--around 3% of Chinese implied demand, or 0.3% of world consumption. demand should fall in both China and India as subsidies have been reduced substantially;
- Russia cut their export tariff substantially in response to the fall in the price of crude;
- Apparent increase in security in Iraq / apparent (overall) reduction in tensions between Iran and the US
- it is beginning to appear as if the world's economies are not structured to profit at $100/b, especially export-based economies where transport costs would be significantly affected
- a "crushed" dollar would presumably have the same effect as high transportation costs on export-based economies, especially those founded on exporting primarily to the United States

Although the above is just a sampler, it is my sense that the reduction in open interest in NYMEX, which in part is due to the anti-speculation legislation, will mean for more volatility over time. But, I suspect that even with investor money entering the contract for oil (and other commodities) in order to hedge against the fall in the dollar, that the price of oil as expressed in the futures market, will have to fall as worldwide demand appears to be faltering, and, should a worldwide recession be under way, likely to fall even further.