Daily Sources 8/12

CHINA BUYING YEN

Tim Duy at Tim Duy's Fed Watch reports that the renminbi, dollar and yen are on a collision course. China is buying yen at a time where the yen is hitting record highs. If Japan responds by buying dollars, then China has managed to get Japan to help maintain the value of their dollar holdings as well as their ability to sell them. Well worth reading in full.

CHINESE STRATEGISTS SEE EXERCISES IN YELLOW SEA AS PART OF EFFORT TO ENCIRCLE CHINA WITH AN ASIAN NATO

Dai Xu at China.org.cn argues that the US is trying to build an Asian NATO to encircle China.


JAPANESE CONSIDER OPTIONS AFTER ATTACK ON TANKER

Takeo Kumagai and Pradeep Rajan at Platts report that the Japanese are considering how to increase security at the Straits of Hormuz after the bomb attack on the M Star VLCC. One option being considered is to only send tankers through the strait during the day time. However restricting passage to daytime hours would add to the congestion in traffic through the strait. Japan is stuck with importing oil through the Strait of Hormuz--80% of their oil supplies pass through it.

GREEK ECONOMY SHRINKS BY 1.5% IN THE SECOND QUARTER

The BBC reports that the Greek economy shrank by 1.5% in the second quarter from the first. The economy shrank by 3.5% from this time last year.

"That adds to 0.8% decline in GDP recorded for the first three months of the year, suggesting that the decline in the economy is speeding up."

INDUSTRIAL PRODUCTION IN INDIA RISES 7.1%

Kartik Goyal and Unni Krishnan at Bloomberg report that industrial production in India increased 7.1% in June from a year earlier. 7.1% is the slowest rate in 13 months and some see it as evidence that the economies in Asia are cooling.

TURKEY USED CHEMICAL WEAPONS AGAINST PKK

Daniel Steinvorth and Yassin Musharbash at Der Spiegel report that photos have been taken of dead PKK members which seem to demonstrate that Turkey used chemical weapons to kill them. German politicians are demanding an explanation from Ankara.

TOP IRAQI MILITARY COMMANDER SAYS US EXIT IS COMING TOO SOON

BBC reports that the top Iraqi military commander has indicated that the US plan to remove all its troops by 2011 is too soon. He said that the army will only be ready to take control of the situation in 2020.

IRAQ WILLING TO ACCOMMODATE IRANIAN PIPELINE TO SYRIA

Deutsche Presse-Agentur reports that the Iraqi oil ministry has published a press release stating that the government has no objection to a gas pipeline from Iran crossing Iraqi territory to Syria.

"'Iraq does not mind facilitating the extension of the Iranian gas pipeline through its territory to Syria and the Mediterranean Sea,' Iraqi oil minister Hussein al-Sharistani said in the statement"

CHINA AND IRAN AGREE TO BROADER OIL AND GAS COOPERATION; LUKOIL RESUMES GASOLINE EXPORTS TO IRAN; IRAN CANCELS TWO LNG PROJECTS

The Tehran Times reports that Iran's oil minister and China's vice premier met and agreed to broaden their cooperation in the oil and gas sector. Meanwhile, Reuters reports that Lukoil has resumed exports of gasoline to Iran.

"In July, Russia’s energy minister Sergei Shmatko said Russian companies would be ready to supply fuel to Iran if there were commercial interest and attractive terms."

However, the sanctions appear to be having an effect on Iran's natural gas plans, canceling two LNG projects Spencer Swartz reports in the Wall Street Journal. LNG technology is mostly held by Western firms.

EUROPEAN COMMISSION LAUNCHES INVESTIGATION INTO US BIODIESEL DUMPING

Isis Almeida at Platts reports that the European Commission is investigating whether US biodiesel exporters are avoiding anti-dumping duties by sending the product through a third country like Canada or exporting B19--19% biodiesel, 81% diesel--which is not subject to the anti-dumping tax.

US biodiesel receives a subsidy of $1/gal ($300/mt) if blended with diesel, which the European Union says represents unfair competition.

This led the European Commission to slap provisional anti-subsidy and antidumping duties on imports of US biodiesel in March 2009. The measure was extended for five years last July, with definitive antidumping duties on US biodiesel of Eur200-400/mt ($274-$548/mt).

CONGRESSMEN SEEK TO KILL $100 MILLION IN AID TO LEBANESE ARMY ON HEZBOLLAH FEARS

Daniel W. Drezner at Foreign Policy reports that members of the US Congress are seeking to stop $100 million in aid to the Lebanese Army.

"Now, I understand the Congressional impulse to do something here -- I really do. What I don't understand is how Congress thinks that withholding aid from the Lebanese military will weaken Hezbollah. Congress seems to think that anything that aids the Lebanese Armed Forces (LAF) will concomitantly aid Hezbollah. The latter group, however, has independent sources of financial, political and military support. It's better to think of the LAF as a competing power base than as a conduit to Hezbollah. Anything that weakens national institutions in Lebanon empowers the groups that can survive in a more anarchical environment -- and gee, whaddaya know, that would include Hezbollah."

INITIAL JOBLESS CLAIMS UP

Courtney Schlisserman and Tim Homan at Bloomberg report that initial jobless claims for the week ended August 7th rose by 2,000 to 484,000, the highest level since February.

"The number of people receiving unemployment benefits dropped, while those getting supplemental benefits surged by 1.34 million reflecting the government’s extension of eligibility."

HUD TO OFFER $1 BILLION IN INTEREST FREE LOANS TO FOLKS FACING FORECLOSURE

Lorraine Woellert and Kathleen M. Howley at Bloomberg report that HUD is to offer $1 billion in interest-free loans to help out folks who have lost income and are facing foreclosure on their homes.

"The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to a statement released today. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement."

Daily Sources 7/29

1. UN WARNS THAT DEVELOPED WORLD WILL FACE WATER PROBLEMS DRIVEN BY GLOBAL WARNING AND OUTLINES GRIM SCENARIO FOR DEVELOPING WORLD

Thalif Deen at IPS reports that UN Secretary-General Ban Ki-moon yesterday said that

"The United States, Spain, Australia and the Netherlands are likely to face the consequences of climate change resulting in water-related disasters, including droughts, floods, hurricanes and sea-level rise.

'Even the world's richest nations are not immune,' UN Secretary-General Ban Ki-moon warned Tuesday.

Citing official US figures, he said the state of California, the world's fifth largest economy, 'could see prime farmland reduced to a dustbowl, and major cities running out of water by the end of the century'.

Blaming it on the negative impact of global warming, he said that climate is changing--globally. 'And so, therefore, must we.'

He quoted scientists as saying that by 2020, 75 to 250 million people in Africa will face growing shortages of water due to climate change.

'Yields from rain-fed agriculture could fall by half in some African countries in the next 10 years. These are frightening scenarios,' he declared."

(h/t Aqua Blog Maven at Aquafornia.)

2. JAPANESE RETAIL SALES DOWN 3% YOY IN JUNE

Toru Fujioka at Bloomberg reports that Japanese retail sales fell 3% year over year in June, from May they fell 0.3%.

"'The worst is over but that doesn’t completely wipe out households’ concerns,' said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. 'Japan’s recovery will be weak until a pickup in jobs and wages boosts consumer spending.'"

3. CHINA CUTS GASOLINE AND DIESEL PRICES

Wan Zhihong at China Daily reports that Beijing has cut the prices of gasoline and diesel by 220 yuan per ton or 3%, effective today.

"This equals price cut of 0.16 yuan per liter in gasoline prices (~$0.089/gallon) and 0.19 yuan per liter (~$0.105/gallon) in diesel prices. It is the second price cut on fuel prices this year.

The price cut was in response to recent falls in global crude prices, according to the National Development and Reform Commission (NDRC), the country's top economic planning body.

China adopted a new oil pricing system this year, under which domestic fuel prices would be adjusted when the moving average of a basket of international crude (Brent, Dubai and Cinta) changes more than 4% over a period of 22 working days."

Bloomberg reports:

"Pump prices for 90 octane gasoline will be set at a maximum of 5.7 yuan ($0.83) a liter, or about $3.14 a gallon, in Beijing, the National Development and Reform Commission said in a statement on its Web site. Prices were adjusted to reflect the decline in global crude prices, said China’s top planning agency."

The reduction in price will encourage demand, of course.

4. MANUFACTURERS SAYS CHINESE COST OF LABOR NOT FALLING IN RESPONSE TO GLOBAL DOWNTURN, REPORTS OF ILLUSORY REAL ESTATE BOOM

The American Chamber of Commerce recently released a report which says that the cost of labor is not falling substantially in China despite the global economic slowdown.

"Even with the current economic conditions, manufacturing in China has become more expensive. Companies reported that costs are still rising--up to 15% in 2008 compared to an increase of 10% in 2007--particularly in compensation costs for management, support staff and blue-collar workers as well as raw materials. Although labor and raw materials costs have come down from the premium levels of last summer, they are expected to rise again once market conditions improve.

Finding reliable, experienced talent has always been a challenge in China and despite rising unemployment during the current downturn, companies must ensure turnover remains at a minimum for when growth resumes.

• 86% of companies reported implementing pay-for-performance compensation plans.
• 62% of companies said they were providing training and development programs."

(h/t Carlos Tejada at the China Journal.) Meanwhile, China Stakes reports that while the Chinese real estate market appears to be in the midst of a boom, defaults are on the rise.

"Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the 'boom' of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts.

Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. 'In fact, it is still difficult for small and medium developer to get credit support from banks,' said a sales manager of a medium real estate company.

Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. 'There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract,' the sales manager added."

Prieur du Plessis at Investment Postcards from Cape Town links to a video of Hugh Hendry

"walking around the streets of China (presumably Beijing or Shanghai) and pointing out numerous empty buildings. Huge debt must have been incurred in erecting these buildings and without tenants there is no prospect of servicing the debt. What’s more, the workmanship also seems shoddy as a nearly-completed 13-story building in Shanghai collapsed last month.

Who will pick up the tab for creating all the overcapacity in the Chinese economy?"

Worth checking out.

5. EUROZONE BANKERS TIGHTENING CREDIT, FRUSTRATING STIMULUS EFFORTS

Margot Patrick, Laurence Norman, and Nina Koeppen at the Wall Street Journal report that the European Central Bank released a report today showing that eurozone banks continued to tighten credit in the second quarter, frustrating efforts at stimulus.

"Banks in the 16-country euro zone further tightened their credit standards in the second quarter, and companies and households may even face slightly tougher requirements in the current quarter, the European Central Bank said in a report on bank lending released Wednesday."

"'Access to credit has become clearly more difficult,' said Ifo Institute President Hans-Werner Sinn, commenting on the think-tank's latest credit constraint survey for German industry and trade, also published Wednesday. 'Despite the expansive monetary policy of the ECB, banks have become more restrictive in granting credit,' Mr Sinn said."

Worth reading in full.

6. TURKISH CENTRAL BANK GOVERNOR INDICATES RATE CUTS TO CONTINUE


Ali Berat Meric and Steve Bryant at Bloomberg report that the governor of the Turkish central bank--Durmus Yilmaz--has indicated that it will continue to cut the benchmark interest rate and is unlikely to raise the rate until some point in 2011.

"The bank reduced its forecast for year-end inflation to 5.9% from 6%, assuming that 'policy rates are further lowered in the short term and held unchanged until the end of 2010,' Yilmaz said at a news conference in Ankara today. Inflation was 5.7% in June, compared with the bank’s year-end target of 7.5%."

7. BAGHDAD PLEDGES SUPPORT IN SUPPRESSING THE PKK

Thomas Grove and Pinar Aydinli at Reuters report that Iraqi Minister of State for National Security Shirwan al-Waeli told a news conference in Ankara that Baghdad will cooperate with Turkish and American efforts to suppress the Kurdish Workers' Party (PKK) until it is eliminated.

"Waeli and Turkish Interior Minister Besir Atalay told the joint news conference they expected concrete results of their cooperation by the time they meet again in Iraq in October but provided no further details."

8. IRAQI CABINET APPROVES THE RE-INCORPORATION OF A NATIONAL OIL COMPANY, OIL EXPORTS AND REVENUES INCREASE

Dow Jones Newswires reports that the Iraqi cabinet yesterday approved a law which would establish an Iraqi national oil company; it now must be approved by the parliament.

"The reinstated national oil company would act as the parent of the existing three major Iraqi oil operators--the South Oil Co., Iraq's largest petroleum company in Basra; North Oil Co. in Kirkuk; and Missan Oil Co. in Ammarh in southern Iraq."

"'In the new draft law we didn't mention the fields that the new company would run,' [Thamir] Ghadhban [an energy adviser to Prime Minister Nouri al-Maliki] said. 'The fields to be operated by the company would be determined by a federal oil and gas council yet to be established,' he said.

The previous law stated that the INOC would have authority to conclude service and management contracts with international oil companies to improve oil recovery from producing fields. It isn't known if that provision was retained in the new law."

Meanwhile, Ben Lando at the Iraqi Oil Report reports that the Iraqi Oil Ministry announced that oil exports and revenues increased in June.

"The Oil Ministry data show oil exports reached 1.923 mb/d last month, up from 1.906 mb/d in May. Iraqi crude fetched an average $64.37/b, a more than $7/b increase on May.

Iraq earned nearly $62 billion in oil revenue last year and through July 22 this year’s exports have brought in $17.11 billion, according to the U.S. State Department’s most recent Iraq Status Report. It also estimated July production thus far at 2.46 mb/d and exports at 1.99 mb/d."

9. KYRGYZ POLICE BREAK UP ELECTION PROTESTS

The Associated Press reports that Kyrgyz police broke up opposition rallies protesting the recent Kyrgyz election results, which they contend were rigged.

"The opposition planned separate rallies and marches around the country Wednesday, rather than call all of its supporters to the center of the capital, Bishkek, in an effort to avoid a confrontation with police."

10. IRANIAN DEATHS IN DETENTION FUELING PUBLIC ANGER

Robert F Worth at the New York Times reports that accounts regarding the abuse of protesters arrested in Iran is fueling widespread anger at the administration.

"The head of Iran’s Supreme Administrative Court, Ayatollah Ghorbanali Dorri-Najafabadi, said more prisoners would be released by the end of the week. He added that a 'serious judicial inquiry' was being conducted into the deaths that have occurred in prisons since the June 12 election.

On Wednesday, there were conflicting reports about whether the government had released Saeed Hajjarian, a prominent reformist figure whose family said he was being subjected to torture.

Iran plans to put 20 people accused of rioting on trial starting Saturday, the official IRNA news agency reported. They are charged with 'attacking military units and universities, carrying firearms and explosives, organizing thugs and rioters, and vandalizing public property.'

On Tuesday, the state-financed English-language broadcaster Press TV quoted Farhad Tajari, deputy head of the parliamentary judicial commission, as saying that the former deputy interior minister, Mostafa Tajzadeh, and former deputy speaker of Parliament, Behzad Nabavi, were in detention facing major security charges and could be released on bail.

The prisoner releases appear to be the act of a government desperate to defuse the issue, coming quickly after the head of Iran’s judiciary promised Monday that the detainees’ cases would be expedited."

11. OBAMA ADMINISTRATION TO EASE SANCTIONS ON A CASE-BY-CASE BASIS WITH SYRIA

Sharon Otterman at the New York Times reports that Obama Administration officials yesterday indicated that a message was conveyed by George Mitchell to Syrian President Bashar al-Assad that the US will take new actions to ease sanctions on Syria on a case-by-case basis.

"[T]he American government [will] try to expedite the process for obtaining individual exemptions to the sanctions, which prohibit the export of all American products to Syria except food and medicine.

The move will particularly affect 'requests to export products related to information technology and telecommunication equipment and parts and components related to the safety of civil aviation,' said a State Department spokesman, Andrew J Laine."

The law imposing sanctions on Syria itself will, at this stage, remain untouched, but the Administration is indicating that OFAC will take a broader view when considering corporate requests for individual waivers.

12. UN WARNS OF WORSENING SITUATION IN SOUTH LEBANON

Naharnet News Desk reports that the UN has warned of a deteriorating situation in south Lebanon.

"The warning was made by Oscar Fernandez-Taranco, Assistant Secretary-General for Political Affairs, during a Security Council meeting on the Middle East.

Taranco urged both the Israeli and Lebanese sides to 'end' their violations of Security Council Resolution 1701 which halted a 34-day war between the Jewish state and Hizbullah in the summer of 2006."

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

13. VENEZUELA RECALLS COLOMBIAN AMBASSADOR, THREATENS TO SHUT OFF TRADE, FARC SAYS HAD MADE NO ELECTION CAMPAIGN CONTRIBUTIONS TO ANY FOREIGN CANDIDATE, VENEZUELAN OIL MINISTER SAYS JAPAN-VENEZUELAN ORINOCO E&P JV WILL BE FINALIZED BY YEAR END

Christopher Toothaker at the Associated Press reported yesterday that Venezuela has recalled its ambassador to Colombia and threatened to halt imports from the country on the accusation aired by Bogota that anti-tank weapons found in a FARC stash came from Venezuela.

"Chávez also said he would sever diplomatic ties completely and seize control of Colombian-owned businesses 'if there's one more accusation against Venezuela.'"

"Chávez also raised the possibility of shutting down a 139-mile (224-kilometer) pipeline that carries 5.7 million to 8.5 million cubic meters (200 million to 300 million cubic feet) of natural gas daily from Colombia to oil installations in western Venezuela.

'The gas that comes from Colombia isn't indispensable for us. We could shut down that gas pipeline,' he said."

Tensions between Caracas and Bogota have long been tense, most recently inflamed by US plans to expand our military presence at three military bases in Colombia--see Daily Sources 7/22 #12. Meanwhile, the Associated Press reported yesterday that FARC officially denied that it had contributed to the 2006 election campaign of Ecuadorian President Rafael Correa. Correa recently publicly asked FARC to confirm that he had received no campaign contributions from the militant organization. FARC stated that it had at no time contributed to any election campaign in any foreign state.

"The FARC's ruling secretariat contends in a July 25 communique that video given to The Associated Press earlier this month by Colombian officials was manipulated by Bogota and Washington. The video shows the FARC's No 2 leader reading a letter in which contributions to Correa's campaign are mentioned."

Meanwhile, Carlos Camacho and Takeo Kumagai at Platts report that Venezuelan oil minister Rafael Ramirez announced yesterday that Japan and Venezuela will have an exploration and production plan for the Junin area of the Orinoco belt ready by October and a JV to carry out the E&P activity will be launched by year-end.

"Ramirez did not mention, which Japanese companies would be given the E&P contract (in a minority role, by law) together with PDVSA, but Mitsubishi, Itochu, Mitsui and Marubeni all have ongoing energy projects in Venezuela."

14. US MANUFACTURED DURABLE GOODS DOWN 2.5% IN JUNE FROM MAY, DOWN 27.7% YOY, MORTGAGE ASSOCIATION WARNS THAT INCENTIVES FOR MODIFYING MORTGAGES INSUFFICIENT

The Commerce Department today announced that new orders for manufactured durable goods in June fell $4.1 billion or 2.5% from May. Excluding transportation equipment, new orders rose 1.1%. Un-seasonally adjusted year over year new orders were down 26.7%, excluding transportation they are down 23.4% year over year. Meanwhile, Al Yoon at Reuters reports that the Independent Mortgage Servicers Coalition has issued a warning that the government incentives to modify bad mortgages may prove counterproductive.

"'We are in a position where it's a very tough balance act, and that's weighing heavily on us now,' said [Bruce] Rose [CEO of Carrington Capital Management, LLC], in an interview on Monday. 'This is a classic case of an unfunded government mandate.'

The costs of borrowing to finance delinquent payments to bond investors far outweigh expected revenue from incentives paid by the government, Rose said. The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current.

The group since September has approached the Treasury, the Federal Reserve and Congress for help in funding the temporary 'advances' that are fully reimbursed when a loan is modified or foreclosed, Rose said. Help offered through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors, has backfired, and is increasing financing costs, he said."

(h/t Yves Smith at naked capitalism.)

15. COMMERCIAL CRUDE STOCKS WAY UP, REFINING UTILIZATION DOWN, IEA SUGGESTS $50-60 BOTTOM FOR OIL PRICE

The EIA reports that commercial crude stocks built by a whopping 5.1 million barrels in the week ended July 24 to 347.8 million barrels. The stock levels are above the five year historical range for this time of year and the build was versus the median expectation of analysts of a 1.5 million barrel draw, per a Bloomberg survey. Gasoline stocks were drawn down by 2.3 million barrels and are near the top of the five year historical range. Distillate stocks, on the other hand, continued to build by another 2.1 million barrels versus analyst expectations of a 1 million barrel build. Distillate--diesel and heating oil--stocks are well above the historical range for this time of year, there are 32.1 million barrels more distillate held in commercial stocks than the equivalent week last year, or 24.6% more.



The ongoing build is consistent with the reports from the American Truckers Association, the American Association of Railroads, and US major ports. Total US refining utilization fell to 84.57% from the 85.84% reported for the week previous. For the week ended July 27, the national average of regular gasoline prices rose by 4 cents to $250.3/gallon, just inside the range where you start to see demand fall. The EIA report includes the following observation:

"On May 21, NOAA predicted a 70% probability that nine to 14 named storms will form within the Atlantic Basin during the current hurricane season, including four to seven total hurricanes of which one to three will be intense. These ranges are slightly above the seasonal average. Using these storm projections, the STEO analysis estimates the uncertainty surrounding seasonal shut-in projections. The median of the probability distribution represents an outage of 4.5 million barrels for the entire season, which is the assumption that the STEO uses for its forecasts for crude oil production."

Upstream online reports that Eduardo Lopez, a senior oil demand analyst at the International Energy Agency told Reuters that

"The evidence so far suggests that prices have probably reached a floor which maybe around $50 to $60. So, unless something dramatic were to happen, its plausible...prices will remain again at around that level, of course with probably a lot of volatility."

Monday Mark Shenk at Bloomberg noted that the current demand projections from the IEA do not correlate well with its past correlation with global GDP growth--see Daily Sources 7/27 #12.

16. FARM STATES INFLUENCE ON FOREIGN ENERGY POLICY--SHOCKED, JUST SHOCKED

Keith Johnson at Environmental Capital has a nice anecdote of how farm-state congressmen influence US foreign policy--including energy policy.

"Iowa’s Republican Sen. Chuck Grassley is holding up the nomination of Thomas Shannon to become ambassador to Brazil. The problem? Mr. Shannon has hinted he’s in favor of repealing the $0.54 cent-per-gallon tariff the US levies on imports of Brazilian sugar-cane ethanol—a direct threat to the farm-state interests Mr. Grassley represents."

Worth reading in full.

Daily Sources 6/25

1. OECD REVISES FORECAST FOR CHINESE 2009 GDP GROWTH UPWARD TO 7.7%

Liu Li at the Wall Street Journal reports that the OECD has upped its forecast of Chinese GDP growth in 2009 to 7.7% from its 6.3% projection made in March.

"The OECD said it now expects China's economy, the world's third largest, to grow 9.3% in 2010, up from its previous projection of 8.5%. Still, it cautioned that 'the outlook for 2010 is more uncertain and depends on the extent to which private consumption and business investment react to the stronger economic situation, as both the fiscal and monetary stimulus will be easing.'"

The OECD stood by its projection that the consumer price index in China would fall by 1% in 2009 versus the projections coming out of Beijing of an 4% increase.

2. CONSUMER SENTIMENT UPTICK IN JAPAN, BUT BOJ SEEMS TO BE DISCOURAGING TOO MUCH OPTIMISM

Edward Hugh at Fistful of Euros has a characteristically long and detailed post on the Japanese economy where he notes that consumer sentiment is upbeat, with the confidence index climbing to 35.7 from 32.4 in April, according to the Cabinet Office in Tokyo--but in the face of horrible export numbers. Hugh notes that the OECD's new forecast has Japan's GDP still on course to contract by 6.8% in 2009 and has revised its forecast for 2010 down to 0.7% growth in 2010. Hugh remarks:

"In its Monthly Report of Recent Economic and Financial Developments the BOJ revised its basic view of the economy upwards for the second consecutive month. In April, the Bank were saying that “Japan’s economic conditions have deteriorated significantly”, but this was revised in May to the view that 'Japan’s economic conditions have been deteriorating, but exports and production are beginning to level out', and in June to the view that 'Japan’s economic conditions, after deteriorating significantly, have begun to stop worsening'.

This has been widely seen as an indication that the BOJ has revised its view on the economy upward, but the BOJ itself has been trying to discourage this interpretation. At the press conference, Governor Shirakawa said that the BOJ’s view on the current state of the economy was in line with the forecast made in the Outlook for Economic Activity and Prices report published on 30 April, namely that 'the pace of deterioration in economic conditions will likely moderate gradually and start to level out', thus emphasizing that the BOJ has not changed its view. To reinforce this point, using the analogy of a weather forecast, he said that if the weather forecast for the following day turns out to have been right, this does not mean that the forecast has been revised."

Well worth reading in full.

3. CHINA AND TURKMENISTAN INK DEAL FOR ADDITIONAL 30% SUPPLY OF NAT GAS, CHINA AGREES TO $4 BILLION LOAN ON PREFERENTIAL TERMS

Alexander Vershinin at the Associated Press reports that China has signed a 30 year deal to increase purchases of Turkmen natural gas by 30%.

"Chinese Vice Premier Li Keqiang met with his Turkmen counterpart Wednesday to sign the contract, which increases gas deliveries to 40 billion cubic meters (52 billion cubic yards) annually, the state-run newspaper Neutral Turkmenistan reported.

Work on a 7,000-kilometer (4,300-mile) pipeline from Turkmenistan to China is expected to be finished by the end of the year.

'This agreement is very important for ensuring a stable, long-term and adequate supply of gas for this pipeline,' Li said at an official signing ceremony, according to the newspaper.

China has also committed to lending Turkmenistan's state gas company $4 billion on preferential terms, the newspaper reported."

4. JAPAN STRIKES DEAL WITH ADNOC TO INCREASE ITS STRATEGIC PETROLEUM RESERVE

Chikako Mogi at Reuters reports that the Japanese trade ministry has concluded a basic agreement with the UAE's ADNOC to store stocks of oil in Kagoshima, southern Japan.

"The ministry did not provide details of the volume that Japan was expected to receive from ADNOC.

The ministry said the project will help beef up Japan's energy security by tapping the supply from ADNOC in times of supply shortages."

5. KOGAS AND GAZPROM AGREE TO FEASIBILITY STUDY ON NAT GAS PIPELINE EXTENSION TO SOUTH KOREA

Eric Watkins at the Oil & Gas Journal reports that Gazprom and Kogas have signed a memorandum of understanding to study the feasibility of supplying gas to South Korea via a pipeline extension from the Sakhalin-Khabarovsk-Vladivostok (SKV) gas pipeline.

"According to analyst Global Insight, two pipeline options between Russia and South Korea are currently being evaluated: an overland route via North Korea and a direct subsea line.

'The first option suffers from severe geopolitical risks while the second option presents partners with formidable technological and financial challenges,' GI said, adding, 'A drawn-out negotiation and planning process for the project…can be assured in either scenario.'

Underlining that point, Russian officials also have been courting Japanese investors into joining the SKV pipeline project."

In televised comments during his visit to Tokyo in May, Prime Minister Vladimir Putin said,

"Japanese partners could take part in projects to develop pipelines and other transport infrastructure. I mean from Sakhalin Island to Khabarovsk to Vladivostok." (see Daily Sources 5/12 #4.

6. IRAQI MINISTRY CONSIDERING HOW TO RESPOND TO SINOPEC'S BID FOR ADDAX

Anthony DiPaola at Bloomberg reports that the Iraqi Oil Ministry is considering whether to exclude Sinopec from bidding on developing oil fields, following the news that the company had made an offer on Addax Petroleum, which operates fields in Kurdish Iraq. (See Daily Sources 6/24 #7.)

"The Oil Minister hasn’t yet decided, a ministry spokesman said by telephone today. The Chinese company, also known as Sinopec Group, is among more than 30 oil producers short-listed by Iraq to bid for development rights on June 29 and 30.

The government hasn’t received official notification of the agreement between Sinopec and Addax, said Abdul Mahdy al-Ameedi, deputy director general of the Oil Ministry department running the bid rounds.

'They can participate so far,' he said of Sinopec. 'There are some days until the bidding process,' he said, adding the government would be reviewing the deal."

7. OPEC SAYS WORLD OIL MARKET IN "DELICATE AND PRECARIOUS" STATE

Margaret McQuaile at Platts reports that in its latest bulletin, OPEC said that the world oil market is in a "delicate and precarious state."

"A commentary in the latest issue of the OPEC Bulletin said oil prices were now 'closer to levels that could support sound investment plans for future production' but were not justified by fundamentals of supply and demand.

It noted that OPEC's own crude basket, which had stood at $44/barrel at the start of the March 15 ministerial meeting, had climbed above $70/b since the most recent conference on May 28 despite supply continuing to be greater than demand and OECD commercial stocks remaining well above five-year average levels."

8. RUMORS OF SAUDI-SYRIAN-LEBANESE 'GRAND BARGAIN'

Michael Collins Dunn at the MEI's Editor's Blog reports that there are rumors of a grand bargain being arranged between the Saudis, Damascus, and Lebanon.

"To sum it all up before I start linking: Syria is going to accept the idea of Sa‘d Hariri as Prime Minister in Lebanon. In turn, Saudi Arabia is going to patch up its relations with Syria. King ‘Abdullah will then visit Damascus. And if the Lebanese can smooth out the outlines of a unity government of some sort, Syria won't stand in the way."

Worth reading in full.

9. US DELIVERS WEAPONS TO SOMALIA'S TFG

Stephanie McCrummen at the Washington Post reports that the US has sent a shipment of weapons and ammunition in aid for the transitional federal government in Somalia.

"To cut off the rebels' weapons and supplies, the United States has stepped up pressure on Eritrea, and foreign warships patrolling Somali waters to combat piracy have begun blocking cargo ships heading to the rebel-held port of Kismaayo in southern Somalia.

African diplomats have also proposed a no-fly zone over Somalia to prevent weapons from being flown in from Eritrea to the rebels, but it is unclear whether that idea will gather necessary support at the United Nations."

10. MEND ATTACKS IN NIGERIA FORCE CLOSING OF TWO REFINERIES, GAZPROM AGREES TO JV WITH THE NIGERIAN NATIONAL OIL COMPANY, GAZPROM TO BEGIN CONSTRUCTION ON TRANS-SAHARAN PIPELINE NEXT YEAR, TOTAL OFFERS TO COOPERATE WITH GAZPROM--ESPECIALLY IN AFRICA

Jacinta Moran at Platts reports that Nigeria shut down the 125 kb/d Warri and the 150 kb/d Port Harcourt after attacks by MEND on pipelines and other oil facilities have cut the flow of crude, making operations impossible. Warri has reportedly been shut down for over a month.

"Nigeria's main militant group earlier Thursday said it sabotaged a Shell oil pipeline in the Delta today, the latest in a slew of attacks against facilities in Africa's biggest oil producing country.

The Movement for the Emancipation of the Niger Delta (MEND) said in an emailed statement it had attacked the Billie-Krakama pipeline in Rivers state in the Niger Delta.

'Cawthorne Channel 1, 2 and 3 flow stations feeding the Bonny export terminal have been effectively put out of service,' it said."

Susan Njanji at AFP reports that Shell confirmed that the Billie-Krakama pipeline had been attacked and stated that it had been shut down.

"President Umaru Yar'Adua on Wednesday expressed hope he could resolve the Niger Delta crisis this year.

'I am hopeful and confident that by the end of this year, we will have a secure and stable environment in the Niger Delta,' he told a news conference with [Russian President] Medvedev [who was in Nigeria yesterday to pursue energy cooperation initiatives.]

Yar'Adua is Thursday expected to unveil details of an amnesty package for militants who cease hostilities as part of efforts to end the unrest and save the crucial oil and gas industry."

BBC reported last week that one militant leader took advantage of the amnesty offer--see Daily Sources 6/17 #9. Meanwhile, Medvedev's visit evidently bore fruit as Gazprom announced that they have started a 50-50 JV in oil, gas, gas processing and transportation. Gazprom also announced it plans to begin construction of the Trans-Saharan pipeline next year.



Meanwhile, Simon Shuster at Reuters reports that the general director of Total E&P Russie told reporters today, "We are very open to discussing with a company like Gazprom to have developments abroad including, of course, in Africa."Douglas Muir at Fistful of Euros observes:

"If you’re a human being who speaks French, you’re more likely to be African than European. La Francophonie’s demographic center of gravity is now somewhere around Bamako, Mali.
...
Demographic growth plus the slow-but-steady rise of literacy rates in most of Africa means that by the next decade, most literate Francophones will be African too.
...
[T]he Academie Francaise has always allowed non-French citizens to be members; by 2050, I’d expect these members to be approaching a majority.
...
If you’re a human being who speaks French, and is also a practicing Catholic, you’re almost certainly African--like, ten-to-one odds. Plenty of people have already pointed out that Catholicism, slowly retreating in Europe, is growing like crazy in Africa, so I won’t go into that here.

But: French is now one of the major languages of Islam. "

11. VENEZUELA AND US TO EXCHANGE AMBASSADORS

Ian James at the Associated Press reports that Venezuela and the United States will exchange ambassadors, after each expelled them nine months ago.

12. CREDIT CARD CHARGEOFFS RISE WITH UNEMPLOYMENT INSURANCE EXHAUSTION RATES, INITIAL UNEMPLOYMENT CLAIMS UP

Barry Ritholtz at the Big Picture compares credit card charge off rates to the rate of people who have exhausted their unemployment insurance.



Meanwhile, Glenn Somerville at Reuters reports that initial unemployment claims rose by 15,000 to a seasonally-adjusted total of 627,000.

"Continued claims, which gauge how many Americans were still on jobless rolls after an initial week of claims, rose 29,000 to 6.738 million in the week ended June 13, the latest period for which the data was available."

12. ANOTHER STUDY LINKING US RECESSIONS TO PRICE OF OIL

Sheila McNulty at FT Energy Source reports that Steven Kopits of Douglas Westwood Energy research has released a study which notes that in the last 37 years the US has experienced seven recessions, and that oil has played an important role in each. "In every case when oil consumption breached 4% of GDP, he notes, the US has suffered a recession." Koptis also remarks that every time there has been a sustained rise of more than 50% or more in the price of oil, the US enters a recession. McNulty writes:

"From his research, then, it seems there are three rules by which to avoid recession caused by oil prices:

- Crude oil expenditures should not exceed 4% of GDP.

- Oil prices should not increase by more than 50% year-on-year.

- Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8% of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession."

Kotis' piece graphs nominal and inflation-adjusted crude prices from 1970-2009, shading the periods of US recession.



His work can be found here--well worth reading in full. Meanwhile, Grant Smith at Bloomberg reports that Barclay's Capital technical analysis that crude will fall to below $66/b after having broken through a "Ichimoku cloud" at $70.35/b.

"The so-called Ichimoku cloud is an area bound by two predictive lines on a general-overview chart, the investment banking arm of Barclays Plc said. Crude breached the lower boundary of this cloud at around $70.35 a barrel in New York on June 19, and oil may consequently be dragged towards a support layer around $66 and fall below that, the bank said.

'You still want to be looking to sell,' Barclays analyst MacNeil Curry said in a telephone interview from New York. 'In the sessions ahead, we look for a break of trend-line support at $66.83 to reignite the downtrend,' the bank said in a report."

This analysis comes from a different team, if I understand aright, than the one led by Paul Horsnell in London, which correctly predicted in May that prices were set to breach $70/b--see Daily Sources 5/14 #9.

Daily Sources 6/24

1. JAPANESE EXPORTS IN MAY DOWN 40.9% YOY, 0.3% MOM; CHINESE GDP GROWTH NOT TRANSLATING INTO MORE IMPORTS; CHINA'S NBS PROVIDES QUARTERLY ESTIMATES OF GDP GROWTH

Jason Clenfield at Bloomberg reports that Japanese exports fell by 40.9% in May from a year previous, a sharper decline than the 39.1% seen in April. Exports fell by 0.3% in May from April.

"Shipments to China, Japan’s biggest trading partner, fell 29.7%, more than April’s 25.9%. Exports to Asia slid 35.5% from 33.4% a month earlier.
...
Imports slid 42.4% from a year earlier, and the trade surplus narrowed 12.1% to ¥299.8 billion (~ $3.1 billion), the Finance Ministry said."

Brad Setser at Follow the Money notes:

"US exports to China are also down (15.6% y/y, through in the first four months of 2009, though a bit less in April itself). The eurozone’s exports to China are also down--though the 8% or so fall y/y fall in the eurozone’s exports to China seems a bit more modest than the fall in Japan’s exports to China.

China’s economy may have expanded over the last year, but that expansion clearly hasn’t fed through into more Chinese demand for US, European or Japanese goods."

In the meantime, Andrew Batson at China Journal reports that Guo Tongxin, an official at the National Bureau of Statistics, provided GDP estimates on a quarterly basis in contrast to Beijing's traditional practice of providing year on year data.

"The new estimates from Guo, which only cover 2008 and early 2009, may be a surprise for skeptics who suspect that China’s statistics officials are only capable of reporting nice-sounding numbers. These figures actually show the slowdown in the fourth quarter of last year was even sharper than most outside economists had believed.

Economists surveyed by the Journal in February had, on average, estimated that fourth-quarter GDP expanded at an annualized rate of 2.1%. Guo cited what he called a preliminary estimate that fourth quarter GDP grew 0.1% from the previous quarter, equivalent to an annualized rate of just 0.4%.

The headline year-on-year growth rate announced at the time, by comparison, was 6.8%--a gap that clearly shows how quarterly and annual growth rates can give very different pictures of economic turning points."

2. THE US AND EU LODGE WTO COMPLAINT AGAINST CHINA ALLEGING THAT BEIJING HAS BLOCKED THE EXPORT OF RAW MATERIALS

Gabriella Stern at China Journal reports that the EU and the US have filed a WTO complaint against China. The complaint alleges:

"that Beijing unfairly helps domestic makers of steel, aluminum and chemicals, among others, by effectively blocking overseas exports of raw materials (eg. the ingredients that go into steel, aluminum and chemicals)."

Stern adds:

"Brian Blackstone points out the irony that the US government is complaining about China holding back on exports when Washington’s usual stance is to complain about China flooding the world with its exports. There are, indeed, many ironies in the messy world of trade disputes. This is the Obama administration’s first WTO complaint against China and the timing is sensitive, given America’s deep dependence on Beijing’s purchases of US sovereign debt--and also the global importance of a Chinese economic recovery spurred by that government’s thus-far-effective stimulus program."

3. BEIJING SUSPENDS REFORESTATION EFFORT ON FOOD SECURITY CONCERNS

Jonathan Watts at the Guardian reports that Beijing has suspended the reforestation of marginal arable land on fears of food shortages.

"Lu Xinshe, deputy head of the ministry of land and resources, said the country was struggling to hold the 120 million hectare 'red line' considered the minimum land areas needed for food self-sufficiency.
...
By the end of last year, the amount of arable land in China had decreased to within 1% of the 'red line.'"

In November, Zhang Xiaoqiang, Vice Chairman of China's National Development and Reform Commission, set as a national strategic priority domestic production of 95% of their grain consumption through 2020--see Daily Sources 11/14 #5. China was facing the worst drought it has seen since 1951 at the beginning of the year--see Daily Sources 2/9 #13--I have no idea what the rainfall situation is now.

"[S]elf-sufficiency [of 95%] requires the production of 500 million metric tons of grain a year. To maintain this level, prime minister Wen Jiabao has said the state would increase spending on agricultural production by 20%, well above inflation."

4. GERMAN HOUSEHOLD CONSUMPTION UP IN Q1; CABINET ADOPTS FISCAL PLAN WITH DEFICIT SPENDING

Eurointelligence reports that German household consumption appeared to rise in the first quarter, per FT Deutschland.

"Why should this be so? First, the article says, unemployment was still low and will be rising more strongly later this year and in 2010. But also there have been a number of tax cuts, a large increase in pension payments, a large increase in public sector wages to support private sector incomes."

In the meantime, Der Spiegel reports that Chancellor Merkel's cabinet adopted a fiscal plan for the next four years, which includes deficit spending.

"In total, it calls for €310 billion ($436 billion) in fresh debt from 2010 to 2013, including a whopping €86.1 billion ($121.2 billion) for 2010, far and away the largest single-year budgetary hole in the history of post-war Germany.

The 2010 total could even top €100 billion depending on the development of expenses related to Germany's economic stimulus packages (worth a total of €82 billion) and its bank bailout fund (worth €500 billion). Germany's previous record for fresh debt in a single fiscal year was the €40 billion borrowed in 1996. Steinbrück's new plan calls for new debt to begin falling after 2010, with €71.1 billion necessary in 2011, €58.7 billion in 2012 and €45.9 billion in 2013."

5. INTERNATIONAL INVESTORS LEARY OF NEW DELHI'S NEW DEBT ISSUANCE PLANS

Anil Varma and Anoop Agrawal at Bloomberg report that international investors appear uncomfortable with Indian Prime Minister Manmohan Singh’s plan to sell a record $74 billion in bonds this fiscal year.

"Foreign funds cut holdings of local-currency debt by 20% from a January peak to $5.7 billion, according to India’s Securities and Exchange Board. Investec Asset Management Ltd., Nikko Asset Management Ltd. and ING Investment Management, which together manage more than $15 billion in emerging-market debt, say they’re avoiding the market.

Yields are rising as Singh boosts spending on infrastructure and programs to reduce poverty, which he says are needed to return the economy to 9% growth, from the 6% forecast by the central bank for the year started April 1. Standard & Poor’s said June 22 that India may raise its budget deficit estimate in July to 6.5% of GDP, the most in 19 years. It has a negative outlook on the nation’s BBB- credit rating, the lowest investment grade."

6. KYRGYZSTAN REVERSES DECISION TO CLOSE MANAS AIR BASE TO US

Michael Schwirtz and Clifford J Levy at the New York Times report that Bishkek has decided to reverse its decision to end the US lease of the Manas air base.

"[T]he base is to be renamed a transit center, as opposed to an air base. And the Kyrgyz will control security around the base; currently, American military personnel do. The text of the new agreement specifies few other restrictions on how the United States can use the base. There do not seem to be any prohibitions on shipping weaponry.

One major change, though, is the rent. It will rise to $60 million annually from $17.4 million, Kadyrbek Sarbayev, Kyrgyzstan’s foreign minister, told the Kyrgyz Parliament on Tuesday.

Washington will also pay $36.6 million to expand the airport and will contribute tens of millions of dollars toward economic development and the fight against drug trafficking, Mr. Sarbayev said. He said the agreement would be for one year and would be contingent on the situation in Afghanistan."

The agreement must now be approved by parliament, which is reportedly a sure thing.

7. SINOPEC OFFERS $7.24 BILLION FOR ADDAX A WEEK AHEAD OF BAGHDAD'S OIL CONCESSION AUCTIONS

Kate Mackenzie at FT Energy Source reports that the rumored acquisition attempt of Addax Petroleum, which has a large stake in the Taq Taq field in Kurdish Iraq, are true. Sinopec has offered $7.24 billion for the company and the board has recommended the sale to its shareholders. Baghdad is set to auction concessions next week. Yesterday, the Kurdish government released a statement calling the planned auction "unconstitutional"--see Daily Sources 6/23 #5. On June 1, the Kurdish Regional Government presented Baghdad with a fait accompli, sending oil through the Iraq-Turkey pipeline without an arrangement for revenues to accrue to the operators of the fields--see Daily Sources 5/12 #8. Iraqi parliamentarians are openly calling for the resignation of oil minister Hussein al-Shahristani for his alleged mismanagement of the issue of oil concessions--see Daily Sources 5/21 #6.

8. LARGE MIDDLE EASTERN BUY US$/€ PROGRAM REPORTED

Macro Man reports that there "appears to be a large EUR/USD buy program emanating from the Middle East."

9. US TO SEND AMBASSADOR TO DAMASCUS AFTER 5 YR HIATUS

Patrick Rucker at Reuters reports that the US will send an ambassador to Syria, after having recalled the ambassador in 2005.

10. US EMBASSY IN KHARTOUM WARNS OF POTENTIAL ISLAMIC MILITANT ATTACKS ON GOVT

Andrew Heavens at Reuters reports that the US embassy in Sudan has issued a statement warning of attacks by Islamic militants on the government in Khartoum. The statement read in part:

"Statements threatening violent action against the government of Sudan have been posted on a jihadist website, following the death of a suspected Islamic extremist."

In the meantime, BBC News reports that representatives of southern and northern Sudan have agreed to abide by a ruling at the Hague's Court of Arbitration on the status of Abyei in talks led in Washington, DC, by US Sudan envoy Scott Gration.



Much of Sudan's oil wealth is in the region. The south began demobilizing earlier this month--see Daily Sources 6/11 #9.

11. CARACAS DOLLAR SALE PRIORITIES HURTING REGIONAL EXPORTERS TO VENEZUELA

Andrea Jaramillo at Bloomberg reports that Fabricato Tejicondor SA, Colombia’s biggest textile maker, has announced that exports to Venezuela have fallen by about 70% after Caracas decided to stop allowing the industry's importers to purchase dollars at the official exchange rate.

"Importers ... have to buy dollars in Venezuela’s unregulated parallel market, where the bolivar trades at 6.63 per dollar, a rate that is 68% weaker than the official 2.15-per-dollar, said Fabricato Chief Executive Officer Oscar Ivan Zuluaga. He said the surge in the cost in bolivar terms 'put a brake on demand' in Venezuela, which accounts for about half of Fabricato’s exports."

On April 24, the Venezuelan finance minister said that Caracas would make imports of food and medicine a priority in allotting dollars for sale at the official rate this year.

12. NEW ONE FAMILY HOME SALES UP 0.6% IN MAY FROM APRIL, DOWN 32.8% YOY

Barry Ritholtz at the Big Picture reports that sales of new one-family homes were up 0.6% in May from April, but notes that the margin of error is plus or minus 17.8%.

"And as expected, April’s data was revised downwards.

Year over year, sales fell 32.8%--a valid number relative to the error (±10.9%) below the May 2008 estimate ...."

He links to a Barron's Econoday chart plotting new homes sales since January 2006:



13. DURABLE GOODS ORDERS UP 1.8% IN MAY FROM APRIL

Shobhana Chandra and Courtney Schlisserman at Bloomberg reports that the Commerce Department announced today that orders for durable goods rose 1.8% from April.

"Economists projected goods orders would drop 0.9 percent, according to the median of 75 forecasts in a Bloomberg News survey. Estimates ranged from a decline of 3.9% to a gain of 1%. Commerce revised the April gain to 1.8% from a previously reported 1.9% increase."

14. US COMMERCIAL CRUDE STOCKS DOWN 3.8 MB, GASOLINE UP 3.9 MB, REFINERY UTILIZATION UP TO 87.05%

The EIA reports that commercial crude stocks were drawn down by 3.8 million barrels in the week ended June 19 to 353.9 million barrels. Holdings are well above the historical range for this time of year, but have been falling steadily in recent weeks. A Bloomberg News survey had the median expectation of analysts for a 950,000 barrel draw. Commercial gasoline stocks grew by 3.9 million barrels and are at the bottom of the historical range for this time of year. Distillate stocks grew by 2.1 million barrels and are 32.7% larger than the comparable week last year. The national average price of gasoline rose to $2.691/gallon for the week ended June 22. Refinery utilization for the week ended June 19 rose to 87.05% from the 85.90% seen in the week ended June 12.

Daily Sources 6/3

1. JAPAN MAY NEED TO SHUT MORE THAN A 5TH OF ITS REFINING CAPACITY ON REDUCED DEMAND

Reuters reports that Nippon Oil Corp President Shinji Nishio told the Reuters Energy Summit that Japan may be forced to shut as much as 1 mb/d of refining throughput capacity, more than a fifth of the country's total capacity, as oil demand is falling more quickly than previously expected.

"'I think we are likely to see an even faster decline than the government's projection,' he said in Tokyo.

Japan's trade ministry projects oil sales will fall by an average annual 3.5% to 168.2 million kl (2.9 mb/d) in the year from April 2013, from a total 3.46 mb/d last year. It has the capacity to refine 4.8 mb/d.

'Unless we cut the capacity by (1 mb/d), the nation's production will not be at an optimum level,' he said. 'When you think about the future beyond (2013), we will have to cut even further.'

Major Japanese refiners have slashed refinery production sharply in response to weakening demand, but relatively few have thus far mothballed capacity, despite a downturn in global profit margins that is likely to curtail hopes of shifting to exports."

There will be fierce competition for export markets given the wall of new refining capacity which is hitting the Asia Pacific.

2. C.I.C. TAKES AN ADDITIONAL $1.2 BILLION IN MORGAN STANLEY; AN OBSCURE TOW TRUCK MANUFACTURER TO BUY G.M.'S HUMMER UNIT

Jason Dean and Peter Stein at the Deal Journal report that the China Investment Corporation--one of China's sovereign wealth funds--took an additional $1.2 billion stake in Morgan Stanley yesterday.

"CIC executives and other Chinese officials have talked about how little confidence they had in US and European financial sector, thanks in large part to the heavy paper losses CIC suffered on a previous $5.6 billion stake it bought in Morgan Stanley in December 2007, plus an earlier stake in Blackstone Group. Officials said they worried about the market turmoil and the uncertainty over US and European government bailout programs.

So, the new deal is clearly a new vote of confidence by CIC–though one perhaps foreshadowed in April, when CIC Chairman Lou Jiwei said the fund was starting to see opportunities and planned to expand its overseas investments this year."

This comes a day after the news that Chinese students at Peking University laughed at Secretary Geithner's assertion that Chinese assets were safe. The article also points out that Temasek--Singapore's sovereign wealth fund--sold its entire stake in Bank of America in the middle of May. At that time the New York Times reported that Bank of America sold a consortium of sellers which included Temasek about a third of its 16% holding in China Construction Bank. Meanwhile, Joe McDonald at the Associated Press reports that Sichuan Tengzhong Heavy Industrial Machinery Co. announced yesterday that it would purchase the Hummer unit of GM.

"Tengzhong's Web site says the company is privately owned, though that status can be murky in the Chinese system. Comments posted Wednesday on Chinese Web sites for car lovers asked whether China's military financed the Hummer takeover."

The company is four years old and has 4,300 employees. It makes cement mixers and tow trucks--the Hummer will be its first venture into passenger cars.

3. KASHGAR PARTY SECRETARY SAYS BEIJING HAS DISRUPTED 7 UIGHUR TERRORIST CELLS THIS YEAR

The Associated Press reports that the Communist Party secretary of Kashgar, China, Zhang Jian, told China Daily that the government had uncovered seven Uighur terrorist cells in the city so far this year.

"Zhang was quoted in a Xinhua News Agency article Tuesday saying the government had broken up 591 alleged separatist and terrorist groups from 1990 until 2003.

Last July, the China Daily paper said officials had foiled a dozen terrorist cells linked to foreign-based organizations in the region, making it hard to determine if the seven marked an increase in activity.

China says militants among the Uighurs--Turkic-speaking Muslims--are leading a violent Islamic separatist movement in Xinjiang and are seeking to set up an independent state in the Central Asia border region. A series of several attacks around the Olympics last year were blamed on separatist groups."

(h/t Sky Canaves at China Journal.)

4. CHANCELLOR MERKEL SPEECH ATTACKS Q.E., DER SPIEGEL WORRIES SHE IS BEING LEFT OUT OF THE LOOP

Joellen Perry at Real Time Economics reports that German Chancellor Angela Merkel said in a speech yesterday in Berlin:

"[T]he independence of the European Central Bank must be preserved and the things that other central banks are now doing must be retracted. I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds. We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time."

Meanwhile, Gregor Peter Schmitz and Gabor Steingart in Der Spiegel report that the White House views the Chancellor as difficult, and that Berlin is increasingly being left out of the loop in international financial policy decisions.

"Washington has not forgotten how she thwarted the US Treasury's attempts to solve the crisis within the forum of the G-20. The Chancellery instead used diplomatic channels to push for a meeting of G-8 states.

The thinking in Berlin was that Germany would have had more influence over G-8 decisions. And that would have meant that China, the world's third largest economy and the US's biggest creditor, would not have been involved. However, the US regarded Germany's stance as unacceptable both economically and politically. In the end Berlin had to back down.

Ever since, the Germans have been shown time and again that things can be done without them. It was the Americans and the British who were behind the push to triple the International Monetary Fund's lending capacity to $750 billion. The Germans, who had originally specified a lower figure, were persuaded to fall in line.

The IMF's executive board, on which Germany has a seat, didn't even get to meet to discuss the issue. It simply had to implement the decision made at the London G-20 summit. For the first time in the IMF's history huge sums could be doled out without obligations attached. In recent weeks credit lines worth billions of dollars have been granted to Poles, Mexicans and Colombians. A leading IMF employees said: 'We have almost no control over how this money is used.'"

When President Obama visits Germany en route to Normandy to commemorate the beach landing of 1944, he will visit the Buchenwald concentration camp. Well worth reading in full.

5. RIKSBANK SAYS LOAN LOSSES FACED BY MAJOR SWEDISH BANKS LIKELY $22.8 BILLION, 40% OF WHICH ON EASTERN EUROPE EXPOSURE

Mia Shanley and Niklas Pollard at Reuters report that the Swedish central bank, or Riksbank, said in its biannual financial stability report that it expected loan losses at major Swedish banks of 170 billion krona (~$22.8 billion) this year and next.

"The central bank said it estimated just under 40 percent of total losses were expected to stem from the banks' operations in the Baltic countries and the rest of eastern Europe.

'It is primarily the corporate sector, both in Sweden and in other countries where the Swedish banks have operations, that is contributing to the increase in loan losses,' it said.

The Riksbank said the main scenario set out in its report was 'very uncertain' and that conditions for banks could prove more daunting than previously thought, for instance if either the regional or wider downturn worsened."

The report said that Swedish banks were sufficiently capitalized to weather the crisis, and "well-capitalized in an international comparison." (h/t Chuck Butler's Daily Pfenning.)

6. OBAMA IN SAUDI ARABIA TO VISIT BIRTHPLACE OF ISLAM, AL-QAEDA RELEASES OSAMA TAPE

Scott Wilson at the Washington Post reports that President Obama is in Riyadh today to discuss with King Abdullah Iran's nuclear program, the Palestine peace process, and, in all likelihood, the price of oil. On the tarmac the President told reporters:

"Obviously the United States and Saudi Arabia have a long history of friendship, we have a strategic relationship. ... I thought it was very important to come to the place where Islam began and to seek His Majesty's counsel and to discuss with him many of the issues that we confront here in the Middle East."

Al-Qaeda released a new audio-tape, purportedly by Osama bin-Laden, to al Jazeera to coincide with the visit in which it accuses the President of "planting seeds [of] 'revenge and hatred' toward the United States in the Muslim world." Thomas Hegghammer at Jihadica observes that the tape did not reach the news organization by "regular channels" and deduces that bin-Laden may be feeling the squeeze. An excerpt:

"While most statements by AQ Central in recent years have been posted directly on the Internet, this one was distributed 'the old way', in a physical copy delivered by courier to al-Jazeera. As of 2pm EST, the statement has not yet appeared on the forums. Moreover, the absence of references to recent events suggests the tape was recorded several weeks ago. Finally the length of the tape is reportedly only around four minutes, which is unusually short. In all these respects, the latest tape differs from UBL’s three previous statements this year, on Gaza in January and on Gaza and Somalia in March."

Worth reading in full.

7. SYRIA AGREES TO HOST US MILITARY DELEGATION IN DAMASCUS FOR DISCUSSIONS ON IRAQ

Glenn Kessler at the Washington Post reports that Syria has agreed to schedule a meeting with a US delegation of military commanders in Damascus in the coming weeks to discuss how best to put down the insurgency in Iraq.

"US officials said the administration was not committing to drafting a formal plan for improving relations, but the two visits could form the building blocks of a new relationship. Although officials from US Central Command have met their Syrian counterparts at regional security meetings on Iraq, military officials have been unable for years to have a thorough, joint discussion on the situation in Iraq."

8. SHEIK OF DUBAI SAYS MIDDLE EAST NEEDS TO CONCENTRATE ON EDUCATION

Mohammed bin Rashid al-Maktoum, vice president and prime minister of the UAE as well as the ruler of Dubai, has an opinion piece in today's Wall Street Journal where he remarks that over half of the 300 million people in the Middle East are under 25 years of age, meaning that efforts to win hearts and minds should be a priority. Key excerpt:

"[P]erhaps Mr. Obama might want to consider a new American-Arab education and health-care initiative. Arabs have the primary responsibility to create a better investment climate and stronger policies concerning education and economics. This will require greater transparency in governance, a stronger rule of law, and more independent institutions of justice.

Far too frequently in our region, good governance strategies take a back seat to military spending. Such recklessness has cost Arabs decades in lost development. The total expenditure on conflicts in the Middle East in the last six decades has exceeded $3 trillion. In fact, the Middle East is the world's most militarized region. And how much do we spend on education? The per capita expenditure of our region's 22 nations has shrunk in the last 15 years to 10% from 20% of what the world's 30 wealthiest countries spend.

We in the United Arab Emirates are dedicated a new education paradigm, notwithstanding some recent setbacks on account of the world financial crisis. We're urging our Arab brethren to do the same."

Worth reading in full.

9. ISRAELI FOREIGN MINISTER SAYS TEL AVIV WILL NOT ATTACK IRAN

Steve Gutterman at the Associated Press reports that Israel's Foreign Minister Avigdor Lieberman said to reporters after a Moscow meeting with Vladimir Putin:

"We do not intend to bomb Iran, and nobody will solve their problems with our hands. We don't need that. Israel is a strong country, we can protect ourselves. But the world should understand that the Iran's entrance into the nuclear club would prompt a whole arms race, a crazy race of unconventional weaponry across the Mideast. That is a threat to the entire world order, a challenge to the whole international community. So we do not want a global problem to be solved with our hands."

Lieberman also suggested that those most concerned about a nuclear-armed Iran were its Arab neighbors in the Middle East, more so than Israel in any case.

10. CNPC TO REPLACE TOTAL ON SOUTH PARS PHASE 11

Zahra Hosseinian and Fredrik Dahl at Reuters report that IRNA, Iran's state news agency, has reported that CNPC has replaced Total SA as the developer of Phase 11 of the South Pars gas fields. The announcement today was made to coincide with Iran's foreign minister scheduled meeting with President Sarkozy in Paris.

"It was signed in Beijing by Seifollah Jashnsaz, managing director of the state National Iranian Oil Company (NIOC), and his CNPC counterpart, ... IRNA ... said.

'The signing of the cooperation agreement between Iran and China took place as CNPC has replaced the French company of Total,' IRNA said.

Jashnsaz said the aim was to reach daily production of 50 million cubic metres of natural gas and other products.

Total had no immediate comment on the report. In Beijing, CNPC officials were not immediately available for comment."

11. USDOE OFFICIAL REMARKS ON LARGE RESERVES IN UGANDA, HERITAGE OIL IN MERGER TALKS

Edris Kisambira at Kampala's East African Business Week reports that Sally Kornfield, a senior analyst in the USDOE's office of fossil energy, told a visiting Ugandan delegation in Washington DC yesterday that:

"You are blessed with amazing reservoirs. Your reservoirs are incredible. I am amazed by what I have seen, you might rival Saudi Arabia."

Heritage Oil announced that it had found enough oil in Uganda to expect a return on its investment in January, estimating that its blocks by Lake Albert contain 2 billion barrels--see Daily Sources 1/13 #10. In May, Heritage announced a world class giant oil field find in Kurdish Iraq--see Daily Sources 5/6 #4. Fred Pals at Bloomberg reports that Heritage today announced that it is in preliminary discussions which may lead to a merger.

"'No agreement has been reached between the third party and the company and there can be no assurances that any agreement will be reached or even if reached, that any such agreement will be completed,' Heritage said in the statement."

Last year Heritage had received an "unsolicited approach." From the story it is unclear if this is a merger discussion or a takeover.

12. U.S. COMPROMISE ON CUBAN READMISSION TO O.A.S. REJECTED

Mark Landler at the New York Times reports that a compromise fashioned by Secretary of State Clinton regarding the readmission of Cuba to the Organization of American States failed to gain any traction at the club's meeting in Honduras today. The compromise would have given Havana a road map to readmission, enumerating the steps it would have to take in order to rejoin. It was reportedly clear that there was a clear majority in favor of Cuba's readmission, though whether or not a vote would be forced on the issue was yet to be seen. It would take a two-thirds majority for the ban to be overturned.

13. A.D.P. ESTIMATES U.S. COMPANIES CUT 532,000 WORKERS IN MAY, FIVE TIMES AS MANY OFFICIAL UNEMPLOYED AS REPORTED JOB OPENINGS

Courtney Schlisserman at Bloomberg reports that ADP Employer Services has released its estimate that US companies cut about 532,000 workers from their payrolls in May. "April’s reading was revised to show a reduction of 545,000 workers, up from a previous estimate of 491,000." Barry Ritholtz at the Big Picture links to Econopic Data's graphs of Job Openings plus number of Unemployed:



There are nearly five times as many reported unemployed people as there are reported job openings.

14. EIA REPORTS CRUDE STOCK BUILD

The EIA reported that, for the week ended May 29, commercial stocks of crude oil grew by 2.9 million barrels to nearly 366 million barrels.



As you can see from the EIA's graph above, commercial stocks remain quite high, historically speaking, and the stock build was contrary to analyst expectations of a 1.5 million barrel draw, per the Bloomberg survey. Gasoline stocks fell by 200,000, versus analyst expectations of a 650,000 build, and are below the five year average historical range for this time of year. Distillate stocks continue to grow by 1.6 million barrels.

Spot Life CL Apr 09

The reported causes of the first 10 days that the CL Apr 09 contract was front, or spot, month is below. The main story for that time was twofold: more bad news on the economic front and analyst estimations that OPEC had made good on as much as 85% of its supply allocation reductions made in the December 17 meeting. Most OPEC members sounded as if they were ready to cut further in the March 15 meeting in Vienna, though Iran, very atypically, suggested that "a solution" would be proposed at the upcoming meeting which would not require further cuts on the part of the cartel. Russia indicated that it would present some sort of proposal for cooperation at the meeting with the cartel, saying that its interests were completely aligned with the organization in the matter of supply.

The Obama Administration made some conciliatory moves in the Middle East, including dispatching two officials to discuss the situation with Syria, following on the French initiative and indicating that they were interested in bringing Iran into "big tent" discussions on Afghanistan. Saudi Aramco sent its first cargo of oil to its joint venture refinery expansion project in Fujian and the National Reform and Development Committee approved a slew of further refinery expansions and greenfield construction, including a potential plan with Rosneft in northern China.

The general economic news was very bad everywhere with Japan reporting a nearly 50% drop in exports in January. South Korea announced exports fell a further 17% in February after dismal showings in the last couple months. German industrial orders also contracted sharply. CDS spreads on a wide variety of sovereign and private debt climbed precipitously. Natural gas in the US fell below $4/MMBtu (~ $23.20/b on a Btu basis) primarily as a result of declining industrial demand.



The giant contango of 2008 continued, though it narrowed considerably from March 2. The one year differential fell from $13.09/b on February 23 to $8.10/b on March 6, or 38%.



After spending a long time at a premium to CL, front month Brent finally dropped to a small discount to front month CL--Brent is historically usually at about a $1-2/b discount to CL/WTI. (The controversy over CL's vulnerability as a price discovery mechanism for the US crude market continued to boil, with the CME announcing that it would have Bob Levin, its Managing Director of CME Group Energy Research and Product Development, lead a 7 hour on line seminar on CL on Thursday to discuss, and presumably defend, the CL contract. Platts proposed another pricing benchmark--the Americas Sour Marker.)



CL Apr 09 exhibited no linkage to the €/$ interbank exchange rate--and I suspect that the past perceived linkage is in a large part due to oil exporting nations purchasing large numbers of euros in order to keep their own currencies from appreciating too steeply--meaning that it would only exist as the price went up and would be led by crude, not the euro. Crude climbed 18.4% between February 23 and March 6. The euro fell by 0.3% from February 21 (a Saturday) and March 6.



Below is a chart of CL, the Russian ruble, Kazakh tenge, and the Nigerian niara percent change from close Jan 1, 08. Astana never really allowed the tenge to float much against other currencies, Moscow and Nigeria have both taken steps recently to reduce speculation against their currencies by domestic banks. (Moscow was especially irked that apparently monies given the banks to bail them out of the current crisis were used to speculate against the ruble.)



On March 6 the April 09 NG contract fell to $3.945/MMBtu (and the ICE Apr NG contract fell to about $3.9626/MMBtu at interbank exchange rates) mostly on the back of a decline in industrial demand. Some analysts forecast that the US NYMEX price might fall as low as $3.50/MMBtu (~ $20.30/b on a Btu basis) over the course of the year and then, on the back of increasing LNG supply, new US supply, and the steep decline in industrial demand to as low as $2/MMBtu (~ $11.60/b on a Btu basis.) Heating oil and diesel (which are nearly identical) cracks have fallen as the price of natural gas declines, though forward differentials are still pretty healthy. RBOB prices arguably resisted further declines in crude prices at the beginning of March, with the price of crude then chasing the crack--as expressed by Apr 09 RBOB - Apr 09 CL--back up.



However, the forecast relative competitiveness of heating oil versus natural gas has not translated into lower heating oil prices for delivery in the winters of 2009-11.



Commitment of traders reports would seem to indicate that the market is unclear of which direction it will go next--positions net long or short account for 0.32% of the market. Even with another OPEC cut (or Russian cooperation, perhaps the "solution" Nozari alluded to) it is unclear to me just where you will see the demand growth or storage availability to see large price gains near term. (If you look at the commitment of traders report for futures and options combined, there is a larger indication with 2.68% of open interest being held by traders net short or long. Given that commercials short to hedge against lower prices and non-commercials are long, the market would be signaling upwards price, but it is still a small share of the traders, given 2008.)



That said, volatility is extremely high just now, with 17 days since January 1 of price changes of 5% or more. Below is a chart of volatility for front month to month 12 delivery for CL from the beginning of the year until March 6.



As you can see from the graph below of price volatility since 1984, we have had more days with price moves of 5% or more than all but four years since 1984 in the first 65 days of 2009. Average volatility for the front month contract has been 4.365% for the first 65 days, well above average volatility for any given year from 1984 on. (Obviously that is not an apples to apples comparison, but I think it's still noteworthy.)