Daily Sources 5/13

1. EUROZONE INDUSTRIAL PRODUCTION DOWN 20% IN MARCH YOY, EVEN AS GERMAN IP IS FLAT

Jan Strupczewski at Reuters reports that Eurostat released data today showing the industrial production in the eurozone fell by 20% in March from the year previous. From February, industrial production for the 16 members of the monetary union fell 2% in March.

"Industrial production accounts for roughly 17% of euro zone gross domestic product and the grim March output data could mean the economy shrank more than economists expect.

'Following today's release this indicator is pointing to a -2.2-2.3% quarter-on-quarter reading in Q1. This suggests downside risks to our 2% forecast,' said Saleem Bahaj, economist at Goldman Sachs.

Eurostat also revised down production data for February to a monthly fall of 2.5% from the initially reported decline of 2.3% and, in year-on-year terms, to a plunge of 19.1% from 18.4%."

However, Germany, the largest economy in the eurozone, announced flat industrial production in March last week, though exports continued to drop--see Daily Sources 5/8 #4.

2. CHINESE INDUSTRIAL PRODUCTION UP 7.3% IN APRIL YOY, EVEN AS ELECTRICAL GENERATION DOWN AS MUCH AS 4% YOY AND INDUSTRIAL PRODUCTS IMPORTS FALL BY 14.3%

The AFP reports that Chinese industrial output rose by 7.3% in April year over year according to data released by the National Bureau of Statistics today.

"The figure was down from 8.3% growth in March, and 11.0% in February, according to earlier data issued by the government.

'It was a small fluctuation in a generally upgoing trend,' said Lian Ping, a Shanghai-based economist with the Bank of Communications.

'It's rather unlikely it will go back to a rate of around five percent,' he said.

Growth in industrial output--a main gauge of activity in factories and plants across China--hit lows of little more than five percent at the end of last year."

On May 5, the China Electricity Council released preliminary data that electricity generation was down 3.55% from a year previous and that the finalized statistic--to be released later this month--was likely to be a 4% decline. This was also in the face of CLSA Asia Pacific Markets' positive PMI reading for April--see Daily Sources 5/5 #3 for both of these. I find the notion of industrial production continuing to increase at annual rates of 7% or more difficult to reconcile with electrical generation decreases of annual rates of up to 4%.

"Exports of industrial products totaled 566.2 billion yuan (~ $83 billion ) last month, a steep decline of 14.3% from the same month in 2008, the statistics bureau said."

3. CHINA BANKING REGULATORS PROPOSE RULES FOR ESTABLISHMENT OF CONSUMER LENDING FIRMS AS WESTERN BANKS EXIT CHINESE FINANCIAL SECTOR IN ORDER TO SHORE UP BOOKS

Sky Canaves at the China Journal reports that the China Banking Regulatory Commission told Xinhua that it had issued a draft of new regulations that establish guidelines for the establishment of new consumer financing corporations. Although there was a record number of new loans made in the first quarter and April, consumer lending accounts for only 12% of total loans--see Daily Sources 5/7 #2 and Daily Sources 5/12 #2.

"Under the proposed rules, domestic and foreign-invested consumer finance companies would be able to make loans for durable goods, as well as general-purpose personal loans, in amounts up to five times the borrower’s monthly income.

The finance companies would not be allowed to accept deposits and would have to maintain a minimum registered capital of 300 million yuan (~ $44 million). Prospective applicants should have at least 80 billion yuan in total assets, five years of experience in consumer financing, and profitability in the last two fiscal years, according to the draft rules."

Canaves notes that private consumption currently accounts for about 35% of Chinese GDP. Chen Qiong, an official with the commission said,

"The establishment of consumer finance companies will expedite an increase in personal consumption, thus driving increases in the production and sales volumes of manufacturers and retailers, while also driving demand in related industries and altering the GDP’s over-reliance on exports and fixed asset investment."

In the meantime, Louise Story and David Barboza at the New York Times reports that Bank of America agreed yesterday to sell about a third of its 16% stake in China Construction Bank for $7.3 billion.

"[A] person involved in the deal said Bank of America agreed to a private placement sale to a consortium that includes China Life Insurance, Temasek Holdings of Singapore and the private investment firm Hopu Investments of China, which is partly controlled by Fang Fenglei, the Chinese partner of Goldman Sachs. ...
Bank of America’s move comes a few weeks after Allianz and American Express sold nearly $2 billion worth of shares in another big Chinese bank, the Industrial and Commercial Bank of China, according to Reuters. The Royal Bank of Scotland also recently sold its stake in the Bank of China."

4. CHINA MAY HAVE RESTARTED AS MUCH AS 1.4 MMT OF ALUMINUM CAPACITY IN APRIL AS RIO TINTO DEAL LOOKS LIKELY TO SOUR

Richard Dobson at Bloomberg report Ru Xiaojie, an analyst at Aluminum Corp. of China Ltd., indicated at a conference today that the country may have restarted as much as 1.4 million metric tons of capacity in April. Ms. Ru indicated that the country may produce as much as 12.6 million tonnes of aluminum this year. Alcoa notes there is oversupply on the market. Meanwhile, the Rio Tinto Chinalco deal appears unlikely to go through.

5. KAZAKH PRESIDENT SIGNS BILL INTO LAW SENDING MORE GAS VIA RUSSIA, EU NABUCCO EFFORT DOESN'T SECURE FEEDSTOCK PARTICIPATION AS THE U.S. SEEMS TO RELAX SUPPORT FOR NABUCCO

Upstream online.com reports that Kazakh President Nursultan Nazarbayev has signed into law Kazakhstan's agreement with Russia and Turkmenistan today to carry more natural gas via the Central Asia-Center pipeline system, which would take the gas to Europe through Russia.

"The Russian pipeline plan is expected to transport up to an extra 10 billion cubic metres of Turkmen gas a year and the same volume of extra Kazakh supplies, according to the original deal."

Last Friday's the EU, meaning I infer Andris Piebalgs, signed an "energy agreement" with Azerbaijan, Georgia, Turkey and Egypt regarding a southern transit corridor. The Southern Corridor Summit apparently failed to seal the deal with other key meeting participants: Turkmenistan and Kazakhstan, ie most of the feedstock, which now appears to have gone north. On Friday the rumor that the US was not unequivocal in its support for Nabucco was mooted at the USDOS daily press briefing:

"QUESTION: Robert, just a quick thing on energy issues. The new Obama Administration envoy for energy Richard Morningstar was in a conference in Bulgaria, and he seemed to say that the Nabucco pipeline, which is EU-backed, was not, quote, 'the holy grail,' and suggested that the Russian alternative, South Stream, might work as well. Is this part of the reset in relations with Russia and the US? And what’s the US position on the two pipelines?

MR. WOOD: I think it--I think--and I haven’t seen the remarks from Ambassador Morningstar. But we have always supported diversification of energy supply and resources. And--but I don’t have the specifics with regard to the two pipelines. I haven’t heard--you know, only--I’ve only heard what you have said about it. I’d have to talk to Ambassador Morningstar to get further clarification. But as I said, we want to see a diversification of energy resources in that region, as we said, and worldwide in general."

6. OFFICIAL KREMLIN STRATEGY FORECAST EXPECTS RESOURCES TO BE CENTER OF FUTURE INTERNATIONAL DISPUTES

Al Jazeera reports today that the Kremlin released its National Security Strategy today which forecast that

"The attention of international politics in the long-term perspective will be concentrated on the acquisition of energy resources.

Amid competitive struggle for resources, attempts to use military force to solve emerging problems can't be excluded.

The existing balance of forces near the borders of the Russian Federation and its allies can be violated."

The document identified the Middle East, the Barents Sea, the Arctic, the Caspian Sea and Central Asia as likely loci of future resource conflicts. (h/t Leanan at the Oil Drum's Drumbeat.)

7. BANK ROSSI CUTS RATES ON OIL PRICE INCREASES, WHILE OPEC MONTHLY OIL REPORT SHOWS INCREASE IN SUPPLY IN APRIL, BIGGEST CHEATER IS IRAN

Emma O’Brien at Bloomberg reports that Bank Rossi cut its benchmark interest rates effective tomorrow today, the refinancing rate, seen as the limit for borrowing, was cut to 12% from 12.5% and the repurchase rate charged on central bank loans was cut to 11% from 11.5%.

"Bank Rossii has been buying foreign currency on the market as a way of reducing the ruble’s volatility and controlling its advance, [First Deputy Chairman Alexei] Ulyukayev said. The central bank is purchasing dollars and euros at about 37.20 versus the basket, after earlier defending 37.25, MDM [Bank]’s [Mikhail] Galkin, [head of fixed-income and credit research in Moscow] said, adding that policy makers bought about $1 billion yesterday."

The ruble has been climbing on stronger oil prices.



Spencer Swartz at Environmental Capital reports that OPEC's monthly report released today found that its eleven central members increased oil production by 220 kb/d.

"The production increase--as if the global recession and rising oil prices weren’t already a good enough deterrent--further diminishes the prospect of OPEC announcing any production cut when it meets in Vienna May 28. After months of reducing its output by around 150,000 barrels a day more than its OPEC quota obliges it to, Saudi Arabia, OPEC’s top dog, will be in no mood to hear Iran talk about more cuts when the Persian state is pumping some 400,000 barrels over its quota, according to OPEC’s latest data.

The kingdom was already annoyed privately in March when OPEC last met about the “cheaters” within OPEC. Ditto with the other OPEC Gulf producers, like Kuwait, which have also been carrying their full weight of OPEC cuts and forgoing oil revenue.

The April rise in production 'buries the chance of a fresh cut,' says one analyst who tracks OPEC closely."

Jackson Thies and Mine Yücel at the Dallas Federal Reserve Bank produce a graph showing OPEC production as a percentage of the (implied) quota in February and March:



The EIA produced a graph of OPEC surplus capacity versus price in today's Week in Petroleum report as well:



All fundamentals--even with the reduction in commercial stockpiles reported on below--do seem to point toward a downward pressure on price.

8. UZBEKISTAN, VIA SOUTH KOREA, TO ALLOW NATO SUPPLY TO AFGHANISTAN VIA NAVOI, OBVIATING MANAS CONTROVERSY

Deirdre Tynan at EurasiaNet.org reports that Uzbek President Islam Karimov announced during the state visit of South Korean President Lee Myung-Bak that a cargo airport in the city of Navoi is being used for non-lethal supply of NATO forces in Afghanistan.



A South Korean corporation is heading a renovation project at the airport which would convert it into a world-class air freight hub.

"South Korea’s involvement in the project provides a face-saving way for the resumption of US-Uzbek strategic cooperation, capping over a year of US diplomatic efforts to bridge the rift that opened amid the fallout from the 2005 Andijan massacre.

Karimov evicted US forces from an air base in Karshi Khanabad in late 2005 as a response to US protests over his administration’s handling of the Andijan events.

The Uzbek-South Korean agreement regarding Navoi airport gives Karimov the ability to deny to Moscow that he has cut a deal with the United States. But at the same time, Washington stands to get what it needs--a transit base that can take over much of the load from the American base in Kyrgyzstan, which is scheduled to close this summer."

Though the deal is publicly a commercial arrangement between South Korean and Uzbek entities, the US Transportation Command in late 2008 conducted a market survey which concluded that the hub at Navoi could provide "an integrated commercial-based solution to meet US forces’ transportation requirements to Afghanistan." In late February, the Kyrgyz Parliament voted nearly unanimously to formally cancel the US lease to Manas, giving the President the power to serve US forces an eviction notice within 180 days--see Daily Sources 2/20 #4. In the beginning of February the Kyrgyz President, Kurmanbek Bakiyev, announced in Moscow that he had secured $150 million in aid from Moscow, the forgiveness of $180 million in debt, and $2 billion in loans. Kyrgyz nominal GDP in 2008 was about $5 billion. US annual aid was running at about $150 million, but mostly was directed to non-governmental recipients--see Daily Sources 2/5 #6. Navoi's use as a supply route for NATO forces came as KNOC signed deals to explore five oil and gas fields as part of an oil for infrastructure strategy being employed by the big four energy importers in Asia--China, India, Japan, and South Korea--see Daily Sources 5/12 #6. If Seoul is coordinating its energy security policy with US general security concerns in Asia that may well, in certain corners of the world, give it a considerable edge, in a way similar to, say, Total's decision to enter a new upstream venture in Venezuela in conjunction with China's CNPC--see Daily Sources 4/14 #6. Tynan's piece at EurasiaNet is well worth reading in full. (h/t FP Passport's Morning Brief.)

9. POPE CALLS FOR TWO STATE SOLUTION TO ISRAEL PALESTINE CONFLICT AND END TO GAZA EMBARGO, ANGERS EVERYONE

Howard Schneider at the Washington Post reports that Pope Benedict called for greater international pressure on Israel for the creation of a Palestinian state as well as urging an end to the embargo on Gaza. Scneider quotes the Pope as telling the crowd in Bethlehem, which is located in the West Bank:

"I call on the international community to bring its influence to bear in favor of a solution. ... I pray too that, with the assistance of the international community, reconstruction work can proceed swiftly wherever homes, schools or hospitals have been damaged or destroyed, especially during the recent fighting in Gaza. ... Please be assured of my solidarity with you in the immense work of rebuilding which now lies ahead, and my prayers that the embargo will soon be lifted."

Unsurprisingly, the pontiff managed to displease everyone, as Israelis condemned him for not making stronger expressions of regret for the Holocaust and Palestinians said that since he did not refer to the situation as the "Israeli occupation," he is a tacit ally of Tel Aviv. However, perhaps Benedict's overriding concern was to assure--in light of his speech in 2006 which highlighted a dialogue of Manuel II Paleologus saying that the spread of faith by the sword was irrational and contrary to God's will which offended so many and the recent televised meeting of US Christian soldiers in Afghanistan mulling over how best to proselytize given their situation--that Islamic community that Catholicism, insofar as he is its highest plenipotentiary, is not a sponsor of what many in the Muslim community regard as a Crusade.

10. MEND SAYS CIVIL WAR EMERGING IN NIGERIA

Platts reports that Nigeria's MEND released an email statement warning oil companies to remove personnel from the region as the conflict with the central authorities flared up.

"Oil companies operating in the region are advised to evacuate their staff within the next 24 hours to avoid them being part of the statistics of an emerging civil war.

All freedom fighters in the Niger Delta have been placed on alert to defend their positions and unleash a horrible toll on the oil industry and the Nigerian economy."

11. US RETAIL SALES DOWN 0.4% IN APRIL FROM MARCH

Jeff Bater at the Wall Street Journal reports that US retail sales fell by 0.4% in April from March, according to the latest data from the Commerce Department.

"Sales in March were revised down, decreasing 1.3% instead of 1.2% as previously reported. Sales rose in January and February, after sliding six straight months."

Import prices rose by 1.6% in April from March, completely due to the 15.4% increase in petroleum prices during that time. Excluding oil, import prices were down 0.4% in April from March, and 5.6% down in April from a year previous. Including oil, import prices in April were down 16.3% from the year previous, "the biggest one-year drop since the index was first published in 1982."

12. GOVERNMENT ONLY GUY HIRING, BUT GOVERNMENT IS BROKE, WILL IT GO AFTER PREDATORY LENDERS TO SHORE UP REVENUES?

Rebecca Wilder makes the point that the April jobs report showed that the government was adding a record number of jobs, but that this is taking place as state budgets generally are sharply in the red. She notes that federal jobs only account for 13% of all government jobs (as of April), whereas state jobs have a 24% share and local governments account for 64%. She links to Conor Dougherty's story at Real Time Economics which notes that revenue has declined in 45 of the 47 states which have reported their first quarter numbers. The WSJ helpfully provides a map:



Dougherty notes that the steepest decline in revenue was seen in Alaska, where first quarter revenues were down a whopping 74.1%, primarily on oil prices. In the meantime, Bruce Krasting at his blog notes that Goldman Sachs settled with the Massachusetts Attorney General for $60 million in a case which charged GS with predatory lending practices in Boston. Krastings notes:

"This means next to nothing for Goldman Sachs. However, a very dangerous precedent has been set. In the critical years 2005-2007 Goldman was ranked 15th in the League Tables for sub prime and Alt-A origination/securitization. Goldman’s management must be pleased as punch with that poor showing today. Those that ranked high on that list are no doubt consulting with their attorneys.

If Goldman gets its hand slapped for $60 million over 714 mortgages what does this mean for Countrywide Financial?"

(h/t Yves Smith at naked capitalism.)

13. FORECLOSURES UP, SPREADING TO SUBURBS, AND CORRELATED TO JOB LOSSES, WHICH ARE EXPECTED TO CONTINUE

On top of this news, Dan Levy at Bloomberg reports that US foreclosure filings rose to a record level for the second consecutive month in April, per data released from RealtyTrac today. 342,038 properties received an auction or default notice in April, as banks have increased their efforts to seize properties.

"Foreclosure filings jumped 32% from the year-earlier period, RealtyTrac said. Filings were little changed from March as some states delayed seizures. Ten states accounted for three-quarters of all foreclosures in April, with California leading the nation."

The culprit? "The inevitable result" of steep job losses. (California, incidentally, is one of the state's facing the worst budget shortfall this year.) And Crain's Chicago Business News notes that the foreclosure wave has headed out to the Chicago suburbs from the city proper according to data from the Woodstock Institute, perhaps indicating that the same is happening generally across the nation.

"Foreclosure cases filed in the first quarter jumped between 25% and 70% from the fourth quarter in DuPage, Will, McHenry, Lake and Kane counties, according to new data provided to Crain's by the Woodstock Institute, a Chicago-based housing advocacy group. Meanwhile, foreclosures fell 8% in Chicago, the first quarterly decline in a year.

Across the six-county Chicago metropolitan area, foreclosure filings rose 6% in the first quarter to 17,819, the highest one-quarter total since the housing crisis began in mid-2006.

The shifting locus of new foreclosures shows how the recession and job losses are supplanting subprime lending as the main driver of mortgage defaults, says Geoff Smith, vice-president in charge of research at Woodstock. While the first wave of foreclosures hit hardest in poorer city neighborhoods targeted by high-interest-rate lenders with loose credit standards, the latest round is striking middle-class areas where most borrowers qualified for standard-rate mortgages."

(I also came across this article due to Yves Smith's daily links.)



And on top of that, Phil Izzo at Real Time Economics records that the National Association of Realtors reported yesterday that the median single-family home price fell 14% in the first quarter from the year previous to $169,000. Izzo's post includes a useful sortable chart of the rate of change in home prices by region correlated to job losses for the same. "The data are sortable by city, state, price, percent change from a year earlier and unemployment rate." Michael Shenk, a Research Assistant at the Federal Reserve Bank of Cleveland plots a graph of the number of new single family home sales versus the median sales price for those houses:



(I wonder whether the average sales price would look worse than the median sales price.) Shenk notes:

"[T]he most positive sign for housing markets is that the home-price indexes are beginning to suggest that price declines may be slowing. Both the latest S&P/Case-Shiller indexes and the FHFA index indicate some stability in the 12-month growth rate of prices as of February. The FHFA index shows prices actually improving in February, while the Case-Shiller index, which is narrower than the FHFA index in terms of geographic coverage but also includes nonconforming loans which the FHFA index leaves out, simply has prices falling at a slower pace."

(h/t Mark Thoma at Economist's View.)

14. MIT COMMERCIAL REAL ESTATE INDEX SHOWS PRICES FELL 28% YOY

In the meantime, the MIT commercial property price transactions-based index developed by Professor David Geltner showed that transaction prices of commercial property sold by major institutional investors fell by 5.8% in the first quarter. The index is now down 21% on the year and 26% below its peak in mid-2007. Geltner commented:

"It's possible that the first quarter of 2009 was the nadir in market sentiment. Sales volume is down almost to nothing, as reflected in our demand index. The prices buyers are willing to pay fell a record 12% in the first quarter and is now 28% below a year ago and 39% below its mid-2007 peak."

(I also came across this story via Mark Thoma's blog.)

15. OBAMA ADMINISTRATION TO REGULATE DERIVATIVES

Stephen Labaton at the New York Times reports that the Obama Administration will ask Congress to pass legislation which would require that all derivatives instruments be traded via an exchange and be subject to tight regulatory oversight.

16. COMMERCIAL OIL STOCKS UNEXPECTEDLY FALL, SENATE TO CONSIDER STRATEGIC PETROLEUM PRODUCTS RESERVE

In a sharp reversal from weeks of stock builds, the EIA today announced that commercial stocks of crude oil fell by a whopping 4.7 million barrels in the week ended May 8 to 370.6 million barrels. Though the stocks are still well above the five year historical range for this time of year and at highs last seen in the early 90s, a Bloomberg survey indicated that the median expectation of analysts was for a one million barrel build. Gasoline inventories also fell by 4.1 million barrels, and are now in the middle of the five year historical range for this time of year, versus a split analyst expectation for builds and draws. Distillate stocks built by a million barrels to 147.5 million barrels and are completely counter-cyclical with 40.4 million barrels (37.7%) more in storage than this week last year.



Nick Snow at the Oil & Gas Journal reports that the US Senate Energy and Natural Resources Committee will consider a bill introduced by Jeff Bingaman (D-NM)--S. 967, the Strategic Petroleum Reserve Modernization Act of 2009--which would create a strategic petroleum products reserve. Europe maintains products reserves, but the US strategic reserve is entirely made of crude. There are two primary difficulties with creating strategic products reserves:

One: Petroleum products degrade in storage at relatively speedy rates; crudes do not.
Two: The specifications for each petroleum product in the US varies by state. So, for example, gasoline stored for use in Texas would meet the environmental regulations for Texas gasoline, much more lax than those in California.

Of course, in an emergency Washington has in the past relaxed specifications requirements to meet products shortages, so this second objection is more about the rationality of the US products market than a products SPR, per se.

Daily Sources 1/21

1. Feng at Information Dissemination notes that Ukraine is one of China's more important partners in terms of military cooperation. The Ukrainian defense minister recently made a week-long trip to China where they discussed military cooperation and Ukraine figures heavily in several on-going improvement projects by the PLA including naval aviation training and large transport. Also, according to Feng, China relies upon Kiev for a considerable portion of the engines that they use for planes, helicopters and chips. It is an interesting piece and worth a look. He asks whether Ukrainian inclusion in NATO would be predicated upon less cooperation with Beijing. I'm not in a place to know, but just now, despite the Shanghai Cooperation Organization, I'd suspect that developed world leaders are beginning to regard Beijing as a more responsible partner than Moscow.

Under that rubric, China would join Eastern European states as a kind of ring around Russia, meaning that Ukrainian participation in NATO wouldn't necessarily require limiting military ties to China. Such an outcome was, in my mind, unthinkable prior to the Russo-Ukrainian gas row, but now I think it possible, if not particularly likely. (It was unthinkable simply because in terms of raw power, the real displacement in terms of balance is coming from China, and that is hypothetically the change that needs to be rebalanced for.) Either way, strong NATO-China-newly independent states military relationships are possibly the preferred, perhaps even the likely, outcome for several of the newly independent states. Iranian participation in the SCO, though, would be a serious roadblock to that outcome. (Tehran applied for full membership in March 2008.) Meanwhile, Amanda Jordan at Bloomberg reports that German utilities informed the wire that they were receiving full shipments of gas today after Gazprom turned back on the taps yesterday. It is hard to understand how full deliveries could have been resumed so quickly had Kiev truly stolen all the so-called "technical gas."



Meanwhile, Karen DeYoung at the Washington Post reports that Army Gen. David H. Petraeus told journalists that deals for new supply routes for troops in Afghanistan have been agreed to with the relevant partner states. The supply route through Pakistan was complicated by its vulnerability to Taliban forces, allies inside Pakistan itself, and Pakistan's uneasy political situation. Petraeus declined to say where the transit route would be located, but recently concluded an eight day trip through Tajikistan, Turkmenistan, Kazakhstan and Kyrgystan and a potential route might actually originate in Russia and run through Kazakhstan and Uzbekistan to Afghanistan.

2. Rama Lakshmi at the Washington Post reports that US nuclear power corporations are, despite the nuclear cooperation pact between the US and India passed by Congress last year, hitting roadblocks in terms of arranging deals in India as per a business junket which visited with high-level officials in New Delhi last week.

"'The simple reality is that the French and the Russians are ahead of us. They know the sites that have been identified for them to set up business,' said R. Michael Gadbaw, a member of the delegation and a professor at Georgetown University Law Center. India has assured the United States that it will give at least two sites to US companies to generate a minimum of 10,000 megawatts of nuclear power. But Gadbaw said the US companies do not know where those sites are. Another hurdle is amending India's atomic energy law to recognize patents for private companies. An amendment to this law may take more than a year."

The nuclear deal with India and getting the Nuclear Suppliers Group to agree to exceptions for New Delhi was a tremendous foreign policy success for the Bush Administration--an Administration I am not often inclined to praise--and this particular story is probably no more than a hiccup in the process of building a tighter security and commercial relationship between India and the US. But if US priorities include a security ring in Eastern Europe, Central Asia and China--driven in part by domestic constituencies--designed to temper irrational ambitions in Moscow, how does that work from the perspective of New Delhi's security concerns--and thus those of their ex-patriots here in the US?

3. Henry Meyer and Ayesha Daya at Bloomberg report that Nouriel Roubini, Dr. Doom, one of a fairly small set of economists who saw the current crisis playing out the way it has ahead of time, believes that the US financial sector is facing credit losses of $3.6 trillion.

"If that’s true, it means the US banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis"

he said today at a conference in Dubai. Roubini said that Europe's financial sector was in the same boat, which suggests that the vast majority of global invested capital is in the hands of organizations which are bankrupt.

"Oil prices will trade between $30 and $40/b all year, Roubini predicted.

'I see commodities falling overall another 15-20%,' Roubini said. 'This outlook for commodity prices is beneficial for oil importers, it’s going to imply that economic recovery might occur faster, but from the point of view of oil exporters, this will be very negative.'"

I am unclear on why Roubini thinks the commodities complex will only suffer 15-20% losses if the bulk of liquid global capital is tied up in insolvent organizations.

It seems to me, as a non-economist, the primary reason that it is so hard to determine the direction of oil prices just now is because it is not clear how long this deflationary period is going to last. I think that we may be bumping along the bottom here in terms of oil price, but if there is a second wave of financial crisis, impeding the flow of money, making existing debt more painful to retire, indeed, making the simple act of exchange itself difficult, then I do not see why $30/b is the bottom. And in that vein, Ambrose Evans-Pritchard, of the perennially alarmist UK Telegraph, writes that he is "seriously alarmed" and that the slide in "sterling has turned disorderly."

"The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn."

But England cannot simply allow the banks to default, because it is a center of global finance, and if it does so, it will set off a global panic pushing the entire world into deep depression.

"England has not defaulted since the Middle Ages. There is a real risk it may do so now."

I distrust alarmist talk, generally speaking, but I do find this scarily convincing just now.

And part of the reason I find it convincing can be found in Brad Setser's latest post in Follow the Money, where he shows that the US deficit is increasingly be financed by very short term debt--which he reports is usually a sign of danger. Here's a graph of his which nicely illustrates what he is talking about:



If the US, as opposed to the worries of Evans-Pritchard, defaults, what does that mean for the dollar? The answer to that question is a possible line of thinking on price for oil.

4. Megumi Yamanaka at Bloomberg reports that sales of power to industrial consumers in Japan fell at an annual rate of 13% in December, the latest evidence of the scale of contraction in the manufacturing sector. It is the largest drop ever recorded--separate data on power sales to industrial customers was first compiled in 1972.

5. Ahmed Rouaba at Bloomberg reports that Algerian Oil Minister Chekib Khelil told the media that there were no plans for OPEC to meet prior to the scheduled March 15 conference. Alonso Soto at Reuters reports that today the Ecuadorian oil minister, Derlis Palacios, told journalists that Quito saw no benefit in cutting production again. Quito produces about 500 kb/d for export, and would lose money were it to be asked to cooperate with a further reduction in supply. IRNA news agency reported today that the Iranian oil minister, Gholamhossein Nozari, reiterated his argument that OPEC could not rebalance the market alone, and that non-OPEC producers would need to cooperate. The problem, of course, with calls from Tehran for non-OPEC cooperation is that no data shows that Tehran itself is cooperating with the OPEC mandated cuts, but instead that it is cheating and continuing to produce at pre-December 17 levels.

6. Last week there was a rash of analysis about the impending implosion of the Mexican government, all across the ideological spectrum. What I didn't realize was that the stories were driven by the release of a report by the US Joint Forces Command on worldwide security threats. Diana Washington Valdez at the El Paso Times reported on the 13th that the "command's 'Joint Operating Environment (JOE 2008)' report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico." In the poll of readers that the paper hosted, out of 24,812 people, 63.27% thought that the Mexican state could collapse in 2009, because "the drug lords are taking over." Indeed, and the proximate cause is the drug lords. But there hasn't appeared, in any media that I caught, any discussion of how the ultimate cause is likely at least in part America's drug prohibition and reluctance to prosecute consumption, focusing instead on distribution. Nor, in any foreign affairs analysis that I have seen, has anyone discussed the notion that America's second Prohibition is exporting instability to its neighbors, South America, South Asia, and Central Asia. The JOE 2008 can be found here. I have yet time to read it, of course, but it should be interesting.

7. Benoit Faucon at Dow Jones Newswire reports that analysts are arguing that Israel's offensive in Gaza will have an effect upon its status as an energy corridor--that is the attractiveness of the trans-Isreal pipeline which has endpoints at the Mediterranean port of Ashkelon to the Red Sea port of Eilat.



(The map above has little relationship to the actual path of the pipeline, it just aims to illustrate where the nodes connected by the pipeline are located.) The pipeline has a 400 kb/d capacity, and generally oil is shipped from the Black Sea or Ceyhan to Ashkelon, piped to Eilat, and then shipped on from there. The pipeline apparently has a potential design capacity of 1.2 mb/d, but development has been complicated by the vulnerability of the port of Ashkelon to Hamas rockets. The conflict with Hamas, however, has damaged relations with Turkey, with which Tel Eviv wants to connect the trans-Israeli pipeline. Worth reading in full.

8. Nick Snow at the Oil & Gas Journal reports that the DOE awarded the first contracts to directly purchase crude since 1994, and the SPR will take on roughly an additional 6.16 million barrels of oil from May 2009 - January 2010.

9. Yves Smith at Naked Capitalism concludes if the National Association of Home Builders is right, then "housing price will fall to 53% of their peak level, so the decline through this year will be 47%."

Daily Sources 1/7

1. Yves Smith at Naked Capitalism posts on a series of reports with very gloomy readings on China's economic outlook. The People's Bank of China has said that it will up its scrutiny of "abnormal" changes in foreign currency flows in and out of the country. This comes as reportedly investors who had put money in China recently in the anticipation of an appreciating RMB are taking their money out as it has become clear that Beijing will pursue a policy of depreciation or at least maintaining the current price band against the dollar. The country is also seeing a reversal in foreign direct investment--where physical assets are held--as multinationals seek to increase their cash on hand. And the Beijing Bureau of Statistics has reported a 52.4% drop in square meters of real estate sold in from January to November over the same period from 2007. Worth reading in full.

2. Jason Clenfield at Bloomberg writes that Richard Iley, an economist with BNP Paribas, published a report today which argues that "The scale of the global policy response -- monetary and fiscal -- should ensure the recovery [of the Asian economies] is more V than U-shaped." Iley forecasts that Asia, excluding Japan and China, will grow at a rate of 1.4% in 2008 followed by a rate of 4.1% in 2008. He forecasts that China grew by 9.3% in 2008, and will expand by 7.7% in 2009 and 8.1% in 2010.

3. The Oil & Gas Journal reports that Reliance, having started its 580 kb/d refinery in Jamnagar on December 25, is now synchronizing and initiating its secondary units. Reliance says it expects the refining complex to reach full capacity in due course, but will have a slow ramp up due to slow products demand. The Jamnagar refining complex is now the largest in the world with a total refining capacity of 1.24 mb/d.

4. Eric Watkins at the Oil & Gas Journal reports that PetroVietnam plans to sell a 49% stake in its Dung Quat refinery--Vietnam's first--scheduled to go online in February. "The Vietnamese firm, which plans to give preference to international partners committed to supplying oil to the refinery, is expected to begin talks with BP PLC next week." The refinery has a capacity of 130 kb/d and was thought to be set to run most of the Bach Ho crude stream (one of Vietnam's largest crude streams.) (see Daily Sources 12/24 #11)

5. Pamela Constable at the Washington Post reports that during his visit to Afghanistan yesterday Pakistani President Asif Ali Zardari the foreign ministers of the two countries signed an agreement to develop a "joint comprehensive strategy for combating terrorism." Zadari pledged to "closely cooperate" with Karzai in fight against militant non-state actors.

6. Christian Schmollinger at Bloomberg reports that refiners in Singapore and Taiwan told the media that the National Iranian Oil Company has informed them that it will reduce supply to them under long term contract by 14%. In and of itself this doesn't mean much, especially given that they could provide other volumes outside of the long term contract and we don't know the initial volumes. Further, Iran produced 232 kb/d more than its obligations under the November OPEC supply allocation cuts in December, and thus considerably more than its obligations under the December allocation cuts. That said, Alex Lawler at Reuters reported yesterday that a survey of oil companies the media company conducted indicated that OPEC-11 produced 27.36 mb/d in December, a bit more than the production allocations for November called for in the October 24 meeting in Vienna of 27.306 mb/d. The OPEC-11 supply target set on December 17 is for 24.845 mb/d, or roughly 2.52 mb/d less than the cartel produced in December.

7. Taghreed el-Khodary and Isabel Kershner at the New York Times reports that Israel pressed on with its operation in Gaza after allowing a brief respite for humanitarian aid to enter to region.

"In Paris, Mr. Sarkozy, who toured the region earlier this week in a diplomatic drive for a cease-fire, issued a statement welcoming what he called 'the acceptance by Israel and the Palestinian Authority' of a cease-fire plan put forward Tuesday evening by President Hosni Mubarak of Egypt in the resort of Sharm el-Sheikh."

But, if I understand correctly, the Palestinian Authority is not exactly Hamas.

8. Benjamin Netanyahu has an op ed in the Wall Street Journal entitled "Militant Islam Threatens Us All: Hamas rockets have the same terror goal as Hitler's blitz."

9. Sabrina Tavernise at the New York Times reports that Azerbaijan has begun enforcing a law that bans foreign companies from broadcasting over the national FM frequency. This follows the news that the State Department made a statement on December 30 deploring Baku's decision not to renew the broadcasting licenses of RFE/RL, Voice of America, and the BBC. (see Daily Sources 12/31 #7) "Foreign companies are still permitted to broadcast on shortwaves, satellite and cable, according to Ali M. Hasanov, an official in Azerbaijan’s presidential administration."

10. Philip P. Pan at the Washington Post reports that shipments of natural gas via Ukraine came to a halt today, with Russia accusing Ukraine of shutting down the pipelines which supply Europe with 20% of its natural gas requirement and Ukraine accusing Russia of cutting off supply altogether.

"Chris Weafer, chief strategist at Uralsib, an investment bank in Moscow, said Europe needs to act as a mediator in the dispute because Russia and Ukraine 'have reached the point they're entrenched in their positions, and it is almost impossible for either side to back down.'"

The FT had a nice graphic showing how dependent on Russian natural gas a variety of European countries are:



RIA Novosty reported today that Gazprom accused Ukraine of stealing more than 86 million cubic meters since the beginning of 2009. At $250/tcm that would come to $2.15 million--not exactly big numbers in the natural gas business, but substantial. Gazprom has sought to assure Europe that they are available for negotiations with Ukraine, but that Kiev does not appear to be willing.

Kateryna Choursina and Lyubov Pronina at Bloomberg report that Gazprom CEO Alexei Miller said yesterday:

"'If Ukraine fully stops delivery of gas to the west, for consumers in central and western Europe, we do not see sense in supplying gas to the border with Ukraine' ... . Miller said Gazprom would hold talks with European partners in Brussels tomorrow."

Meanwhile, Isabel Gorst, Roman Olearchyk, Delphine Strauss and Chris Bryant at the Financial Times report that Oleg Dubyna, chairman of Naftogaz, told reporters that he had spoken to Miller and would be flying to Moscow for talks tomorrow, January 8.

"Brussels on Tuesday called for the immediate resumption of gas supplies to Europe and urged the two sides to resume talks immediately. 'Without prior warning and in clear contradiction with the reassurances given by the highest Russian and Ukrainian authorities to the European Union, gas supplies to some EU member states have been substantially cut,' the EU said in a statement."

The German economics minister, Michael Glos, urged the two sides to resume talks on Tuesday, emphasizing that both nations' commercial reputation was being undermined by the debacle. Meanwhile, Platts reports that Stephen Hadley, the US National Security Adviser, said in prepared remarks at the CSIS today "A Russia that continues to threaten its neighbors and manipulate their access to energy will compromise any aspirations for greater global influence."

12. Farangis Najibullah at RFE/RL reports that beginning January 1, Uzbekistan began charging its neighbors Kyrgyzstan and Tajikistan $240 per thousand cubic meters (tcm) of natural gas, up from last year's price of $145/tcm. ($240/tcm roughly corresponds to $6.80/MMBtu or $39.43/b on a Btu basis; $145/tcm ~ $4.12/MMBtu ~ $23.82/b on a Btu basis.) Gazprom, which already takes much of Uzbekistan's natural gas output, reportedly has agreed to pay more than $300/tcm for Uzbeki gas in 2009 (~$8.50/MMBtu ~ $49.29/b on a Btu basis.) "LUKoil has said it would invest $5.5 billion in gas projects in Uzbekistan by 2015."

13. Eurointelligence reports that FT Deutschland has the story that Angela Merkel has a plan to set up a €100 billion (~$134.9 billion) fund to ensure that German industrial groups will have access to credit.

14. Edward Hugh at Fistful of Dollars has a detailed survey of the situation facing the Spanish economy, which he argues is in a serious downturn, not just a housing slump.

"So my argument is that the disinflation which is being produced by the negative energy price shock, in the context of very, very weak internal demand could in fact produce a negative feedback cycle of price reductions which extend well beyond food and energy."

Long, but worth reading if you have the time.

15. Bob Willis at Bloomberg reports that ADP Employer Services released a report today suggesting that 693,000 people were cut from employer payrolls in December. "The ADP report is based on data from about 400,000 businesses with approximately 24 million workers on payrolls." Meanwhile, WTVN Ohio reported yesterday that the state Department of Job and Family Services is being overwhelmed by people seeking information about unemployment benefits.

"Spokesman Brian Harter said Tuesday the section of the state's web site that enables people to make claims online is down.

Harter said the telephone hot line generally receives about 7,500 calls a day, but has been getting about 80,000 each of the past two days."

New York and North Carolina are reportedly experiencing similar difficulties.

16. Bob Lawless at Credit Slips reports that the number of chapter 11 petitions rose 61.5% in 2008 year over year, outpacing the total number of bankruptcy cases which rose at an annual rate of 32%. (In the comments, Lawless argues that about 1 in 5 chapter 11s are filed by individuals, most of whom he suspects are there because of business-related problems.) (h/t Yves Smith)

17. Kerry E. Grace at Real Time Economics reports that the latest Fitch Ratings Credit Card Index has charge off rising in December to 6.8%, nearly one-third higher than in 2007. Fitch expects the rate to hit 8% in 2009. (If I understand correctly, charge offs are credit card debts that the credit card company has written off as bad loans.) Given that US GDP is 70% comprised of consumer spending, a full one third rise in credit card debt default by consumers would seem to be very bad news, indeed.

18. In another bad indicator for the world economy, Julie Creswell at the New York Times reports that Alcoa, one of the world's largest aluminum smelters, plans to eliminate 13% of its employees, or 13,500 jobs, and cut output by 18% in 2009. Aluminum demand has crashed, most significantly in the automotive and consumer sectors. Klaus Kleinfeld, CEO and President, estimated in a conference call with analysts October that one-third of the world's aluminum capacity was "under water" and that "one half" of the industry was losing money at the current market price.

19. The Oil & Gas Journal reports that ExxonMobil is planning to spend $1 billion on three refineries to expand their total capacity to produce ultra low sulfur diesel (less than 15 ppm sulfur) by 6 million gallons per day (142.9 kb/d). "The company is adding new units and modifying existing facilities at its 567 kb/d Baytown, Tex.; 503 kb/d Baton Rouge; and 305 kb/d Antwerp, Belgium, refineries." The modifications and additions are expected to be complete by the end of 2010 and are clearly targeted to the European diesel market.

20. Eileen O'Grady at Reuters reports that T. Boone Pickens told a gathering at Rice University that oil prices will return to $100/b by the end of 2010 in response to a global economic recovery. He also said that oil prices in the $40/b range are "not going to be around much longer." He argues that if the US continues to rely on foreign sources for 70% of its oil requirement, then prices could reach $200-300/b in another 10 years.

21. Justin Fox at the Curious Capitalist has further anecdotal evidence that lower gasoline prices has bolstered the sales of SUVs and pickup trucks, especially pick up trucks. Also some evidence that the potential bankruptcy of the car companies doesn't appear to be deterring potential customers, though it's hard to say.

22. Matthew L. Wald at the New York Times reported yesterday that Continental today will test fly a Boeing 737 on jet fuel manufactured from algae and jatropha oil. (Jatropha is a fruit bearing tree that is the basis of much of India's biofuels production plans.)

"Air New Zealand flew a four-engine Boeing 747 last week with one engine on a 50 percent biofuel mix, and Japan Airlines will do the same in a few weeks as part of a series of tests including the flight on Wednesday."

The flight will last for two hours and start and end in Houston.

"The three test flights involved several airlines; the Boeing Company; three engine makers, Pratt & Whitney, Rolls Royce and General Electric; and the fuel maker, UOP, a subsidiary of Honeywell. The companies will use the data to try to get the fuel certified as a drop-in replacement, meaning no changes would be needed to engines or other plane parts, or to the fueling infrastructure at the airports."

23. Alaric Nightingale at Bloomberg reports that Jens Martin Jensen of Frontline told her in a telephone interview that there are inquiries from oil traders for the charter of 5 to 10 very large crude carriers for storage purposes. VLCCs have a capacity of about two million barrels. There are already approximately 25 VLCCs being chartered for storage purposes, an additional ten charters would bring the potential amount of crude stored at sea to about 70 million barrels, or 82.4% of daily global oil consumption (assuming 85 mb/d). 35 supertankers would represent 7% of the world's VLCC fleet. "A supertanker would cost about 90 cents a barrel a month for storage depending on the length of the rental, according to data last month from shipbroker Galbraith’s Ltd." Traders would be renting the ships to capture profits from the giant contango of 2008. (see my post on The Giant Contango of 2008.) Using yesterday's closing price, the cost of crude for delivery three months out beyond crude for delivery next month is $8.21/b. Thus if you purchase now and store for four months, you would be locking in a profit of $4.61/b, two million barrels of that profit is $9.2 million. The contract to delivery oil a year out is $15.12/b more expensive than the contract for front month delivery. Generally this would put upward pressure on the near month contract as there is extra demand and downward pressure on later delivery month contracts as there is less. But storage tanks are nearly full everywhere, which means there is little physical capacity to store which has limited the upward pressure on price.

24. The EIA's This Week in Petroleum reported that for the week ended January 2 crude oil stocks grew by a whopping 6.7 million barrels to 325.4 million barrels, well above the historical range for this time of year. Analysts expected stocks to rise by 800 kb on average, according to a survey by Bloomberg. Gasoline stocks grew by 3.3 million barrels to 211.4 million barrels and are in the middle of the historical range. Bloomberg's survey showed that analysts had expected a one million barrel build. Distillate stocks grew by 1.8 million barrels to 137.8 million barrels, near the top of the historical range. Analysts had expected a build of 1.1 million barrels. Taken in isolation this news should put strong downward pressure on price, and at the time of my writing CL was trading at $43.30/b, down $5.28/b or 10.9% on yesterday's close.

Daily Sources 9/2

1. The WSJ has an editorial praising Japan's Prime Minister Fukuda, but pointing out that his resignation yesterday makes the outlook for the world economy a bit more uncertain.

2. Jay Deshmukh at the AFP reports that the Iraqi cabinet has cleared a deal for China to develop the Al-Ahdab oil field at $6/b service fee. The service contract builds on the original 1997 deal China struck with Saddam Hussein. Production for the first three years is slated to be 25 kb/d, or $54,750,000/year in service fees to China.

3. In his September 1st posting on Informed Comment, Juan Cole writes that the al-Maliki government is mounting a campaign against families that have moved into homes vacated via ethnic cleansing in Iraq and having a hard time convincing 200,000 Iraqi refugees in Jordan to return. In the post, he also updates story of tensions between the Kurdistan Regional Government and al-Maliki in Khanaqin in Diyala. Apparently, al-Maliki has also threatened any Peshmerga forces discovered operating in Iraq proper with prosecution.

4. Reuters reports that purchasers of Saudi Arabian crudes expect the country to lift the prices on its heavy sours and reduce the prices on its light sweets. This is likely to make folks in Iran and Venezuela happy, but might upset some folks in Nigeria. It is a response to the change in crack spreads, new sophisticated refining capacity has increased the demand for heavy crudes in Asia which, in turn, reduces the demand for light sweets, which sell at a premium to heavies.

5. Saul Hudson at Reuters reported that Caracas and other "major parts" of Venezuela were hit by a power outage yesterday. Chavez nationalized the largest private electricity company last year.

6. AFP reports that Iran has renewed its call for OPEC to discuss quota busting (member countries producing more than the OPEC agreed-upon production quota) in upcoming September 6th--this Saturday's--meeting.

7. On Sunday, Atul Aneja of India's The Hindu reported that Iran’s Foreign Minister Manouchehr Mottaki put the blame for the Georgia imbroglio squarely on the shoulders of the Georgian government.

8. Philip Sherwell and William Lowther of The Telegraph reported on Sunday that US intelligence fears that Russia is planning to sell its S-300 missile defense (ground to air) system to Iran, should NATO continue to expand with Georgia and the Ukraine. The Telegraph, it should be noted, is pretty yellow press, just look at the totally unrelated headline "Russia threatens to supply Iran with top new missile system as 'cold war' escalates," and so, everything stated should be taken with a grain of salt, to say the least.

9. The Associated Press reports that Putin complained of the ship build up in the Black Sea today.

10. Philip P. Pan and Temo Bardzimashvil at the Washington Post report that the EU has backed off on threats to impose economic sanctions on Russia as Russia appears to have agreed to move its troops back to the pre-Saakashvili attack positions.

11. Putin announced an agreement to build a new natural gas pipeline through Uzbekistan to move gas from Turkmenistan and Uzbekistan to Russia's pipeline network, according to Catrina Stewart of the Associated Press. (Readers should be cautioned that these announced "agreements" often don't come to fruition, and, if they do, tend to take a long time to do so. Chinese announcements are an exception, as they usually come to pass quickly, unless the deals are with politically significant countries, like the US, Iran, or Russia.)

12. Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, says that financial institutions must be allowed to fail, as per Bloomberg.