Spot Life CL Jan 09

Below find the reported causes for the changes in price of oil for the first 7 days that CL Jan 09 has been the front month contract. The story is mostly the economy and plenty of news that the downturn in China will be worse than expected. (Including from the Chinese themselves.) US consumer spending down 1%. Everywhere manufacturing is contracting. Contango continues. 7.3 million barrel build in commercial stocks in the US ... refiners are taking out tankers to store the stuff. The rest is OPEC, it's decision not to cut production allocations and the loud determination to cut soon. They ask Russia to join. (Ever get the feeling that they're yelling: "Oh don't throw me in that briar patch! After all, much of OPEC's competition in the form of marginal production is taking much worse a bath than they.)



NYMEX light sweet versus the euro:



Oil is still in an incredibly steep contango ("super contango") all along the curve and has even widened some. The differential between the front month (CL Jan 09) and last month (CL Dec 2016) contracts is $37.04/b or 78.9% of the front month price! The differential between the front month and a contract one year out (CL Jan 10) is $13.20/b or 28.1% of the front month price!



The Commitment of Traders Report as of November 25 doesn't indicate market direction. Open interest (the number of futures--and options--contracts on the market) is pretty much unchanged from the week prior.



I decided to take a look at the differential between heavy sours and sweet light to see if that would give us a better sense of the market's direction. I looked at the differential between the average spot price of WTI at Cushing for each week minus the average price each week for three heavy sour crudes as determined by the EIA.

(WTI is a sweet light crude, which is easy to refine into profitable products. Heavy sour crudes require sophisticated refineries in order to yield enough profitable products at specification. A specification is the legal requirement for any petroleum product--driven by performance or environmental concerns--in any given country. Light sweet curdes therefore typically sell at a premium to heavy crudes.)



The spike in the differential at September is from Hurricane Ike, which eliminated more than 2 mb/d in US demand. But, if you look at the differentials versus the price of WTI, you'll notice that at the price peak, they were much smaller percentages of the cost of light sweet than they are now. Khafji, which is produced in the Persian Gulf with API 28 and 2.85%wtS (% weight sulfur), had a differential of $6.50/b for the week's prices ending July 4 and a $4.24/b differential for the week ending November 21. That translates into a 4.6% differential in July and an 8.1% differential in November.

But the real story looks to be the differential between WTI and Maya, a major Mexican crude stream with an API of 22 and 3.3%wtS. The differential at July 4 was an average of 13.2% and an average of 31.1% for the week of November 21. In absolute terms they are not so different, moreover. Production is down in Mexico, but it seems that there are not many alternative lifters to the US. This suggests to me that there is very little demand out there, which is what everyone has been saying of course, but is another data point to draw from.

Daily Sources 10/16

1. Yves Smith at Naked Capitalism has a series of links to articles investigating the effect the inability of cargo shippers to secure letters of credit is having on the shipping industry and, by extension, international trade. Evidently yesterday Tom Albanese, Rio Tinto’s CEO, provided more anecdotal evidence that China's demand for commodities is slowing down.

Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young shipbrokers, said: “You face continued freezing of activity because of the problems with credit in particular.”

Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

This is resulting in US cargos of grain sitting in buyers' ports waiting to offload because importers are unable to obtain letters of credit with which to purchase the cargoes. It seems to me that if this becomes a real problem, where people are facing hunger as a result, the banks will see various governments getting involved in this business. I can't imagine this would be the financiers' goal, given that this is an especially low risk--as I understand it--part of their business operations. It doesn't make a hell of a lot of sense.

2. Michael Steen at the Financial Times reports that the Unico Banking Group, which represents eight banks with 21% of Europe's retail banking market, said Wednesday that they will resume unsecured lending of up to three months at LIBOR. Evidently calls for the private sector to begin making good on the efforts of the central banks to provide security are having an effect.

3. Shobhana Chandra at Bloomberg reports that US industrial production fell 2.8% in September.
This was the biggest decline since 1974. For the third quarter, industrial production fell 6%, which is the most seen since 1991. However, analysts basically think the data represents a decline in production brought on by Hurricanes Ike and Gustav. Further mitigating news is that consumer price inflation was flat last month.

4. Nelson D. Schwartz at the New York Times reports that the Swiss National Bank extended a $60 billion lifeline to UBS.

"$31 billion in American assets will be taken over by the Swiss National Bank, much of it in the form of debt linked to subprime and Alt-A mortgages, in addition to securities linked to commercial real estate and student loans. An additional $18 billion worth of non-American assets will also be transferred.

The Swiss government will also provide UBS with 6 billion francs in exchange for bonds convertible into a nonvoting 9 percent equity stake."

Credit Suisse turned down the offer of government help, preferring to raise capital via private funding sources. Credit Suisse plans to raise $8.75 billion and potential creditors include the Qatari Investment Authority. The government also announced that it plans to increase its maximum deposit insurance shortly.

5. Anthony Faiola and Karen DeYoung at the Washington Post report that Pakistani President Asif Ali Zardari arrived in Beijing Tuesday for a four day visit. The President is there partially to see if it can secure a loan to cover upcoming purchases of food and oil to the country, given that it only has enough reserves left for a month's worth. A request for forebearance on petroleum import payments from Saudi Arabia made in July have so far gone unanswered. Zadari has said he needs $100 billion in credit and, as I have pointed out in an earlier post, he is known in his home country as Mr. 10% for the corruption charges levied against him. Given the propinquity of Pakistan to China, Beijing may feel more obliged to do something to shore up the situation in Pakistan. However, the fact that President Zadari feels the situation is secure enough to allow international travel suggests a level of stability inconsistent with imminent state collapse.

6. Xinhua reports that the two-day EU summit has produced draft conclusions which include a commitment to strengthening energy supply security. More specifically, the draft endorses efforts to speed up energy infrastructure connections in the Baltic. The Union will seek to further develop its ties to producer and transit nations. A meeting of Caspian Sea producers and transit countries will be organized by the Czech Presidency of the Union next spring. Platts reports that the European Biodiesel industry today asked the EU to require the detailed registration of all biodiesel imports from the United States. The industry claims that the EU imported 900,000 tonnes of biodiesel from the US last year, or about 18.4 kb/d.

7. Kate Dourian at Platts reports that OPEC has moved up its emergency meeting from November 18 to October 24. Ahmed Rouaba at Bloomberg reports that OPEC President and Algerian Oil Minister Chakib Khelil told journalists that the "ideal" price for crude is between $70-90/b. Iraqi Oil Ministry spokesman Assem Jihad said that $100/b was a fair and reasonable price for both producers and consumers, as per the AP. Alonso Soto at Reuters reports that Ecuador's Oil and Mines Minister Derlis Palacios said today that OPEC should cut production. Ecuador, though tied to Chavez politically, has generally taken a moderate stance on price recently. Maher Chmaytelli at Bloomberg reports that the Qatari Oil Minister Abdullah al-Attiyah said OPEC will cut production by 1 million barrels or more come October 24. Qatar is generally not hawkish on price and this echoes PFC Energy's prediction yesterday. Iraq joins the list of OPEC countries that have reported they will need to revisit their 2009 budget today. Sinan Salaheddin at the Associated Press reports that the Iraqi Finance Ministry said yesterday that it will likely have to scale back its $79 billion budget on lower oil prices. This comes on top of political rhetoric in the US regarding the costs of the Iraqi war. Taken in isolation these items should provide some support to the price of oil. The growing spread between front month and December 2016--at around $14/b last I looked--may partially be explained by these OPEC signals. Ole Petter Skonnord at Reuters reports that non-OPEC producer Norway announced today that it has no plans to reduce output on the declining price.

8. Juan Forero at the Washington Post reports that Chavez has ramped up the fear factor in preparation for upcoming elections.

Documentaries on the CIA-supported coup of Chile's socialist president, Salvador Allende, in 1973 are daily fare on Venezuelan state television, with pundits warning that the same could happen here. One recent program included excerpts of the 1997 Barry Levinson film "Wag the Dog," in which a Washington spin doctor hatches a war. Carlos Lanz, an associate of the president, provided commentary, explaining that the film showed how the United States topples governments.

The Russian naval maneuvers are seen as an effort to warn off an impending US invasion of the country. Pretty far-fetched. I guess it is fair to say it is straight out of Bush's playbook.

9. RIA Novosti reports that the Russian Federal Antitrust Service (FAS) announced it would take legal action against the five largest Russian crude producers unless they reduced their product prices inside the country. I am not clear on whether the FAS is working at cross-purposes to the Kremlin here or not. It is an interesting item. Russian product prices are slightly below market rate--or they were a few months ago.

10. The EIA reported that crude oil stocks grew by 5.6 million barrels for week ended October 10. This is at the middle of the historical range and against analyst expectations of a 3.1 million barrel build, as per Platts' survey Tuesday. Gasoline stock grew by 7 million barrels versus analyst expectations of the same 3.1 million barrel build. Though stocks are still below the historical average for gasoline, they are much closer to the historical band than they were in the last two weeks where stocks dropped to their lowest levels since 1967. Distillate stocks dropped by 0.5 million barrels and are slightly below the historical average. Taken in isolation, this should put downward pressure on the price of oil.

CL Nov 08 Spot Life (wk 2)

The reported causes for the seven day's worth of trading is pretty much all about the financial crisis. Two things worth noting in terms of watching the traditional fundamentals of oil pricing.

1) OPEC appears very nervous. Nearly every day another OPEC governor or other government representative makes public remarks about re-balancing the market. Saudi Arabia remains the decider, but supply capacity may be tight enough even in the declining demand environment that another member could influence price by cutting production significantly. Certainly if all members but Saudi Arabia decided to do so they would have an effect. They are unlikely to do so, and many analysts think that the demand destruction is so substantial in the OECD (and with supply coming online from Baku-Ceyhan the shut in of which was volumetrically similar to the hurricanes in the Gulf) that OPEC will have moved to protect prices far too late. Hard to tell, but it looks like most ministers are very upset and that a serious cut might ensue come November 18th at the emergency meeting.

2) There is a large movement of jet fuel from Asia to the West. That means less demand for it in Asia which should be an indicator of a significant drop in demand for Asian products from the rest of the world. There are reports of considerable drop in demand for product imports from China. But that comes on top of a 46% month over month increase in demand for crude imports. Hard to figure what that will mean for the market as a whole, though it seems sentiment at this time is still negative on crude prices (and the commodity complex as a whole.)



CL Nov 08 contract vs the Euro Dollar interbank exchange rate:



Forward differentials are widening even further, from about $6-7/b between the front month and December 2016 to about $10/b. There might be a technical trading reason for this ... it might suggest that resistance to the price decline is building, on the other hand.

Daily Sources 10/10

1. Mark Landler and Edmund L. Andrews at the New York Times report that leaders worldwide, which will be in Washington for the IMF and World Bank meetings this weekend, are beginning to consider a wholeheartedly international approach to the financial crisis. The G7 meet today.

2. Nigel Lowry at LLoyd's List reports that industry representatives at a shipping conference last week acknowledged that they might not be able to meet their financial obligations to their creditors in a timely fashion. They urged the banks to be patient. In laymen's terms I believe that means they urged the banks not to foreclose. This comes on the news yesterday which send shockwaves through the shipping community that a bulk carrier booked a cargo from India to China at cost of fuel and docking fees. Sandra Tsui at Lloyds List reports that brokers expect more deals like this in coming months. That's a pretty big sign that demand for shipping--and thus exports--have dropped precipitously of late. Indeed, the AP reported that the US trade deficit was slightly down in August on the back of lower oil prices.

3. Alex Nicholson and Torrey Clark at Bloomberg report that Russia will expand its bailout to not only take equity in it banking system, but in other domestically based corporations.

4. Peter Finn at the Washington Post reports that Secretary Gates reached a compromised with NATO defense ministers which would allow NATO forces to target opium production in Afghanistan. Gates believes the industry needs to be targeted in order to break the back of the Taliban in that country. On the face of it that makes sense. As Cicero pointed out in the Philippics, "Endless money forms the sinews of war." The compromise allows some NATO members to opt out of the strategy. The compromise also requires a strike on a particular production area to be requested by the Afghan government.

5. Elaine Sciolino at the New York Times reports that the IAEA are investigating whether a rogue Russian scientist has assisted Iran with nuclear detonation technology which has no use consistent with conventional arms. The agency's suspicions were stoked by a document they recently acquired.

"The original, Farsi document is described by officials familiar with it as a detailed narrative of experiments aimed at creating a perfectly timed implosion of nuclear material. According to experts, the most difficult challenges in developing nuclear weapons are creating the bomb fuel and figuring out how to compress and detonate it."

The article makes clear that the scientist was not operating at the behest of Moscow.

6. In the midst of the avalanche of news, I missed the important news caught by ZAMIN on October 6th, that Iran's Ayatollah Yazdi met with Iraq's Ayatollah Sistani this week. Ayatollah Yazdi is considered a mentor of Iranian President Ahmadinejad, with strong ties, therefore, to the Iranian Revolutionary Guard. He is also on the Assembly of Experts, the organization in Iran which more or less vets candidates for the post of Leader of the Revolution aka Supreme Leader. Ayatollah Mohammad Taghi Mesbah Yazdi is possibly one of the most important clerics in Qom--the most important religious center in Iran. Ayatollah Sistani is the most important cleric in Iraq, based in Najaf, the most important religious center in Iraq and historically the base of Islamic clerics--like Ayatollah Khomeini--criticizing the regime in Tehran. Sistani has been critical of the Iranian theocratic model of the role of the "supreme jurisprudent;" Yazdi is one of the most important religious authorities which supported Khomeini's model during the course of the Iranian Revolution. It looks as if sovereignty in Iraq is in the process of being transferred to the local authorities--in this case the Shia parties. But the differences between the various Shia parties in Iraq and the government in Iran are many. I cannot speculate as to the actual substance of the conversation the two clerics might have had, but I think it is fair to conclude it was official government talks from the perspective of Tehran. It is fair to conclude that Tehran has something to fear from Sistani (I gave an analysis of this dynamic in an earlier post), who could present a politically potent rallying point against the regime there.

In a related piece of news, Barry Schweid at the Associated Press reports that formers Bush officials on Tuesday gave a summary of the strong support Tehran gave the US in its response to 9/11.

Iran was "comprehensively helpful" in the aftermath of the 9/11 attack in working to overthrow the Taliban and collaborating with the United States in installing the Karzai government in Kabul.

These remarks were made at the forum hosted by the New America Foundation. The notion of a "grand bargain" with Iran was aired again at the conference.

In a follow-up story to my snarky--I admit--commentary on the comments by the Managing Director of Qeshm Energy in Amsterdam yesterday, Roshanak Taghavi at Dow Jones reports that Iran has struck a deal with Crescent Petroleum of the Sharjah Emirate in the UAE to pipe gas there at the price of $5/MMBTU. At 5.8 MMBTU per barrel of crude, on a BTU basis that comes to about $29/b which may seem like a huge discrepancy but actually is a pretty high price for a natural gas deal of this sort. "The price offered by Crescent is almost four times what the U.A.E. pays for gas from Qatar. And it is more than five times the average weighted regional gas price for the Middle East and North Africa." (As a side note, just now the front month price for delivery of natural gas at Henry Hub--the delivery point for pricing on the NYMEX--is $6.825/MMBTU.) Corruption charges by Ahmadinejad in September might still scuttle the deal, but he has indicated that he would endorse it if it was at regional prices. Given that this deal is much better than seen elsewhere in the region, there is a chance it will go forward. First exports could begin in a few months.

7. David Jolly at the New York Times reports that the IEA (Paris-based International Energy Agency) has reduced its forecast for world demand in 2008 by 240 kb/d 86.5 mb/d, or an 0.5% increase from 2007. It also cut its demand forecast for 2009 by 440 kb/d to 87.2 mb/d or 0.9% demand growth from 2008. The EIA (US Energy Information Agency) on Tuesday released its new Short-Term Energy Outlook which forecast a 300 kb/d growth in energy demand in 2008, a reduction of their previous month's forecast by fully 350 kb/d. The forecast is now for 86.1 mb/d in 2008 and 86.9 mb/d in 2009. The EIA warned that:

"However, unless the global economy is weaker than anticipated, EIA expects that the call on Organization of the Petroleum Exporting Countries’ (OPEC) crude oil will exceed OPEC crude oil production over the next 6 months."

Still, taken in isolation, the new forecasts should put downward pressure on the price of oil. So far it looks like the front month light sweet NYMEX contract is down $9/b. On the other hand, in terms of future production, Martyn Wingrove at Lloyd's List has the story that offshore support vessel charter rates--rates for ships assisting offshore drilling operations, essentially--have shot up to their highest level this year in the North Sea to £160,000 ($272,500) a day. If prices remain stratospheric for non-OPEC production, it will, of course, simply stop. Interestingly, the IEA report also suggests that the reduction in supply from the Baku-Ceyan pipeline has been about equal in volume to the amount shut in by Hurricanes Ike and Gustav, as per Alexander Kwiatkowski of Bloomberg. That would seem to suggest that the run up was completely out of whack with fundamentals. Well, either that or that the current precipitous slide is completely out of whack with the fundamentals. Perhaps we ought to go with the Goldilocks theorum, ie, that the truth is a bit of both.

8. Platts reports that the Department of Agriculture on Friday reduced the amount of corn they forecast would be used for ethanol production in 2009 by 100 million bushels. The change is based on the reduction in gasoline demand.

Daily Sources 10/8

1. Nancy Trejos at the Washington Post reports that $2 trillion has been wiped out of retirement accounts in the US.

According to a survey released yesterday by AARP, 20 percent of baby boomers stopped contributing to their retirement plans in the past year because they have had trouble making ends meet.

This news makes me think I can predict with nearly complete confidence that Barack Obama will be the next President of the United States. In a previous blog I provided an analysis of how his election would affect America's geopolitical situation, but could not have expected that he would have been elected to the position on top of such a tremendous mess. Figuring out just how this crisis will play out geopolitically generally and in terms of specific nations is no small puzzle. But I do think that Obama would return some confidence to the markets worldwide, and as such, may do something to alleviate the situation we have found ourselves in. There was some good news today, AP reported that pending home sales rose 7.4% from July to August as per the National Association of Realtors. The index of pending sales reading is at the highest seen since July 2007.

2. Naked Capitalism has a post on Arvind Subramanian's proposal for a bail out of the American financial system by China published in the Financial Times yesterday. He suggests that the People's Bank of China could lend the US $500 billion (of its $1.8 billion cash reserves) on the condition that the money only be used to recapitalize the banks (as opposed to providing liquidity by purchasing toxic assets, as our current emergency financial stabilization fund is structured to do.) Yves Smith thinks the tongue in cheek plan makes a lot of sense. In today's Washington Post, Subramanian and C. Fred Bergsten have an op ed arguing that a globalized crisis "requires a globalized response." Well, just in time for ...

3. Carter Dougherty and Edmund L. Andrews at the New York Times report that the Fed, the European Central Bank, the Bank of England, and the central banks of Canada and Sweden all coordinated a cut in interest rates of a half percent. Switzerland also cut its benchmark rate and Japan publicly supported the move, though it left its benchmark rate of 0.5% (if I remember correctly.) (The yen is rapidly approaching the landmark 100 per dollar rate (interbank).) China also reduced its benchmark lending rate by 0.27%.

4. Nigel Morris, David Prosser and Sean Farrel at the Independent report that Downing Street has arranged a £50 billion rescue fund for the British banking system.

5. Denis Maternovsky at Bloomberg has the story that Russia, Indonesia and Ukraine shut down their stock markets today in the face of massive sell offs. Russia's RTS bourse will be shut indefinitely. MICEX will be closed until Friday. Jakarta's exchange will shut indefinitely, or so I have been led to believe.

Hungary headed for its worst daily decline since 1999 as the Budapest Stock Exchange fell 6.3 percent. Latvia's OMX Riga Index lost 6.5 percent to its lowest level since January 2004. India's Sensex index slid 2.6 percent and China's CSI 300 Index fell 3.8 percent, its third day of declines. South Korea's Kospi Index lost 5.8 percent.

6. From a panel discussion at the Council on Foreign Relations featuring Nouriel Roubini, Brad Setser, Benn Steil and Mort Zuckerman on September 25:

ROUBINI: So what you have to ask yourself is whether the sharp falling U.S. private consumption demand -- is there enough domestic private demand in the rest of the world in emerging markets that can grow to suspend global economic growth, and my answer is no because, you know, in U.S. the total consumption's about $9.5 trillion. Take the entire consumption of 1 billion Chinese, it's about $1 trillion. Take all of the consumption of almost 1 billion Indians, it's $600 billion. So the sum of the consumption of 2 billion Chindians is about one sixth of the U.S. consumption, right?

So if there's a shortfall U.S. consumption, can their consumption go up by 500 percent in order to compensate for the falling U.S.? The answer is no. The question in this country is whether we're relying especially China some parts of Asia some parts of Latin America on expert to the United States is the main engine of goods, and the rest of the demand is essentially production of investment goods that produce more exportables is the question of whether their policy stimulus in terms of monetary and fiscal policy can be aggressive enough to avoid a hard landing.

And for China -- by the way, a hard landing means a growth that's gone from 11 (percent) to 6 percent because China needs a growth rates of 10 percent in order to move about 15 million--(inaudible)--investment sector every year to maintain social and political stability. And my concern is that while now they're going to have a fiscal stimulus, they cannot so aggressively flow all of the infrastructural spending they want to do over the next five, 10 years over a year or two. And if that's the case actually, their policy response may not be aggressive enough to control the fall out coming from the collapse of demand in the United States and the recession and the rest of the advanced economy. And if China goes into essentially a hard landing, then the two main engines of global growth, that were U.S. and China, one on the consumption, the other one on the production are going to have a recession or a near recession, then you have real trouble for the global economy.

SETSER: If I could just make one small amendment to what Nouriel said which is that over the last two years, Europe has been a bigger engine of demand growth for most of them, the emerging world than the United States because our net exports have been contributing to growth and so for much of the emerging world, the economic trajectory of Europe over the next 12 months will matter as much if not more than that of the United States, which is a significant change from the world of, say, five years ago.

STEIL: And in terms of the so-called--very briefly, in terms of the so-called BRIC countries--Brazil, Russia, India, and China--I'm particularly concerned about Brazil and Russia. The reason is that we really haven't seen fundamental reforms in those economies, their boom has been very much based on the rise in commodities prices. If global demand really does take a deep hit, I think Brazil and Russia go down with it.

I'm pretty convinced by these remarks that we are likely to see a significant slowdown in China and India. Continuing in that vein, Steve Mufson at PostGlobal reports that Chinese gasoline demand fell 5.6% (470 kb/d) in August from July and 2.7% (or 200 kb/d) in July from June. Chinese gasoline prices averaged about $3.62/gallon in September, as compared to the US average of $3.72/gallon. Diesel prices are still 21% lower in China than the US (and China "dieselized"), but clearly these prices can be expected to put a damper on Chinese demand. Paul Cavey has an op ed in today's Wall Street Journal Asia which states that China's domestic real estate market has contracted by 50% over the last few months. Cavey, head of China economics at Macquarie Capital Securities, argues that domestic real estate and exports are the two central drivers of Chinese economic growth.

7. Isambard Wilkinson at the Telegraph reports that Pakistan has enough reserves to purchase about 30 days worth of food and fuel, after which the country faces bankruptcy.

Pakistani President Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

Evidently talks with Riyadh to defer payments on the daily delivery of 100,000 barrels of oil have not born any fruit at this stage. Islamabad has been unable to secure loans at favorable terms from friendly countries. The rupee has lost 21% of its value so far this year and Standard & Poor's rates Pakistani debt at CCC+. (Well, whatever else you think of governments, at least they are transparent enough that you can rate their debt with some accuracy!) The problem here is that Zadari is known in Pakistan as "Mr. 10%." The government of Musharraf fell, from what I can tell, in great part as a result of the "lawyers revolt" there, caused by the removal by Musharraf of Supreme Court Justice Chaudhry. Even though the lawyers' movement brought down the general, Zadari has refused so far to reinstate the Justice--who presided over the corruption trials brought against the President. It might be difficult to go around the world, hat in hand, asking for $100 billion--no matter how genuine Pakistan's need is--if the general response is going to be how much of that money is actually going to be "... um ... and so what's your cut?" I know I'd be pretty reluctant. But then we have to consider that Pakistan is a nuclear power where food and fuel shortages could create serious unrest and even potentially a total state failure. Is the US about to be subjected to nuclear blackmail by their key ally in the war against terror?

8. Kelly Zang at Xinhua reports that Russia did not include the Altai gas pipeline project in its recently published blueprint for gas sector development to 2030. The Altai pipeline would have shipped 30 billion cubic meters of natural gas from Western Siberia to China. China was hoping for first shipments in 2011. There are plenty of customers vying for Russian gas. In the east, Tokyo offered a $14 billion subsidy for a pipeline to the Pacific. (Japan is looking at cuts in supply from traditional suppliers Indonesia and Malaysia.) Europe also is likely to want more gas going forward. It would be significant if Moscow decided not to integrate their energy complex too tightly to Beijing, choosing a line to Japan or more to Europe.

9. Henry Kissinger and George Schultz have an important and thoughtful op-ed in the Washington Post today which argues, much as I have in my own little way, that:

We believe that the fundamental interests of the United States, Europe and Russia are more aligned today -- or can be made so -- even in the wake of the Georgian crisis, than at any point in recent history. We must not waste that opportunity.

Though perhaps it was necessary to do given military exercises with Venezuela--and though I believe Secretary Gates is a pragmatic realist--Peter Finn in the Washington Post reports that he re-emphasized American support for Kosovan independence in a visit to the province today.

10. Peter Finn at the Washington Post reports that Secretary Gates in Macedonia asked Europe for 10 - 12,000 more troops for action in Afghanistan.

11. Platts reports that the Iraqi oil minister Hussain Al-Shahristani told reporters in Turkey that OPEC was ready to convene an emergency meeting should oil fall much below $90/b. Their next meeting is currently scheduled for December 17 in Oran, Algeria.

12. Nick Tattersall and Thomas Grove at Reuters report that the Nigerian Oil Minister Odein Ajumogobia has expressed concern about the drop in oil, suggesting that OPEC should consider production cuts.

13. Sabrina Tavernise at the Washington Post reported that the Turkish Parliament voted by 497 to 18 to reauthorize projection of force by the Turkish military against Kurdish separatists in Iraq.

14. Dan Scotto told Energytechstocks.com that,

"At best, the Wall Street meltdown has probably set back the timetable for constructing a new generation of nuclear power plants in the U.S. by three years."

Nuclear is difficult to provide security for, but it does burn clean.

15. Dorothy Kosich at Mineweb reports that the US emergency financial stability fund bill (HR 1424) included a fair amount of concessions to the coal lobby.

H.R. 1424 and the short-term budget bill Congress also contained the following provisions supported by National Mining Association (NMA):
- Extension of the mine safety equipment and training tax credit;
- Additional tax credits for advanced coal electricity projects and coal gasification, including gasification in Coal-to-Liquid (CTL) production;
- New tax credits for carbon capture and storage or reuse in enhanced oil recovery
- An extension of the alternative fuels credit applicable to CTL;
- Funding to support the Department of Defense's ongoing CTL testing.

Coal is probably part of the solution to America's energy security, but why such provisions needed to be added as pork to an emergency financial stabilization bill is beyond me. It should be added that of all the fossil fuels, coal is by far the dirtiest to extract and to burn. Coal-to-liquid processes have potential, but just now the climate costs of CTL production are prohibitive. We have Sens. Max Baucus (D-Montana), Mitch McConnell (R-Kentucky), and Jay Rockefeller (D-West Virginia) and Reps. Roy Blunt (R-Missouri--the Minority Whip) and Artur David (D-Alabama) to thank for this particular piece of pork, as per the NMA.

16. Frank Ahrens at the Washington Post reports that the NY Fed will borrow $37.8 billion in investment grade securities from AIG in return for cash. This comes on top of reports that following the government's $85 billion bailout of the insurance company top execs went on a week-long stay at a California spa resort. The new CEO defended this action, saying it was de riguer in the insurance industry. Yeah, maybe, but it ain't de riguer in the government industry, which is what AIG is nowadays.

17. Norval Scott in yesterday's Globe and Mail has a story on how the credit crisis is killing plans for new oil sands upgrading plants in Canada. The story says that an upgrader--essentially a refinery that upgrades the tar in the sands into synthetic crude which can then be refined by another refinery into oil products--now requires $90/b oil to be profitable. Just three years ago I heard prices ranging from $40-$60/b. Given the reader comments, apparently much of the price increase is coming from a scarcity of skilled labor as much as the cost of money.

18. Claire Leow and Yoga Rusmana at Bloomberg reported that government estimates in Jakarta are that palm oil exports will likely drop by as much as 1.5 million tonnes next year due to the biodiesel mandate which came into force late September. The regulations stipulate that all transportation diesel sold in the country must be 1% biodiesel. The country is expected to produce more than 19 million tonnes of palm oil next year and as much as 20 million tonnes in 2010.

Indonesia's biofuel industry can produce between 1.3 million [tonnes] to 1.5 million [tonnes] annually. Capacity may double to 3 million [tonnes] by 2010.

19. The EIA's Week in Petroleum reported that crude stocks built by 8.1 million barrels last week against analyst expectations (as per the Platts survey) of a 1 million barrel draw. (Crude stocks are now a bit above the historical average.) Gasoline stocks increased by 7.2 million barrels versus the 2 million barrel build expected on Wall Street. Stocks are still well below the historical average, but that is a big build against the lowest levels seen since 1967. Distillates saw a 0.5 million barrel draw down against the 1 million barrel increase expected by most Wall Street analysts. Some of this is continuing fall out from the refinery closures caused by Hurricanes Ike and Gustav. I think, even given the shortages, that it is a signal of more demand destruction, and thus, taken in isolation, lower crude prices.

Daily Sources 9/24

1. Joshua Partlow at the Washington Post has an interesting analysis of the Castro-Bush tango over hurricane relief. Evidently, the Cuban American National Foundation, the main pillar of support for the embargo in the US has mellowed some, now actively campaigning against the travel and remittance restrictions to the island. There is no mention in the story of a counter-proposal by Cuba where the US would relax the embargo so that Havana might purchase construction materials on credit. A reader caught the strange dissonance in the story where 500,000 homes were reportedly destroyed, but just 200,000 have been left homeless. Surely the embargo is counterproductive in the extreme, but to be criticized for it by the Cuban-American community via El Nuevo Herald is just a tad unreal.

2. The EIA's Week in Petroleum reports that crude stocks fell in the week ended September 19th, by 1.5 mb versus expectations of a 1.6 mb increase. The draw is definitely counter intuitive given the number of refineries shut down in response to the hurricanes. Gasoline stocks fell by 5.9 mb, which is more than the 5.1 mb that analysts expected, but still well below the 8.5 mb draw that a DOE official warned of last week. "At 179 million barrels, total motor gasoline inventories stand at the lowest level since 1967, based on monthly EIA data. Continuing reports of spot shortages of gasoline at some retail outlets where supplies have been most disrupted can be expected over the next several weeks

Mother Jones' Blue Marble Blog has the story of shortages in the Asheville, NC area. The EIA report states that about 890 kb/d of US production is still shut in from the hurricanes. So far in 2008, US crude oil production has averaged about 5.1 mb/d, so 890 kb/d is about 17% of US total production. The federal petroleum district which includes Texas and Louisiana has so far this year produced about 2.9 mb/d, so 890 kb/d is about 31% of the region's production. The EIA reports that 1.7 mb/d of refining capacity is still shut in by the storms. Total US operable refining capacity stands at about 17.6 mb/d, so that represents about 10% of US operable capacity. Contrary to predictions, gasoline prices have fallen in all regions across the US, by an average of $0.11/gallon. This might indicate lower demand.

3. Nouriel Roubini argues in the Financial Times that the next stage of the financial crisis is a run on the hedge funds. He thinks that a severe US recession is in the works and that it will spread to all the developed economies on the back of an expensive Euro, the European housing bubble, falling US imports, high oil prices, and a hawkish European Central Bank. Yikes.

4. Keith Bradsher and Heather Timmons at the New York Times report that small depositors have begun a run on the Bank of East Asia Wednesday. It is the third largest bank in Hong Kong, with assets of $51 billion.

5. The AAP has the story that BHP Billington is planning to be a long-term supplier of uranium to China. Not exactly surprising considering BHP's bid for Rio Tinto and the number of nuclear plants proposed and under construction in China. Still, it is interesting given the Australian parliament's recent investigation into proposed supply contracts with Russia.

6. Christopher Bodeen of the Associated Press reported on Chavez's visit to China where he was due to meet Hu Jintao Wednesday (China is past the international date line). In televised remarks in Venezuela, Chavez said exports to China will increase to 500 kb/d next year and that they are planned to go to 1 mb/d by 2012. This has been the rhetoric for some time now, but those numbers are very unlikely to be reached any time soon.

7. Reuters has the story that Petrologistics forecasts that OPEC production in September will fall 33.4 mb/d to 32.6 mb/d. Saudi Arabia is predicted to cut its supply from 9.7 mb/d to 9.55 mb/d. Iran is predicted to produce 4.05 mb/d, down from 4.4 mb/d.

8. The Associated Press reported Sunday that Iraqi oil exports declined to 1.75 mb/d in August, a 4% decline from the month previous.

9. A UCLA study of satellite imagery suggests that the surge was not responsible for the reduction in violence in Iraq, but rather that it was due to a correlation with the final stages of successful ethnic cleansing by various sectarian groups in Baghdad.

"If the surge had truly 'worked,' we would expect to see a steady increase in night-light output over time, as electrical infrastructure continued to be repaired and restored, with little discrimination across neighborhoods," said co-author Thomas Gillespie, an associate professor of geography at UCLA. "Instead, we found that the night-light signature diminished only in certain neighborhoods, and the pattern appears to be associated with ethno-sectarian violence and neighborhood ethnic cleansing."

10. From Platt's Quote of the Day:

"The business model has to change or we will be non-existent in the future. Collaboration is critical." Independent oil companies need to change their business models and increasingly collaborate with national oil companies, ConocoPhillips Senior Vice President of Technology Stephen Brand said Tuesday at the IHS Herold Pacesetters Energy Conference.

11. Elaine Sciolino at the New York Times reports that the IEAE has announced that North Korea has barred their inspectors from a nuclear reprocessing plant that produces weapons-grade plutonium. Pretty vigorous action given reports of Kim Jong-Il's being on his deathbed recently.

12. Jesse's Cafe Americain may have discovered the historical basis of Ben Bernanke's thinking in terms of the bailout. In 1929, many of the leading Wall Street bankers met to find a solution to the market situation. They pooled their resources and bid for various blue chips at prices well above market. Apparently, this bid to shore up the market worked in 1907 during a "liquidity panic." As we all know the 1929 intervention did not work, which would make this an odd historical precedent to attempt to repeat. Interesting nonetheless ...

Daily Sources 9/23

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Daily Sources, 9/19

Paradoxes abound this week ...

1. William Branigin at the Washington Post reports that yesterday Condoleeza Rice delivered a speech in Washington which stepped up criticism of Russia. In it, she stated that Europe and the US had to stand up to Russian bullying, complained of "anachronistic Russian displays of military power" in South America, and asserted that the US "will not allow Russia to wield a veto over the future of our Euro-Atlantic community." In a strange echo of Ahmadinejad's rhetoric today regarding Israel, she made clear that the US had no issue with the people of Russia, merely its government. This comes on top of the report by Thom Shanker at the New York Times that Secretary of Defense Robert Gates said yesterday that he would adopt an approach to relations with new members of NATO bordering Russia which would speak to their security concerns without unnecessarily provoking Moscow. That day President Medvedev also said that he was hopeful that Russia and the United States would find a way to repair their relationship. But, as Vladimir Soldatkin at Reuters reports, Russian Energy Minister Sergei Shmatko said Russia will send a high-level delegation to the next OPEC meeting in Algeria on December 17. Their participation in the September meeting caused a lot of worried speculation in Europe. Meanwhile, trading on the Russian stock market was halted again today, but this time because the market was surging too quickly, not falling, as per Edward Hugh at Russia Economy Watch.

2. Barbara Powell at Bloomberg reports that John Duff, the survey manager for the EIA's Week in Petroleum, warned today that next week's report was likely to show a draw of between 6.5 and 8.5 million barrels in gasoline stocks. Jonathan Cogan, a spokesman for the DOE, stated that stock levels are at the lowest seen since November 1967. However, in a story reported by Tina Seeley at Bloomberg, another spokesperson for the DOE, Healy Baumgardner, said in a telephone interview that the US would not seek emergency fuel supplies from the International Energy Agency. This comes on top of an interview by Alex Lawler at Reuters with the head of the IEA, Nobuo Tanaka, where Tanaka said that he thought the current price environment for oil was likely to precipitate a global recession.

3. Nick Snow at the Oil & Gas Journal reports that the US Congress passed the anti-speculation bill today by a large margin. Rep. John Dingell's (D-MI) press release gives the legislation the credit for the fall in oil prices since July, arguing that it is the only factor since then which could account for the price situation. I can think of a few ....

4. Todd Benson at Reuters reports that Brazilian President Luiz Inacio Lula da Silva on Thursday said that he thought the resurrection of the US Fourth Fleet--which was decided early this year--might be because the US covets Brazilian oil supplies. Chavez also has complained about this decision. Brazil is in the process of negotiating a strategic defense alliance with France which would include the construction of a nuclear-powered submarine with which Brazil could police its shores.

5. In an important clarification reported by Nazila Fathi at the New York Times, Mahmoud Ahmadinejad made clear that when he said that "Israel will be wiped off the map" he meant that the Israeli state would cease to exist, not that Iran was working for the genocide of the Jews. He remained extremely hostile to the presence of a state based on Zionist principles, but it appears the the recognition of the holocaust and the assertion of Iranian goodwill to the people of Israel, as opposed to the government, are now state policy. This is an important shift. Ahmadinejad will be in New York next week to address the UN General Assembly.

6. Mahmoud Abbas, President of the Palestinian National Authority, has an op ed in the Wall Street Journal today which argues that peace between Palestine and Israel is still possible, but that if a modus vivendi is not arrived at soon, it will soon become much more difficult.

7. Carlotta Gall at the New York Times reports that Afghanistan had had a very poor harvest and that aid officials are warning of an acute food shortage this winter, which is likely to make an already difficult situation worse.

8. Rob Foulkes and Daniel Litvin of Critical Resource have an interesting piece in Mineweb, where they consider the situation of Areva, an uranium mining company, in Niger. The Tuareg rebel movement of the 1990s, the MNJ or Mouvement des Nigériens pour la Justice, was resurrected last year amidst calls for a fairer redistribution of resource wealth and the Niger Government has begun to allow foreign competition into the mining arena from Chinese, Indian, and Canadian firms. Paris is likely aggravated by these changes, as 80% of French electicity generation comes from nuclear power.

9. An exhausting week of financial news. Today:

The SEC banned all short selling on financial securities.

The Treasury established a temporary guaranty program for money market funds.

Secretary Paulson and Chairmans Bernanke and Cox began discussions with Congress last night on a bailout plan. Paulson's statement on a comprehensive approach to market developments was carried verbatim by the WSJ.

Brad Setser wonders why the dollar hasn't completely tanked.

Daily Sources 9/12

1. The Financial Times published a series of articles yesterday--including an editorial--on China's evident willingness to use its foreign exchange holdings to further political ends. Jamil Anderlini reported that China's State Administration of Foreign Exchange (SAFE) purchased $150 million in Costa Rican government bonds in January in return for Costa Rica essentially de-recognizing Taiwan as a sovereign nation. The deal was originally arrived at in an agreement signed on June 2007, which stipulated the switch in Chinese recognition in return for the purchase of $300 million in Costa Rican bonds and a $130 million grant. Evidently, this information came to light because La Nacion, Costa Rica's largest newspaper, won last Friday a court case which resulted in a judge ordering the government to make the information public.

In a companion piece, Jamil Anderlini noted that while the establishment of the China Investment Corporation (CIC) in September 2007 caused much consternation worldwide, SAFE, through a Hong Kong subsidiary, was quietly establishing stakes of less than 1% in corporations worldwide. It took stakes in companies as diverse as: BP, Total, BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank. The Financial Times has helpfully provided a list of SAFE investment in British corporations here.

The FT also editorialized that sovereign wealth funds should be more transparent about their aims and that China should allow the renminbi to appreciate further against the dollar. Brad Setser at Follow the Money has used the imbroglio to announce the publication of a 60 page or so (of actual text) report on Sovereign Wealth and Sovereign Power: the Strategic Consequences of American Indebtedness. I have yet to read the tome, but it will likely be influential.

On one key level, my response to this is "I'm shocked! Just shocked!" Perhaps it is worrying that China is willing to use its foreign exchange reserves to meet foreign policy goals, but I suspect the only difference between that and the de rigeur behavior of economic powerhouses worldwide is that it was a direct, as opposed to an indirect effort. China and Taiwan have been playing this game for years now and it is hardly surprising to me, at least, that China would use any financial asset they have at their disposal to legitimize their claim to Taiwan. (Though I do feel sympathy for Taipei.)

I would also note though the text of the FT's editorial is fairly calm, the series and the headlines are fairly obviously designed to elicit worry and upset nationalists--which is pretty annoying to see from the FT, though I suppose it is arguably meant as an object lesson. Obviously, the financial world wants to encourage "unregulated" access to Chinese assets and a freely floating renminbi. Though some--in Wall Street anyways--view FDI into China and free exchange as unambiguous in its benefits and ends, it seems hard to argue this to Beijing when its overseas investments are regularly responded to as if they were efforts at colonization. The distinctions seem awful fine.

In any case, we will see how the West responds to CIC possibly being a part of the consortium riding to the rescue of Lehman, as per Henny Sender, Francesco Guerrera and Peter Thal Larsen in the Financial Times today. Barclays, beneficiary of SAFE funds, is also a potential suitor. Also related: a paper published today at Vox arguing that the renminbi is not significantly misaligned.

2. China Daily announces that China may cut its dollar holdings. (h/t Jesse's Cafe Americain.)

3. Naked Capitalism notes that both Japan and China have posted declining growth. In order to protect export to the US, China will have to purchase dollars. Also, per Real Time Economics, US consumer spending dropped 0.3% in August, leading many to conclude that that engine of American and international economic growth will remain dormant at least through 2009, which may mean that China needs to buy a lot of dollars.

4. David Barboza at the New York Times writes that corporations in China are under intense pressure from the government to allow their workers to unionize.

5. Saul Hudson at Reuters has an analysis of potential future, given the recall today of Venezuela's Ambassador to the US, and the expulsion of the US Ambassador to Venezuela.

6. Jeremy McDermott at the Telegraph reports that Evo Morales has expelled the US Ambassador to Bolivia.

7. Aleya Begum at Upstream Online writes that Colombia has pledged, despite all the contretemps with Venezuela, to maintain flows of gas to Venezuela through pipeline opened this January at reduced rates.

8. Simon Romero at the New York Times has more on this story, with the US expelling the Venezuelan Ambassador and declaring that the top two intelligence officials in Caracas were involved in FARC operations in Colombia. Sanctions are being considered, I believe.

9. Hurricane Ike appears to have nudged a little north, satellite courtesy the NOAA:



It is a category 2 now. A bunch of refineries have shut down in response. As a result, the cash market is heading north, while the futures market is heading south, as per The Barrel at Platts. Expect higher prices at the pump.

Spot Life of CL Oct '08 (wk 2)

Hurricane Ike, the OPEC decision and Saudi Arabia's role in it, and demand destruction has been the spot life of CL Oct '08 the last 7 days of trading. Hurricane Ike appears to have veered away from the center of Gulf production and so is not causing so much worry at this stage, or so it seems. Here is the current track, courtesy of the NOAA:



(The largest concentration of infrastructure is more or less centered on the Texas-Louisiana border.) Below is an image, courtesy The Oil Drum (which itself is courtesy of Simmons & Co.) of the deep water infrastructure in the Gulf. (Although I tend to think Oil Drum analysis veers toward the alarmist, the site contains a wealth of information and informed analysis.



In any case, here is the table of reported causes for price changes for the last 7 days of trading:



Here is the Dollar vs the Euro vs spot CL Oct '08:



And here are the forward month differentials for CL:



Very unusual structure here. You can see that on Sep 2nd, the market went into "perfect" contango, where every single contract is more expensive than the one that expires before it. I haven't been watching that long, but I've never seen that before. Notice that the differential between spot and Dec 2016 narrows from a little over $7/b to a little more than $4/b.

Daily Sources 9/9

1. In a moment that I completely missed, but which apparently folks in Chechnya heard loud and clear, presidential candidate John McCain on August 26th said that Western countries ought to think of the independence of Chechnya. Andrei Smirnov at the North Caucasus Weekly--which is a James Foundation publication--writes that this has encouraged many secessionists in Chechnya, which Smirnov believes represents the great majority of Chechens. (h/t to the Tel'nik.) I suspect he is right about that. I would point out however, that the Chechnyan liberation movement has strong ties to Al-Qaeda, ties which pre-date 9/11 and the second Gulf War. The Taliban forged strong ties with the Chechen liberation movement quite early on, and Chechnyan secession has been a cause celeb in the Islamic world for some time now.(1) Which is to say that by making this statement, McCain may have been presenting a face which refuses to "appease" Russian aggression, but that, in doing so, he also provided a morale boost to a movement with close ties to al-Qaeda. One wonders how the Democrats would have been handled in the media--and by GOP media men--had they made a similar mistake. The Caucasus is a tremendously complicated place. The lesson to be learned here, in my opinion at least, is that escalation is what is in neither America's, Europe's, nor Russia's interests, rhetorically or otherwise. Isn't it time the leadership of all three began reflecting that fact?

2. John Helmer at Mineweb reports that Moscow has reacted with calm to last week's threat of the Australian government to cancel the agreement signed last year to export uranium concentrate to Russia. Russia needs a source of uranium to power its ambitious nuclear power plans going forward. Uranium wasn't set to move until 2015. Nota bene: Sergei Kirienko, now the head of Russian Agency for Nuclear Power (Rosatom), was for a time the Prime Minister of Russia. Also puts the story on Washington removing Russian nuclear deal from the consideration of Congress into context.

3. Brahma Chellaney, professor of strategic studies at the Center for Policy Research in New Delhi, has an interesting analysis in Wall Street Journal Asia of how the Indian-US nuclear deal has been oversold by both Administrations. He argues that the hype may throw the broader issues of ongoing cooperation into jeopardy.

4. The Islamabad Daily Mail reports that China is advocating a similar deal with the nuclear suppliers group for Pakistan that the US has advocated for India.

5. Luke Pachymuthu and Alex Lawler at Reuters report that Iranian Oil Minister Gholamhossein Nozari has said that Iran is close to concluding negotiations with (China's) CNPC and (India's) ONGC to develop oil and gas reserves in the Caspian Sea. He also said that Iran was looking at various countries in Africa where they might strike an agreement to establish strategic crude storage, so that they could capture opportunities by being closer to their customer base.

6. Horand Knaup at Der Spiegel has a very interesting article on the rush to invest in Africa's biofuel potential. Neo-colonialism, it may well be. Given China's Africa Policy of 2006, the Russian push to invest in African OPEC countries, and Middle Eastern Sovereign Wealth Funds pursuing agricultural investments there, I'd say it was a fair characterization of the situation. Whether or not the western venture capitalists will be more accountable than the state backed investors will be interesting to see.

7. Max Henderson at the London Times reports that Professor Sir David King, president of the British Association for the Advancement of Science, will deliver a keynote speech tonight where he will argue that environmental organizations are responsible for preventing an agricultural revolution taking place in Africa. By extension, the argument is that they are "keeping the continent poor" and allowing starvation to continue. Very disturbing instance of unintended consequences, if true.

8. Celia W. Dugger at the New York Times reports that the incumbent party, the MPLA, in Uganda won the election--which were carried over for a day--by a landslide. EU election observers said that the election fell short of international standards. Nonetheless, UNITA has conceded, which probably means that the election's results will be accepted peacefully.

9. John Kingston at Platt's blog "the Barrel" has a good piece giving the supply numbers OPEC is considering in their meeting today. Jad Mouawad at the New York Times writes that Saudi Arabia has "dashed talks of a reduction in output."

10. Yu-chin Chen, Kenneth Rogoff, and Barbara Rossi at Vox have an interesting academic article on where commodity prices are headed next. (h/t Mark Thoma at Economist's View.) Pretty interesting given that the answer to that question will tell us where the bottom is likely to be in Asia, and other manufacturing exporter economies. They suggest that currency futures are more likely to be predictive of commodities prices than otherwise, because futures are more forward-looking, and commodities more sensitive to current conditions. I have my doubts, but it is still very interesting.

11. Jesse's Cafe Americain has a piece today which argues that the current dollar rally against the Euro is going to be short lived, and that the dollar will continue its decline. Jesse believes that there is a strong chance of a "significant stock market decline" starting in the next thirty days.

12. And, to continue the thought experiment on where commodity prices will take the export economies of Asia, the editors of Wall Street Journal Asia have a piece lauding Indonesia's President Susilo Bambang Yudhoyono for cutting taxes. They note that last week, South Korea announced it was going to corporate, income and death taxes. Last year, Hong Kong and Singapore cut corporate taxes.

13. 5 day track for Hurricane Ike, courtesy the NOAA:



(1) "Bin Laden's man in Chechnya: The Al-Qaeda Link," by Trevor Royle, The Sunday Herald, 27 Oct 2002.

Daily Sources 9/8

1. The Tel'nik has an interesting piece on the Friday meeting of the Collective Security Treaty Organization (CSTO) in Moscow last Friday. Although Armenia appears to support Moscow's version of the Georgia conflict narrative, they are uncomfortable with the recognition of South Ossetia and Abkhazia as independent regions, given Nagorno-Karabagh. I'm not clear on how this plays out, as Nagorno-Karabagh is a breakaway region of Azerbaijan, with an ethnic majority of Armenians, and basically under the military protection of Armenia, which would lead you to think Armenia would be gung-ho regarding the independence of South Ossetia and Abkhazia ... but it is a complicated region.



2. Jamey Keaten at the Associated Press has the story that President Medvedev has pledged to remove all Russian troops from Georgian territory once EU monitors arrive later in the month.

3. Michael Abramowitz at the Washington Post has the story that the Administration is going to pull from Congressional consideration a nuclear deal with Russia which would have facilitated cooperation between the Russian and American nuclear industries and allowed Russia to import spent nuclear fuel from the US. The deal was signed 4 months ago in Moscow, but the conflict in Georgia means it is unlikely that it would be agreed to in Congress.

4. AP reports that on Sunday Chavez announced upcoming joint maneuvers with Russian warships in late November or December. A Russian Foreign Ministry official confirmed today that this might take place.

5. Kaveh L Afrasiabi has an interesting analysis of the Georgia conflict written as if from the Azeri perspective in the Asia Times. The bit on the never-ending negotiations regarding the status of the Caspian, and how that would seem to put the kibosh on certain pipeline plans, is a fair explanation.

6. Thomas Grove and Orhan Coskun at Reuters have a piece on Turkish efforts to increase Azeri gas exports to the country, given the unreliability of Iranian supply and increased tensions with Russia as Turkey works to maintain good relations with Moscow and meet its NATO obligations. Currently Turkey imports about 6 billion cubic meters of natural gas annually from Azerbaijan's Shah-Deniz field and Hilmi Guler, the Turkish Energy and Natural Resources Minister, is flying today to Baku where he is expected to repeat a request that Turkey import 8 billion cubic meters annually for domestic consumption. Shah-Deniz is estimated to have reserves of 1.2 trillion cubic meters of natural gas and 1.75 billion barrels of condensate. The stakeholders in the project are: BP (25.5%), Norway's Statoil (25.5%), the State Oil Company of Azerbaijan or SOCAR (10%), Russia's Lukoil (10%), Iran's oil trading company NICO (10%), France's TOTAL (10%), and the Turkish Petroleum Corporation or TPAO (9%).



7. Following last Tuesday's news that the Iraqi cabinet has paved the way for CNPC to develop the Al-Ahdab oil field, comes the story by Ahmed Rasheed and Tim Cocks at Reuters that Shell should close a deal by the end of the month to develop natural gas in the southern Basra province.

8. ZAMIN writes that the Supreme Islamic Council of Iraq--a key Shia political organization in Iraq--has announced in Tehran that the Mojahedin-e Khalq [MKO] has been given notice that it has 6 months to remove its members from Iraq. ZAMIN notes that the US has a "vested interest" in the MKO and that we have taken a lead role in guarding their compound in Ashraf, which is in Diyala province. I am not clear as to what the American vested interests are, but it is clear that the US is probably the only organization which could be trusted to provide security for them.

9. Emily Wax at the Washington Post has an interesting story on the potential of a trading route being opened between Kashmir and Pakistan, after protesters have closed down the routes from the region to the rest of India.

10. Ariana Eunjung Cha at the Washington post has another interesting story on how the energy shock is making Chinese--or any distant--manufacturing economically unattractive. Expensive transportation fuels means for a smaller mass market, which would be a feedback loop all its own. It looks like OPEC might try to defend $100/b, but Saudi Arabia is key and have said in the past that $100/b is too high. Even at $80/b the basic emerging markets economies business plan needs to be re-examined.

11. The Wall Street Journal has an op-ed by John D. Shages, former deputy assistant secretary for petroleum reserves at the Department of Energy, lauding Barack Obama's plan to make the grades of crude oil in the Strategic Petroleum Reserve match the sophistication of American refining capacity. Whew. OK ... 40% of American refining capacity is sophisticated enough to profitably refine heavy complicated grades of crude oil. The SPR holds nearly only light sweet crudes, which are easy to refine. The plan is to exchange a good portion of the SPR's light sweet holdings for heavier crudes. The difference could be captured monetarily, as in money back to the Government and perhaps taxpayers, or by getting a larger volume of the heavier crudes in return for a smaller volume of light sweet, thus growing the emergency capabilities of the SPR. Probably a good idea. (Interesting to see the WSJ back an Obama plan, too.)

12. Hurricane Ike's 5 day track, as of 5pm EST Monday, courtesy the NOAA: