Daily Sources 4/16

1. CHINESE GDP GROWTH BELOW THE MAGIC 8, CHINESE RESOURCE INVESTMENTS CONTINUE, AND THE US DECLINES TO DEEM BEIJING A 'CURRENCY MANIPULATOR'

Terence Poon (what a great name!) and Andrew Batson at the Wall Street Journal report that China reported GDP growth of 6.1% in the first quarter. The number is lower than what many analysts regard as necessary to prevent significant social unrest as the number of entrants to the labor market begins to far exceed the ability of the economy to absorb them. Beijing has made the number official, having a policy dating from the first Asian Crisis of 'bao ba," or "protect the eight"--see Daily Sources 3/18 #6.

Eugene Tang at Bloomberg reports that China will lend Kazakhstan $10 billion in return for a stake in Kazakh oil producer AO Mangistaumunaigas:

"China National Petroleum Corp. and KazMunaiGaz National Co. will buy AO Mangistaumunaigas, according to one of 11 agreements that were signed in the presence of President Hu Jintao and his Kazakhstan counterpart Nursultan Nazarbayev in Beijing today. The $10 billion aid comprises a $5 billion loan from the Export-Import Bank of China to the Development Bank of Kazakhstan and another $5 billion from China National to KazMunaiGaz."

The loan mirrors the recent $10 billion loan agreement struck with Brazil (see Daily Sources 2/19 #1) as well as a number of other deals globally.

Brad Setser at Follow the Money comments on the recent report to Congress by the Treasury which does not name Beijing as a currency manipulator:

"But make no mistake, China’s currency still looks undervalued. It is only a bit higher — according to the BIS index--than it was in 2001 or 2002, back when China was exporting a fraction of what it does now. In other words, the rise in the productivity of China’s economy hasn’t been mirrored by a rise in the external purchasing power of its currency. That is a big reason why China’s current account surplus remains large.

And the underlying issue remains: the biggest driver of moves in China’s real exchange rate remains moves in the dollar. History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus--and thus China’s accumulation of money-losing foreign assets--is going to come down. It will be hard--in my view--to have a stable international monetary system if the currencies of all the major economies but one float against each other. And China is now a major economy by any measure.

But it makes far more sense to have a fight over China’s exchange rate regime when China’s currency is depreciating in real terms and Chinese intervention in the foreign exchange market is rising--not when China’s currency is rising in real terms and Chinese intervention in the foreign exchange market is falling."

Well worth reading in full.

2. POLAND SIGNS LNG DEAL WITH QATAR

Eric Watkins at the Oil & Gas Journal reports that Poland's state-owned Polskie Gornictwo Naftowe i Gazownictwo (PGNIG) has signed a deal with Qatargas to supply 1 million tonnes/year of LNG for 20 years starting 2014.

"In March the Polish government passed legislation to speed construction of the Swinousjcie LNG terminal in northwestern Poland. The law is designed to make the construction of the terminal 'simpler and quicker.'

The Swinousjcie terminal, which is expected to be operational by yearend 2013 or early 2014, will have an initial import capacity of 2.5 billion cu m/year, eventually rising to 7.5 billion cu m/year."

The shipments would meet roughly 6% of Poland's natural gas demand forecast for 2014. Warsaw wants to diversify its natural gas import sources away from Russia, in short:

"According to PGNIG Chairman Michal Szubski, LNG supplies are 'one of the keys' to a diversified gas portfolio in Poland, which meets 30% of its gas needs from its own resources, 40% from Russian imports, and the remaining 30% from other sources."

The Energy Regulatory Office in Poland recently reported that Russia supplies nearly 50% of Polish natural gas consumption as of 2006.

3. OBAMA ADMINISTRATION URGED SUPPORT FOR THE JUDICIARY IN PAKISTAN, ZADARI-PACKED COURT RELEASES MILITANT CLERIC INVOLVED IN STAND OFF WITH THE MILITARY

David Ignatius at the Washington Post has a fascinating piece of reporting on how the US urged the Pakistani military to refuse an order by Pakistani President Zadari to shut down the lawyers' protests which eventually reinstated Chief Justice Chaudhry:

"The lawyers' movement began its march on March 12, pledging to occupy Islamabad until the government restored Chaudhry to his post. Zardari sent a police force known as the Rangers into the streets of Lahore, apparently hoping to intimidate Sharif and the marchers. But Sharif evaded the police and joined the protesters as they headed north toward Islamabad.

[Pakistani Army Chief of Staff General Ashfaq] Kiyani then faced the moment of decision. According to US and Pakistani sources, Zardari asked the army chief to stop the march and protect Islamabad. Kiyani refused, after discussing the dilemma with his friend Mullen, the chairman of the Joint Chiefs of Staff. Meanwhile, Kiyani called Sharif and told him to return home to Lahore, according to one source. And he called the leader of the lawyers' movement, Aitzaz Ahsan, and told him to halt in the city of Gujranwala and wait for a government announcement.

Pressure on Zardari was also building within his People's Party. According to a US official, Prime Minister Yousaf Raza Gillani told the president on the night of March 15 that he would resign if Chaudhry wasn't reinstated. (Zardari's camp says it was only a rumor of resignation.) In any event, Gillani went on television at 5 the next morning to announce that the former chief justice would return. The crisis was over."

A success I'd warrant, but the problem, as Ignatius notes, is that the perceived involvement in Pakistani internal affairs is creating serious resentments by important political players in the country--which may have seen their private feud with the Taliban as a guarantee of support. A must read.

In the meantime, Salman Masood at the New York Times reports that the Pakistani Supreme Court ordered yesterday granted bail to a hard-line Islamic cleric--Maulana Abdul Aziz--who allegedly led a standoff with the army two years ago.

"The three-member bench of the Supreme Court that heard the case did not include the newly restored Chief Justice Iftikhar Muhammad Chaudhry.

Analysts said the government of President Asif Ali Zardari lacked the political will to go hard after the Islamists, especially at a time when national sentiment was strongly anti-American."

4. ISLAMIST PARTIES LOST HALF THEIR SHARE OF THE INDONESIAN VOTE IN ELECTIONS LAST WEEK


Sadanand Dhume makes the observation in an opinion piece in today's Wall Street Journal that "Islam-based parties saw their cumulative vote-share shrink to about 20% from 38% five years ago." Worth reading infull.

5. OBAMA IMPOSES FINANCIAL SANCTIONS ON DRUG CARTELS ON EVE OF VISIT TO MEXICO

Spencer S. Hsu at the Washington Post reports that the Obama Administration has reiterated US policy of targeting distribution as opposed to consumption in the war on drugs:

"On the eve of his summit with Mexican President Felipe Calderón today, Obama added the cartels to the list of banned foreign 'drug kingpins,' a move that empowers the federal government to seize their assets, estimated to be in the billions of dollars. It also allows the government to seek criminal penalties against US firms or individuals who provide weapons, launder money or transport drugs or cash for the organizations.

By targeting the cartels--Sinaloa, Los Zetas and La Familia Michoacana--the administration expanded its support for Calderón's crackdown on the narco-traffickers, an effort that has provoked a violent backlash and led to thousands of deaths in the past two years."

The counterproductive, and instability-exporting, policy of prohibition continues.

6. INDUSTRIAL PRODUCTION DOWN THE MOST SINCE V-E DAY, IMF ECHOES REINHART / ROGOFF OBSERVATION THAT FINANCIALLY-LED RECESSIONS ARE DEEP AND LONG

Calculated Risk reported yesterday that:

"[i]ndustrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II."

Here is their graph of industrial capacity utilization since 1967:



Calculated Risk notes that the Federal Reserve observed:

"For the first quarter as a whole, output dropped at an annual rate of 20.0%, the largest quarterly decrease of the current contraction."

Always worth checking out Calculated Risk.

Tom Barkley at Real Time Economics reports that the IMF released the findings of a study of historical recessions:

"'These findings suggest that the current recession is likely to be unusually long and severe, and the recovery sluggish. However, strong countercyclical policy action, combined with action to restore confidence in the financial sector, could improve prospects for recovery,' the fund said.

In a study of 122 recessions across 21 advanced economies since 1960, the IMF found that crises that are globally synchronized and caused by financial shock tend last twice as long as the average recession, at more than seven quarters. They are also more severe, with real gross domestic product contracting 4.8%, versus an average of 2.7%.

Recoveries from such events take twice as long on average - nearly seven quarters - and are weaker in a global financial crisis. GDP tends to rise 2.8%, compared with an average of 4.1%.

In the current crisis, 15 out of the 21 advanced countries covered in the study were in recession by the fourth quarter of 2008 and the downturns 'are already more severe and longer than usual,' the fund said.

'Hence, it is unlikely that overleveraged economies will be able to bounce back quickly via strong growth in domestic private demand--fundamentally, a prolonged period of above-average saving is required,' the report said."

The report more or less echoes the findings of Carmen Reinhart and Kenneth Rogoff in January--see Daily Sources 1/2 #18.

7. MORE SHIPPING DATA

Rebecca Wilder at News N Economics echoes, with reservations, the notion yesterday mooted by Calculated Risk that port activity may be reaching a bottom, noting an article by Ronald D. White in the Los Angeles Times which quotes Port of Los Angeles spokeswoman Lauri Kellman:

"One month isn't much of a benchmark for us, especially a month like March when things are historically slow. But the numbers were up compared to last month, and that is an encouraging sign."

And thoughthe Port of Long Beach numbers don't look so good, showing a yearly decline in volume of 24.9%, they represent a 17.6% increase on February volumes.



February is 10% shorter than March, so another way of putting this would be that average daily TEUs in February were 11,359 TEUs/day against March average daily TEUs of 12,069 TEUs/day or a 6.25% increase in volume month on month. From the LA Times story:

"At the Port of Los Angeles, the nation's busiest cargo container port, about 278,000 containers carrying imported goods arrived in March, down 6.2% from March 2008, port officials said Wednesday. That was the slowest March performance in seven years, but it was substantially better than February, when only 206,000 containers arrived."

On an average daily basis, container volume in March was 8,968 TEUs/day versus February's 7,357 TEUs/day, or a fairly strong 21.9% increase.

The Baltic Dry Index shows a small uptick, though it is still down about 85% from the highs seen in 2008:



8. US COMMERCIAL CRUDE STOCKS UP 5.6 MILLION BARRELS, CRUDE IMPORTS DOWN, MARKET SHRUGS

The EIA yesterday reported that crude oil stocks built by 5.6 million barrels to 366.7 million barrels for the week ended April 10, the biggest number seen since September 1990. According to a Bloomberg survey, analysts had expected an increase of 1.75 million barrels. Gasoline stocks fell by 900 kb. Distillate stocks fell 1.2 million barrels. Taken in isolation, these numbers should be pretty bearish for the price of crude. Margot Habiby and Mark Shenk at Bloomberg note that the report showed that overall fuel demand in the last four weeks was down 5% for the same period last year.

"Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, fell 742,000 barrels to 29.2 million last week, the lowest since the week end Dec. 26.

'The Cushing drop is really important,' said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. 'That will keep crude from falling out of bed. It will keep the spot month steady.'"

Meanwhile, Alaric Nightingale yesterday reported that Jens Martin Jensen, CEO of Frontline Ltd., the largest operator of supertankers globally, thinks that orders for new supertankers are about to face massive cancellations and that many ships in the current fleet will be scrapped.

"Supertankers are making $4,335 a day after fuel costs for delivering Middle East crude to Asia and the US, according to data from the London-based Baltic Exchange. Hamilton, Bermuda-based Frontline said Feb. 26 it needs $12,000 to cover costs such as repairs, crew, insurance and lubricants for engines. Interest on loans takes the figure to $32,100.
...
Shipyards in South Korea, China and Japan have all but two of the 146 orders for very large crude carriers, according to Lloyd’s Register-Fairplay data on Bloomberg. Daewoo Shipbuilding & Marine Engineering Co., based in Seoul, has the most, with 26 orders, the data show. Hyundai Heavy Industries Co., the world’s largest shipbuilder by market value, has orders for 16."

Platts reports that US February crude imports were down 649 kb/d to 9.203 mb/d from January, or about 6.6%.

"Preliminary data from the EIA show Canada retaining the lead supplier slot with 1.913 mb/d, down from 1.946 mb/d in January and 2.033 mb/d in December.

Mexico climbed to second place, pushing Saudi Arabia back into third place despite a fall to 1.219 million b/d from January's 1.299 mb/d.

Crude imports from Saudi Arabia fell to 1.135 mb/d from 1.337 mb/d the previous month, a drop of 200 kb/d."

The US imported 962 kb/d from Venezuela, 671 kb/d from Angola, 519 kb/d from Iraq, 457 kb/d from Nigeria, 365 kb/d from Brazil, 251 kb/d from Kuwait, and 243 kb/d from Ecuador.

9. THE TENTH AMENDMENT

In a movement I regarded merely as a way for the GOP to rebrand itself some time back--see Daily Sources 2/6 #11--a rather large number of states have seen similar bills introduced. I predicted that the bills were unlikely to pass, and though they have failed in several states, one has apparently passed in Idaho. I haven't had time to explore which of these are petitions and which are law, but it is certainly an interesting development. The site hosting the movement is quite explicitly secessionist, see the item in the lower left hand corner which has a fictional account of the US post-secession. I still doubt that the movement will gain enough support to represent a serious threat to the Union, but would make the note that I can think of quite a few liberal ideas and states which could arguably be put into effect by recourse to the Tenth Amendment, should the courts recognize the various legislatures' interpretation of the document. The movement seems to entertain the somewhat laughable notion that the economies of certain oil and gas states would have a major renaissance as federal environmental and concessions limitations were lifted. Of course, the additional supply wouldn't be all that great for those stripper wells. (h/t Gregor.us)

10. SPANISH PROSECUTORS MOVING AHEAD WITH PROSECUTION OF BUSH ADMINISTRATION OFFICIALS

Juan Cole notes that Spanish prosecutors appear to be moving ahead with the prosecution of Attorney General Alberto Gonzales and other Bush Administration officials and that others are likely to be indited according to Scott Horton include:

"Federal Appeals Court Judge and former Assistant Attorney General Jay Bybee, University of California law professor and former Deputy Assistant Attorney General John Yoo, former Defense Department general counsel and current Chevron lawyer William J. Haynes II, Vice President Cheney’s former chief of staff David Addington, and former Undersecretary of Defense Douglas J. Feith"

Cole also links to an Al Jazeera interview of Richard Armitrage where he states that he and Colin Powell lost the battle inside the Administration to ensure that the Geneva Conventions were applied to enemy combatants in the "war on terror."



Prof. Cole's summary and analysis are worth reading.

Daily Sources 4/7

1. Gráinne Gilmore at the London Times reports that new forecasts from the IMF will suggest that bad debts held by banks and insurers are likely in the neighborhood of $4 trillion.

"The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia."

In the meantime, Nina Koeppen at Real Time Economics reports that the German business daily Handelsblatt quoted Jürgen Stark, a key member of the European Central Bank Executive Board, as saying that the decision to increase the resources of the IMF to lend to developing economies by $500 billion and to allow them an issue of $250 billion in special drawing rights amounts to "pure money creation." As an occasional reader remarked to me privately: the Germans probably are most worried by the specter of inflation under the Weimar Republic, where in 1923 consumer prices were doubling every two days.

2. Anna Shiryaevskaya and Robert Perkins at Platts report that Gazprom has reached a deal to purchase Eni's 20% stake in Gazprom Neft (an asset purchased in the April 2007 bankruptcy sale of Yukos) for an estimated $4.2 billion.

"Eni also signed several other cooperation agreements for projects in Russia and abroad with the main Russian energy companies, including electricity company Inter Rao UES, state oil producer Rosneft, oil pipeline operator Transneft and engineering company Stroytransgaz.

Eni plans to "start a wide program of strategic cooperation involving different activities in the energy field" with these companies."

In a statement, Eni said:

"These agreements will further foster ties between Italy and the Russian Federation and will significantly strengthen security of gas supplies to Italy and Europe."

3. Julia Kollewe at the Guardian UK reports that British industrial production fell by an annual rate of 12.5% in February. Output was down 1% from the month earlier, which may be somewhat encouraging given that February is about 10% shorter than January.

4. Manfred Ertel at Der Spiegel reports that with Greek government debt at 94% of GDP, facing disciplinary action by the EU for exceeding the euro zone budget deficit limit of 3% for the third time, and its financial sector hoarding cash after being burnt by financing in eastern Europe and the Balkans, the country is facing a brutal credit crunch which is beginning to bring sectors of the economy to a halt. Worth reading.

5. The Associated Press carried the full text of President Obama's speech in Ankara yesterday. It is long, and worth reading in full, but I thought the most important paragraphs were these:

Make no mistake, though: Iraq, Turkey and the United States face a common threat from terrorism. That includes the al-Qaida terrorists who have sought to drive Iraqis apart and destroy their country. That includes the PKK. There is no excuse for terror against any nation.

As president, and as a NATO ally, I pledge that you will have our support against the terrorist activities of the PKK or anyone else. These efforts will be strengthened by the continued work to build ties of cooperation between Turkey, the Iraqi government, and Iraq's Kurdish leaders, and by your continued efforts to promote education and opportunity and democracy for the Kurdish population here inside Turkey.

This preceded much of the talk of "engaging with the Muslim world," which, evidently, many Turks find offensive anyways, as in, who speaks of the Netherlands, for example, as a "moderate Christian nation." That said, Marc Lynch at Foreign Policy remarked that several Arab commentators were especially impressed that Obama chose to visit a Muslim nation before having visited Israel:

"Several Arab columnists noted with amazement that Obama visited a Muslim country before he visited Israel--which they are taking as a potentially politically costly, and therefore more credible, signal of the importance he places on reaching out to the Muslim world. And not just any Muslim country--as a number of Arab commentators note, Turkey is particularly popular right now because of Erdogan's outburst against Shimon Peres in Davos and his outspoken support for Gaza, along with Turkey's good relations with Syria, Hamas, and others across the great Arab political divide. If there is another speech to come, as I believe there is, it will be interesting to see how that choice balances the Turkey gambit."

That said, Turkey is an ally of Israel. Meantime, Der Spiegel reports on the annoyance mooted by various European politicians at Obama's support for Turkish membership in the EU.

"'It is a meddling in the internal affairs of Europe,' Bernd Posselt, a member of the European Parliament from Bavarian's conservative Christian Social Union (CSU), blustered in an interview with SPIEGEL ONLINE. 'The EU is not Obama's plaything. ... He should accept Turkey as America's 51st state instead,' he continued.

Markus Ferber, the CSU's lead candidate in European Parliament elections set for early June, echoed his party colleague. 'There is no question that the US has a voice in NATO. But when it comes to membership in its own club, the EU decides by itself,' he said. 'We don't need any tutoring from abroad.'

Party head Horst Seehofer said that Europe's 'internal harmony' is dependent on 'common cultural and spiritual roots.' He went on to say that 'Turkey, as self-proclaimed representative of the Muslim world, clearly doesn't fit in.'"

Sarkozy and Merkel also indicated opposition to the notion at this stage:

"Sarkozy was quick to reject Obama's support for Turkish EU membership. Speaking after the US president said in Prague on Sunday that membership for Turkey would 'ensure we continue to anchor Turkey firmly in Europe,' Sarkozy said: 'I have been working hand in hand with President Obama, but when it comes to the European Union it is up to member states … to decide.'

German Chancellor Angela Merkel, whose own conservative Christian Democratic Union is likewise skeptical of Turkish membership--preferring a 'privileged partnership' for the country--spoke of 'differing opinions' when it came to Turkey's EU ambitions."

Worth reading in full. Of course, it costs the US nothing to support Turkish membership in the EU, and it gives the Obama Administration capital in Ankara, much as German and French bashing of "American capitalism" costs them nothing, and gives them political capital at home.

6. Ernesto Londoño, Michael D. Shear and William Branigin at the Washington Post report that in his surprise visit to Iraq today, President Obama said it is time for the Iraqi's to "take responsibility for their country." The statement was greeted with "wild cheers" by the troops.

7. Reuters reports that Russia and China, in the UN Security Council, with the support of three other council members, have indicated that they oppose a resolution which would punish North Korea for its recent satellite launch. The Security Council held a three hour meeting to discuss the issue on Sunday, but agreed to no action outside of agreeing to take up the issue again soon.

"The five permanent members of the Security Council--the United States, Britain, France, China and Russia--plus Japan met at UN headquarters on Monday to explore a possible compromise, but Japan and the three Western powers failed to persuade Russia and China that strong condemnation was needed."

8. Jane Perlez at the New York Times reported yesterday that the recently reinstated Chief Justice of the Pakistani Supreme Court, Iftikhar Muhammad Chaudhry, has asserted the court's jurisdictional supremacy in Swat Province by hauling in the Attorney General and other officials before the court to be castigated for failing to put a stop to the public flogging of a woman by the Taliban.

"From the volley of exchanges between the judges and the officials, and an impassioned account by a prominent lawyer before the court of the terror in Swat, it became clear that the Taliban ran the area with impunity.

Chand was singled out for the punishment after she declined a Taliban fighter’s proposal for marriage, the head of the Peshawar Bar Association, Abdul Latif Afridi, said after the hearing.

After her refusal to marry, an electrician visited the family home, and, according to Mr. Afridi’s account, the scorned Taliban suitor saw her leave the house with the workman. She was flogged on March 7, accused of consorting with the electrician as an unmarried woman, the lawyer said.

Since the video was first shown on Pakistani television stations last Thursday, it has set off an emotional national debate."

The government struck a deal recently with the Taliban in Swat to allow for the imposition of sharia law, but with the proviso that the federal courts would remain the courts of appeal.

9. Patrick Harrington at Bloomberg reports that President Hugo Chávez's press office released a statement upon his leaving Japan for China today that he secured $33.5 billion in Japanese investments in Venezuela.

"Investments ... include $10 billion within five years in liquefied natural gas, $8 billion in petrochemicals, $1.5 billion in refining and $4 billion in a joint-project finance fund ... according to an e-mailed statement sent by his press office. Chávez didn’t specify where the remaining $10 billion would be invested ...."

Harrington also reports that "today said the first African-American US president was 'blacker' than former US Secretary of State Colin Powell." However, after a pretty long search of Venezuelan online (and Spanish-language) news, I could find no confirmation that this remark was made or any sense of the context. On the other hand, I did find a story that Chávez quite positively responded to Obama's decision to work on a new nuclear disarmament efforts with Moscow, saying that he would "extend a hand" to the US in the pursuit of peace in the upcoming Americas Summit in Trinidad and Tobago. Chávez also responded to the question of whether it was contradictory to enter into large oil financing agreements with Tokyo if Caracas wished to pursue an "alternative to the US" strategy, saying,

"La alianza que hemos comenzado a tejer Venezuela y Japón es el reflejo de un mundo de países independientes, de gobiernos libres para decidir su propia política exterior sin depender de ningún centro de poder mundial."

or, more or less

"The alliance initiated between Venezuela and Japan is a reflection of a multipolar world of independent nations, of governments free to decide upon an appropriate foreign policy without relying on a single center of global power."

Meanwhile, Rebecca Wilder at News N Economics reports that it is beginning to look as if the Bank of Japan has begun a policy of "quantitative easing:"



Worth reading.

10. Jacob Greber at Bloomberg reports that the Reserve Bank of Australia cut its benchmark rate by 0.25% today to 3%. The rate is the lowest seen in 49 years and is the latest in 4.25 percentage points worth of cuts since September of last year.

11. Upstream online reports that Baker Hughes reported that the global rig count fell by 440 nearly 16% in March from February to 2753 actively exploring or drilling for oil or gas. The US rig count fell by 215 or 19% to 1105 in March from February.

12. Justin Fox at the Curious Capitalist has another go at plotting the fall in employment in the current crisis against that of the Great Depression:



This is for non-farm payrolls, which represents a much larger share of the total population today than it did in 1929. That is, of a 121,767,000 total population in 1929, 10.5 million, or 8.6% were employed in "agriculture," of 305 million or so total population today, about 3.5 million are employed in "agriculture," or 1.2%.

13. Darrell A. Hughes at Real Time Economics reports that the quarterly survey of CEOs by the Business Roundtable was published today and showed that 67% expect their sales to fall. Nearly 75% expect to lay people off.

"The Washington-based Business Roundtable is an association of CEOs for 160 top US companies. The quarterly survey, completed between March 16 and March 27, aims to provide the executives’ outlook on sales, capital spending, employment and U.S. economic growth for the subsequent six months."

Daily Sources 3/16

1. Real Time Economics carries the full text of the G20 communique released on Saturday. Key excerpts:

"2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
...
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest.
...
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to offbalance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures."

2. Michael Wines, Keith Bradsher, and Mark Landler at the New York Times reported on Friday that Chinese Prime Minister Wen Jiabao aired some of Beijing's worries with regard to their holdings of US debt ahead of the G20 meeting in London.

"'President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. ... We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.'

He called on the United States to 'maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.'"

3. Xinhua reports that the Chinese Ministry of Finance announced on Friday that the 5 billion yuan (~$732 million) stimulus plan directed at subsidizing the purchase of automobiles and motorcycles in rural areas will translate into a 10-13% discount, respectively.

"Farmers who buy light trucks and minivans from March 1 to Dec. 31, would get a 10 percent discount, with the ceiling subsidies of 5,000 yuan (~$732.29).

Subsidies of 2,000 and 3,000 yuan (~$292.92 and ~$439.37) can be use to replace old three-wheeled and four-wheeled vehicles respectively.

From this Feb. 1 to Jan. 31 in 2013, farmers who buy motorcycles would get 13 percent of the purchase price back, with ceiling subsidies of 650 yuan (~$95.20)."

4. Borzou Daragahi at the Los Angeles Times reports that Iranian state television on Saturday carried an announcement by government officials that a $3.2 billion deal to develop the South Pars natural gas fields had been stuck with China.

5. Marcus Hand at Lloyd's List reports that Singapore port container cargo traffic fell by an annual rate of 20% in February. The number of containers that went through the port fell by 6% from January to 1.85m teu. Singapore's port is the world's largest container port.

6. Pamela Constable at the Washington Post reports that Pakistani President Zadari announced early today that he would reinstate a number the judges deposed by Pervez Musharraf in 2007, including former Chief Justice Iftikhar Mohammed Chaudhry.

"Zardari's turnabout came after thousands of demonstrators poured into the streets of this leafy capital of Punjab province [Lahore] Sunday, throwing rocks at police and cheering wildly. A wide cross section of Pakistan's political, social and religious sectors joined the day-long protests.

As the demonstrations escalated, police first responded with volleys of tear gas. But by mid-afternoon they suddenly withdrew from the streets, while numerous city and provincial officials were reported to have resigned. The swift collapse of authority signaled the end of Zardari's bid to seize control of Punjab, the most politically influential region of the country, and raised serious questions about his ability to remain president."

Worth reading in full. Includes links to fascinating pictures of hordes of lawyers protesting in Pakistan.

7. Haig Simonian at the Financial Times reports that on Friday Switzerland's finance minister, Hans Rudolf Merz, "said Bern would abolish the strict distinction between tax fraud, a crime in Swiss law, and tax evasion, a civil offence." Merz stressed that customer accounts would remain secret in all but exceptional cases, meaning that a specific request from an investigative body would be required in order to obtain the data, or so I infer. As I've said before, changes of 500 plus year traditions are better indicators, to me, of what kind of stresses the financial system is under than most. (h/t Yves Smith at naked capitalism.)

8. Eurointelligence notes a media report that Finnish manufacturing orders are down 38% year over year in January.

9. OPEC decided in its meeting Sunday to maintain the current quota allocations, and called on its members to fully comply with them. Current compliance is 79% according to the cartel--the producers which are probably the largest over-suppliers are Iran and Venezuela, ironically usually the biggest hawks in the group. The OPEC press release following the meeting can be found here. Key excerpt:

"The Conference, however, welcomed, some initial signs reported of a reversal in crude oil-stock trends, and a narrowing of the contango in the front price structure, indicating that the adjustment process instigated through OPEC measures vis-à-vis excess supply in the market is gradually helping to redress balance, and was also pleased to observe that following the decision taken by the 151st (Extraordinary) Meeting of the Conference in December 2008 to cut 4.2 mb/d from the actual September 2008 OPEC-11 production level with effect from 1st January 2009, compliance for the month of February, according to secondary sources, was 79%, which has contributed to balancing the price of the OPEC Reference Basket at around US$40/b since the beginning of the year, despite the critical economic outlook.

The Conference therefore emphasized its commitment to comply fully with its decision of December 2008, in order to further contribute to market stability. The Secretariat will monitor very closely developments in the market. Furthermore, the Conference will convene in Vienna, on Thursday 28th May 2009, to consider any further actions deemed necessary."

On a side note, the cartel decided to lengthen Abdullah Salem el-Badri's (of Libya) stay as Secretary General of the organization for another three year term. At Environmental Capital, Spencer Swartz reports that Russia decided not to join the organization or coordinate any serious production cuts.

"[Russian deputy prime minister Igor Sechin] proposed a slew of things for Russia and OPEC ministers to work on together, such as coordinating (i.e., raising) taxes on foreign oil firms’ crude production and refining operations."

Moscow had indicated that it would consider to what extent OPEC was complying with headline cuts before it joined in cooperation. Even so, this has to be considered good news in the West, given recent noise from Moscow and hints from Tehran.

10. Rania El Gamal at Reuters reports that Sheikh Nasser al-Mohammad al-Sabah told al-Watan newspaper that the country would officially cancel the al-Zour 615 kb/d export refinery construction project today in remarks published Sunday. In May, KNPC awarded $8.4 billion in construction tenders to four South Korean and one Japanese firm to build the refinery.

11. Rainbow Nelson at Lloyd's List reports that the Chavez administration expects the Venezuelan Congress to pass a law tomorrow which would transfer the administration of ports from the regional to the state level.

"'We are going to recover the ports and airports in the whole republic, oppose it whoever wants to, this is the law of the republic,' Mr Chavez said on his weekly television program ‘Alo Presidente’.

He warned Henrique Salas, who governs the department of Carabobo and oversees Venezuela’s most important port, Puerto Cabello, and Manuel Rosales, the governor of Zulia, which oversees the port of Maracaibo, that the navy and army would be used to quell any opposition to the move."

Opponents have pledged to resist the law.

12. The Associated Press reports that Mexico has slapped import duties on 90 US products in retaliation for the cancellation of a program that had allowed Mexican trucks to trasnport goods within the US.

13. Mary Williams Walsh at the New York Times reports that AIG issued a press release Sunday which provided the names of the institutions and governments which received payments via the bailout monies provided to the insurance company.

"Financial companies that received multibillion-dollar payments owed by AIG include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

AIG also named the 20 largest states, starting with California, that stood to lose billions last fall because AIG was holding money they had raised with bond sales."

14. Justin Fox at the Curious Capitalist dug up the Bureau of Economic Research data on unemployment in the Great Depression to compare them to the financial crisis of 2008.



As Fox notes, nonfarm employment accounts for a much larger share of total employment in the US today than it did in 1929. Still, nonfarm employment accounted for about 78% of all private sector hours worked at that time, according to Robert Higgs at the Independent Institute.

Daily Sources 3/12

1. Edward Cody at the Washington Post reports that France will return to a full membership in NATO after a 43 year departure.

"'The time has come,' [President Nicolas Sarkozy] said in a speech to France's Strategic Research Foundation, adding, 'Our strategy cannot remain stuck in the past when the conditions of our security have changed radically.'"

I never thought I'd see it happen.

2. Platts reports that Prime Minister Putin said today that Russia will not fine Naftogaz for not taking the contracted for volumes of natural gas from Gazprom. Quote:

"[We] forgive these fines because we understand the reality--they have nothing to pay with. They are on the verge of bankruptcy, and you understand perfectly well that you can't kill your partner, because it will then not be capable of anything."

3. Eurointelligence reports that the US is calling for the tripling of funds available to the IMF in preparation for the G20 meeting in London this weekend. "Geithner also said that each G20 country should set a target of spending 2% of GDP for 2009 and 2010 in fiscal stimulus, and that the IMF should monitor progress towards that goal." David Cho and Anthony Faiola at the Washington Post reports that the Administration will ask Congress for nearly double the US commitment to the IMF to $100 billion.

4. Edward Wong at the New York Times reports that China has officially protested the passage of non-binding resolution H. Res. 226 passed by Congress yesterday. In a news conference today, Chinese foreign ministry spokesman Ma Zhaoxu, said that the resolution "makes groundless accusations against China’s religious policies" and "rudely intervenes in China’s internal affairs." HR226 was introduced on Monday and passed on Wednesday with a roll call vote of 422-1. Key language:

"Resolved, That the House of Representatives--

(1) recognizes the Tibetan people for their perseverance in face of hardship and adversity in Tibet and for creating a vibrant and democratic community in exile that sustains the Tibetan identity;

(2) recognizes the Government and people of India for their generosity toward the Tibetan refugee population for the last 50 years;

(3) calls upon the Government of the People's Republic of China to respond to the Dalai Lama's initiatives to find a lasting solution to the Tibetan issue, cease its repression of the Tibetan people, and to lift immediately the harsh policies imposed on Tibetans, including patriotic education campaigns, detention and abuses of those freely expressing political views or relaying news about local conditions, and limitations on travel and communications; and

(4) calls upon the Administration to recommit to a sustained effort consistent with the Tibetan Policy Act of 2002, that employs diplomatic, programmatic, and multilateral resources to press the People's Republic of China to respect the Tibetans' identity and the human rights of the Tibetan people."

5. Tracy Withers at Bloomberg reports that the Reserve Bank of New Zealand cut its benchmark rate by 0.5% to 3%.

6. Seyoon Kim at Bloomberg reports that the Bank of South Korea today decided to leave its benchmark interest rate unchanged at 2%.

"South Korea’s government said today it will provide cash, loans, school fees and other financial incentives valued at 6 trillion won to help those on lower incomes cope with rising unemployment. The aid package will use funds from the extra budget being proposed this month, the finance ministry said.

Bank of Korea Governor Lee said he expects the government to propose 'a significant' extra spending package, financed through bond sales. The central bank will watch the effect of debt sales on financial markets as it decides whether to purchase bonds, he added.

'The Korean economy is likely to remain in recession due to the persistent weakness of both domestic and overseas demand.'"

7. Juan Cole at Informed Comment has a pretty good overview of the situation in Pakistan as the government there rounds up lawyers involved in this year's long march under Section 144 of the Criminal Procedure Code. Cole concludes that the situation is rapidly becoming an open invitation to the military to take over again.

8. Andre Soliani and Joshua Goodman at Bloomberg report that the policy makers at the Brazilian central bank unanimously voted to cut the benchmark interest rate by 1.5% to 11.25% last night.

"The central bank, in a statement accompanying its decision, said it would evaluate the 'magnitude and speed' of 2.5 percentage points in cuts since January and their cumulative effect before deciding on its next steps."

9. Daniel Cancel at Bloomberg reports that Barclay's analyst Alejandro Grisanti said in a speech today in Caracas that Venezuelan GDP was likely to contract by 4.1% in 2009.

10. Vanessa Ronsisvalle and Beth Evans at Platts reports that the EU imposed anti-dumping duties on imports of US biodiesel today.

"The anti-subsidy duty, designed to offset financial incentive offered to US producers by the US government has been set at rates varying from €211.2/mt-€237/mt [$270-$303/mt or ~$36.00-$40.40/b], according to the Commission's decision published in the official journal of the European Union.

The anti-dumping duty has been set at rates varying from €23.6/mt to €208.2/mt [$30.02-$264.81/mt or ~$4.00-$35.31/b]. The anti-subsidy duties specified by the commission vary less, ranging from a low of €211.2/mt to a high of €237/mt [$268.63-$301.44/mt or ~$35.82-$40.19/b].

Details of the EC's decision showed some companies were given individual anti-dumping duties, ranging from as little as €23.60/mt (~$4/b) for Archer Daniels Midland and €60.50/mt (~$10.26/b) for Cargill to a high of €208.20/mt (~$35.31/b) for Peter Cremer North America.

All other companies listed in the commission's statement, including ED&F Man, Louis Dreyfus, Trafigura, Vinmar and Vitol, face an anti-dumping duty of €122.90/mt (~$20.84/b), while imports from companies not named in the document are subject to a €182.40/mt (~$30.93/b) duty."

11. Shobhana Chandra at Bloomberg reports that the Commerce Department today announced that retail sales fell by 0.1% in February from January. The decline was much less than had been expected by most analysts and if you exclude automobile sales from the numbers retail sales climbed by 0.7%.

Daily Sources 3/11

1. Eurointelligence reports that EU finance ministers rejected proposals to soften the requirements for joining the monetary union.

2. Simone Meier at Bloomberg reports that German manufacturing orders fell at annual rate of 38% in January.

3. Andrew Batson at the Wall Street Journal reports that China's customs agency said today that exports fell by 25.7% from a year earlier. Winnie Lee at Platts reports that the preliminary report from the customs office has China importing 11.73 million metric tonnes (~3.06 mb/d) of crude in February. That is slightly up (1.3%) from the 3.02 mb/d (12.82 million metric tonnes) imported in January.

"The country paid $3.65 billion for its crude imports requirement last month, compared with $9.39 billion in February 2008. This was equivalent to an average $42.32/barrel Chinese oil companies paid for its crude imports on a C+F basis in February, $47.11/b or 52.7% less than $89.43/b a year ago."

China exported 610,000 metric tonnes of crude (~159 kb/d) in February, up 50% from 450,000 metric tonnes in January (~106 kb/d). China exported no crude in February 2008. Bloomberg reported that Chinese urban fixed-asset investment climbed by an annual rate of 26.5% in January and February combined to 1.03 trillion yuan (~$150 billion). "The government plans to gradually cut all export taxes to zero to support overseas shipments, Commerce Minister Chen Deming said this week."

4. Reuters reports that Iranian oil minister Gholamhossein Nozari told Fars news that OPEC would readily accept Russia as a member should it choose to apply:

"The ground is ready in OPEC to accept Russia as a new member, but, of course, countries request membership by evaluating and considering their own interests. ... Our message is that non-OPEC (countries) should join OPEC (in helping the market) and we emphasise that a price lower than the current one does not have a justification at all and it stops development. ... It is not logical that OPEC cuts its exports and non-OPEC (countries) pursue their interests."

Nozari alluded to a "solution" that OPEC would utilize at its next meeting last week--see Daily Sources 3/3 #7. In late February, Russian foreign minister Sergei Lavrov said that it was critical to stabilize the market for oil, and that thus Russia's "interests are fully identical in this sphere" with those of OPEC--see Daily Sources 2/23 #8. Clearly, a decision by Moscow to join OPEC would be a tectonic change in the Russian interests calculus and a set back to the US national interest.

Platts reports that Saudi-owned pan-Arab newspaper al-Hayat reported on March 9 that Riyadh had indicated to the OPEC president that it wanted to see better compliance before agreeing to further cuts. Al-Hayat's unnamed source further said that the March 15 meeting would focus on compliance with the current production allocation as opposed to further cuts. Tehran is probably the largest quota cheater in the cartel at this stage.

5. Pamela Constable at the Washington Post reports on the escalating political conflict in Pakistan between President Asif Ali Zardari and opposition leader of the Pakistan Muslim League-Nawaz Nawaz Sharif. Sharif has been speaking to huge crowds across the country urging them to join the lawyers' march protesting the continuing delay in reappointing Iftikhar Chaudhry this week, saying at one point,

"We can change history in seven days. ... The future of Pakistan is bleak, and the constitution is being violated. The whole country is in the process of disintegration."

Now the government has decided to put the kibosh on the lawyers' march, citing Sharif's comments and warning him that further remarks like that would be regarded as sedition. Police have begun arresting and making warning calls to opposition leaders. Well worth reading in full--the site includes a few photos.

6. The EIA reported that crude oil stocks grew by 700,000 barrels to 351.3 million barrels for the week ended March 6. According to a Bloomberg survey, Wall Street analysts had expected a build of 250,000 barrels. The number is well above the historical five year average range for this time of year, but still below the peak seen in 2007. Gasoline stocks, on the other hand, fell by 3 million barrels and is more or less in the middle of the historical range. Analysts had expected a 1 million barrel draw. Distillate stocks--by which the EIA mostly means heating oil and diesel--were up by 2.1 million barrels and are not only well above the historical range for this time of year but counter-cyclical. Analysts had expected a 200,000 barrel build. The EIA also released its Short Term Energy Outlook yesterday. The Oil & Gas Journal reported that the:

"EIA now expects US real gross domestic product (GDP) to decline 2.8% in 2009, leading to a reduction in energy consumption for all major fuels. EIA forecasts that an economic rebound will begin in 2010, with 1.9% year-over-year growth in US real GDP.

Average annual world oil consumption is projected to decline almost 1.4 million b/d in 2009, with consumption in Organization for Economic Cooperation and Development countries falling 1.6 mb/d. This expected decline is 200 lb/d larger than in last month's STEO, reflecting lower expectations of global economic activity this year.

EIA assumes that worldwide GDP growth will decline 0.8% this year, followed by growth of 2.6% in 2010, compared with last month's assumption of a 0.1% decline this year and 3% growth next year.

EIA forecasts that the global economic slowdown will cut the price of West Texas Intermediate crude by more than half from last year's $100/b average. EIA expects WTI to average $42/b in 2009, and $53/b in 2010. These price forecasts are slightly lower than in the previous STEO."

Meanwhile, Robert Perkins at Platts reports that Paris-based IEA senior energy analyst Amos Bromhead told journalists that the financial crisis has shelved spending on 2 mb/d of planned oil production capacity increases, or about $110 billion of planned investment. The DC-based EIA forecast that OPEC would have between 4 and 5 million barrels of surplus capacity in 2009 and 2010.

Daily Sources 2/25

1. Michiyo Nakamoto at the Financial Times reports that Japanese exports fell by an astonishing 45.7% in January as compared to January 2008.

"Exports to Asia sank by 46.7%, the fourth straight month of decline, with shipments to China falling by 45.1%. ... Automobile exports, which comprise about 20% of all exports, suffered a particularly large decline, falling 66% year-on-year."

MacroMan provides a helpful illustration:



Imports fell more slowly than exports, leaving Japan with a trade deficit for the fourth straight month. Japan's prime minister, Taro Aso, is in Washington DC today and gave an interview with the Washington Post in which he had the following to say about the likelihood that China will seek other currencies for their foreign exchange reserves:

"I do not think such a thing would happen. First of all, the reserves of foreign currency that China holds are almost entirely in dollars. I believe they would not take action that could risk devaluation of the dollar. ...

In the case of the US, as long as the [Federal Reserve's] balance sheet is clean, as long as you are able to maintain confidence in the dollar, there's no chance of the US dollar going into a critical situation; I'll guarantee that. . . . Compared to the dollar, the only foreign currency that is strengthening right now is the yen. All the other currencies have only weakened versus the dollar."

His remarks are well worth reading in full.

2. Andrew Batson at China Journal has posted a translation of excerpts from the People's Bank of China's quarterly monetary policy report published this week. Some excerpts of the excerpts:

"China has a problem of high savings and low consumption. For a long time our country’s economic growth has been mainly driven by investment and exports, and the ratio of final consumption [in gross domestic product] has been in a gradual declining trend. The share of investment [in GDP] has steadily risen from 36.6% in 1992 to 43.5% percent in 2008, while the share of consumption has dropped from 62.4% in 1992 to 48.6% in 2008, well below the world average. The high share of investment and exports and the low share of consumption are not conducive to the healthy and stable development of the economy.

The significant slowdown in global economic growth and the great downside risks for the future will directly affect China’s exports and investment in the tradable [goods] sector. Since external demand is inadequate, the driver for economic growth must come from increasing investment or consumption."

"Therefore it is necessary to, in accordance with the requirements of the 'scientific outlook on development,' speed up the transformation of our economic development model, and strengthen consumption as a driver of economic growth, in order to achieve a balanced growth pattern based consumption, investment and exports."

Worth reading in full.

3. Der Spiegel reports that a new report authored by a commission headed by former governor of the Bank of France Jacques de Larosiere was submitted to the European Commission today. The report recommends the establishment of two new "watchdog" groups--the "European Systemic Risk Council" (ESRC), to be chaired by the European Central Bank, and the "European System of Financial Supervision" (ESFS) to "coordinate the transfer of information and supervision throughout the 27-member bloc." The report states:

"The group believes that the world's monetary authorities and its regulatory and supervisory financial authorities can and must do much better in the future to reduce the chances of events like these happening again."

Worth reading. NRC Handelsblad carries an informative interactive map describing the financial situation throughout the EU. An example image showing the debt load of each EU nation:



4. Ambrose Evans-Pritchard at the UK Telegraph reports that credit default swaps on German five-year sovereign debt touched 90 basis points (0.9%) yesterday and looks ready to become more expensive than CDSs on French sovereign debt. The spreads widened partially in response to a warning by Deutsche Bank that the German economy will likely contract by 5% in 2009.

"'The entire Landesbanken system is rotten,' said Hans Redeker, currency chief at BNP Paribas. 'Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.'

'German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill.'"

5. Pawel Kozlowski and Katarzyna Klimasinska at Bloomberg report that the Polish treasury minister, Aleksander Grad, told the journalists that Warsaw plans to accelerate the scheduled sale of state assets in response to the financial crisis. The government will try to raise 2 billion zloty (~$3.4 billion) from the sales, the proceeds of which will go to the corporations as opposed to the central government.

"'One could always wait for better times, but the market is what it is, and companies need funds for investment now,' Grad, 46, said in an interview in his Warsaw office late yesterday. 'Some companies may lose value in two years if they stop investments or fail to acquire a private investor.'"

Worth reading in full.

6. Edward Hugh at Fistful of Euros reports that in the latest statement by the Russian economic minister he indicated that the economy had contracted by an annual rate of 8.8% in January.

7. Jane Perlez at the New York Times reports that the Pakistani Supreme Court barred the largest opposition party's leader--former prime minister Nawaz Sharif--from ever holding elective office, on the premise that he had been convicted of a crime. The court also banned Sharif's brother, Shahbaz Sharif, from staying in office as chief minister of Punjab Province--Pakistan's most important province and the only province not administered by a member of president Zardari's party. However, the legitimacy of the Supreme Court's rulings are in dispute as the government has yet to reinstall Iftikhar Mohammad Chaudhry as Chief Justice, despite the role that the lawyers' revolt had in removing General Musharraf from power. (This is presumably because the former Chief Justice had ruled against Zadari in the past.)

"Mr. Sharif ... has ... pledged to join protesting lawyers in a long march from Lahore to Islamabad next month, and to take part in a planned sit-in in the capital. The lawyers are campaigning to restore Chief Justice ... Chaudhry."

8. Shashank Shekhar at Emirates Business 24/7 reports that the CEO of the Dubai Mercantile Exchange, Thomas M Leaver, told the journalist that he was sure that Saudi Aramco would move the pricing benchmark of its crudes to the Oman contract sooner or later:

"I don't know whether it will happen soon, but it will definitely happen. ... We believe that if Saudi Aramco incorporates the DME price into its pricing methodology, other national oil companies in the region will follow."

The credit crisis and the fall in oil prices from the Summer of 2008 have served as a catalyst for national oil companies in the Gulf to look at the DME as a pricing option.



The settlement price of the Oman contracts is somewhat exotic, with the price being settled not by the last sales price but rather by the weighted average prices in the "nearby contract month" between 4-4:30 pm Singapore time.

9. Reuters reports that Saudi Aramco shipped its first cargo of crude to the Fujian refinery recently upgraded in its joint venture with Sinopec and Exxon. The cargo was 900,000 barrels of Arab Extra Light. Fujian is currently running at 80 kb/d and should begin running at 240 kb/d later this year. Sinopec hopes to further expand the refinery to a capacity of 480 kb/d between 2010 and 2015.

10. Carlos Camacho at Platts reports that Venezuelan finance minister Ali Rodriguez today said in a television interview that Caracas would push for a further supply cut in the March 15 meeting in Vienna.

11. Eric Watkins at the Oil & Gas Journal reports that Bolivian president Evo Morales has accused the national oil firm--Yacimientos Petroliferos Fiscales Bolivianos [YPFB]--of having been infiltrated by the CIA. YPFB has been subject to a corruption investigation which has embarrassed Morales because one of his major political collaborators was more or less caught red handed receiving half a million in kickbacks from the company.

12. Lester Pimentel at Bloomberg reports that Jakarta plans to sell dollar denominated bonds to mature from 2014 and 2019 on the international markets in order to fund the stimulus plan passed by the parliament yesterday.

"Indonesia’s parliament yesterday approved a 73.3 trillion rupiah ($6.1 billion) stimulus package and endorsed the 2009 budget, paving the way for the country to sell as much as $4 billion of dollar-denominated debt to finance a budget deficit of 139.5 trillion rupiah, or 2.5% of gross domestic product."

13. The New York Times carries a transcript of President Obama's speech last night, which was optimistic in tone. Extremely long, but worth reading if you have time.

14. Courtney Schlisserman at Bloomberg reports that the National Association of Realtors said today that sales of previously owned homes fell by 5.3% to an annual rate of 4.49 million.

15. Rebecca Wilder at News N Economics has an analysis of the latest consumer confidence survey, which hit a record low for the fifth consecutive month in a row of 25. Her graph of the survey's performance over time:



Worth a look.

16. The EIA reports that crude oil stocks grew by 700,000 barrels in the week ended February 20 to 351.3 million barrels. The stock levels are well above the historical range and the build was below Wall Street expectations, as per a Bloomberg survey, of a 1.25 million barrel build. Gasoline stocks fell by 3.4 million barrels versus analyst expectations of stocks staying at the same level. Distillate stocks rose by 800,000 barrels and are well above the historical five year range for this time of year. Taken in isolation, the news is mixed, and the draw in gasoline stocks should be more than compensated for by the unusually high stock numbers.

Open Sources 10/22

1. William Branigin at the Washington Post report that President Bush will host a global summit November 15th to discuss the reformation of the international financial system. G-20 members will be invited as well as the officials from the IMF, the World Bank, U.N. Secretary General Ban Ki-moon, and the chairman of the Financial Stability Forum.

2. Katrin Bennhold at the New York Times reports that President Sarkozy of France urged European leaders to establish sovereign wealth funds in order to prevent European companies from being purchased via foreign capital when they are at their lowest market value. This is kind of an odd position given Sarkozy being at the forefront of calls for an international response to the financial crisis. What this underscores is that Sarkozy, in a way consistent with a history of Gaullism, is a European-ist, and not particularly an internationalist. Germany opposed a pan-European response to the financial crisis on what appeared to be nationalist grounds--that is, they didn't want German banks to fall as other European ones soldiered on--and opposes this suggestion as well, apparently because Berlin just doesn't want to let France look like its leading the European charge. Wall Street Journal Europe's editorial board also came out against the idea today.

3. Ann Scott Tyson and Philip P. Pan of the Washington Post report that Gen. Nikolai Makarov, head of the Russian general staff, told reporters in Moscow following his meeting with his American counterpart in Helsinki that:

"We agreed that on fundamental military issues, we will periodically hold dialogues by phone and, when necessary, at personal meetings that I think will be held on a systemic and routine basis."

This followed the first visit ever by an American Chair of the Chiefs of Staff in Serbia, which perhaps should be seen as the first move in a ... much needed ... "listening tour." The establishment of routine and systemic meetings between Russian and US military establishment chiefs is a very welcome development. In a related story, the Washington Post's Thom Shanker reports that US Chairman of the Joint Chiefs of Staff Adm. Mike Mullen said the NATO was considering increasing the number of military exercises in the Baltic. Adm. Mullen said it was a response to Russia's military action in Georgia. (I suspect it might also serve as a response to military exercises off the coast of Venezuela.)

4. Eric Watkins at the Oil and Gas Journal reports that Russia and Japan have signed an accord to cooperate on oil and gas development.

"The document stressed that the Japanese government promotes participation of Japanese companies in energy projects in Russia, including the establishment of gas processing and gas chemical production facilities in eastern Russia.

The two sides also hailed the start of joint exploration for oil in eastern Siberia, which they said would help to drive the East Siberia-Pacific Ocean pipeline."

Japan has been encouraging Moscow to build a pipeline from the Caspian, essentially, to the Pacific Ocean for some time. Tokyo offered $14 billion to help build the structure, but Russia seemed to have bet on China's market at that time. Chris Buckley has a related story at Reuters, that Chinese Premier Web Jiabao will visit Moscow next weeks in an attempt to jump start plans to build pipelines to deliver Russian natural gas to China. Russia has been reluctant to divert gas away from its main customer--and region with which it wants most to integrate--Europe. (It also has plans to ship LNG to the US East Coast from gas fields in the Barents Sea.)

The Wall Street Journal reports that Iran, Qatar, and Russia agreed to form a natural gas cartel yesterday in a meeting at Tehran. Together the three countries control about 60% of the world's natural gas reserves. Natural gas is relatively difficult to sell at spot, and tends to be sold on very long term contracts given the immense capital requirements for building the requisite infrastructure. Thus there is a bit of a shrug in the oil and gas world's response (pace the response in the papers, which is sure to be shrill.) That said, the Associated Press reports that the European Commission has said it will have to rethink it's energy security policy if the three countries go ahead with plans for the gas cartel. There may be some bite to this threat as some of Europe had abandoned nuclear power and is in the process of reconsidering it. (Natural gas is burned for power generation in Europe--it isn't really used as a transportation fuel.) The most notable countries reconsidering nuclear are Germany and Italy.

Though Iran has huge natural gas reserves, how it will participate in a gas cartel for the near term, at least, is a bit of a puzzle. Just now it is barely exporting to any country, and, in fact, is importing from Turkmenistan for power generation needs. As per Siamak Adibi of FACTS Global Energy, South Pars--the largest gas field in the world (shared with Qatar)--phase 6 is scheduled to come on line this winter, and phases 7-8 next year. (The field is being developed over the course of 24 phases, the completion of phase 6 is already two years late.) But the natural gas from these phases, 3.6 bscf/d's worth, is all slated to be reinjected into oil fields in order to boost the crude oil production from it. Phases 9-10 are slated for first gas this month and December, if they are not flowing at that time, Abidi fears there will be a heating crisis in Iran this winter as there will not be enough gas to meet the energy generation needs of the country.

Also today, Amie Ferris-Rotman and Vladimir Soldatkin at Reuters report that Russian First Deputy Prime Minister in charge of oil, Igor Sechin, told an industry conference that Russia was considering building a large oil reserve in order to serve as a second swing producer. It's an interesting idea guaranteed to produce headlines. But the critical item is this:

"OPEC Secretary General Abdullah al-Badri, who arrived in Moscow on Tuesday for a two-day trip, met with Russian President Dmitry Medvedev to discuss the exchange of market data."

The thing which bedevils the oil markets the most, of course, is the horrible data. Whether or not OPEC is honest even within itself, and thus likely to be with Russia, really is inconsequential if they are simply more honest with each other, and thus with Russia, than with the rest of the world.

5. China Chon at the Wall Street Journal reports on Iraqi Ministry of Finance officials' struggles to retool the 2009 budget on the back of lower oil prices. The budget was based on a $80/b assumption for oil price, and, as you know, oil is now below that. Evidently the budget already envisioned running at a deficit as the government would only have broken even had the price of oil averaged $111/b over the course of 2009. Running a deficit may be difficult for Baghdad, but one likely consequence of the fall in price is that small operators who have secured concessions from the Kurdistan Regional Government will find financing much more difficult to secure from international financial sources. If Kurdish areas become insecure as a result of conflict, as is possible in areas like the province of Diyala, the security costs might bring up the cost of production beyond what the price of oil would bear. Given that Baghdad has an interest--and believes the Kurds have violated the Constitution by selling concessions--in asserting control over all oil resources in the Kurdish regions, Baghdad may decide to incite conflicts in the north. Larger companies will be reluctant to bail out smaller entities engaged in the Kurdish regions as they will want to maintain good relations with Baghdad and thus continue to have a shot at much more lucrative potential concessions.

6. Emad Mekay at Bloomberg reports that Shokri Ghanem, chairman of Libya's National Oil Corp, told reporters a cut of 1 million barrels will not be sufficient and that "We are in agreement that the market is flooded and oversupplied." On the other hand, Felix Onuah at Reuters reports that Nigerian Oil Minister Odein Ajumogobia told reporters it was not in Nigeria's interest to cut oil production as it needed the revenues. If, as CGES has suggested, all countries but Saudi Arabia have made the cuts that their budgets can take already, then it really is up to Riyadh. Carola Hoyos reported in the Financial Times that the only primary signal the market has had to go on

are anonymous comments published this week by Al-Hayat, the Saudi-owned paper, which appear to reflect Riyadh's more conservative thinking.

The paper quoted an unnamed source expressing "doubt that demand for oil will adjust [downwards] requiring a substantial cut in production", adding that it was still uncertain whether even 500,000-1m b/d needed to be cut.

AP reports that Venezuela's budget for 2009 is assuming an oil price of $60/b and inflation of 15%/annum.

"The budget predicts next year's economic growth will be 6 per cent and inflation 15 per cent, despite the fact inflation was estimated at 36 per cent in Caracas in September."

Budget difficulties make it difficult for the major price hawks, ie Iran and Venezuela (and Iraq), to cut supply as a bloc within OPEC, because it would cut their market share, and thus net revenues given the time it will take for prices to recover. Indeed, generally the ability of price hawks in OPEC to cut independently as opposed to allowing Riyadh to act has been their perennial decision to include high oil price assumptions in their budgets.

7. Faiza Saleh Ambah and Candace Rondeaux at the Washington Post report that Saudi Arabia hosted a meeting between Taliban and Afghan officials in Mecca last month. Saudi Foreign Minister Saud al-Faisal made the revelation after a meeting with EU Foreign Policy Chief Javier Solana in Jiddah on Tuesday. The talks centered on the deteriorating situation in Afghanistan and Pakistan.

"Abdul Salam Zaeef, the former Taliban ambassador to Pakistan, attended the meeting and said there was no discussion of peace talks. Zaeef said Karzai's government missed an opportunity when it failed to engage the Taliban in talks three years ago. Since then, he said, the Taliban has grown stronger. 'Before, the Taliban had no hope that the American rule would collapse here,' he said. 'Now, they have hope.'"

The talks included Nawaz Sharif, former Prime Minister of Pakistan and head of the largest opposition bloc in the country's Parliament. Sharif is an advocate of negotiations with the Taliban.

It is critical that Sharif withdrew the support of his party--the Pakistan Muslim League (Nawaz)--for President Zadari because Zadari refuses to reinstate former Chief Justice Chaudhry. The summary dismissal of Chaudhry was the key rallying point in the lawyers' revolt in that country, which is credited with the fall of Musharraf. I wrote an analysis of the potential benefits of supporting the lawyer revolt, and the further development of the rule of law therefore, in Pakistan previously, should you be curious. It is my view that it is a disaster for the US if their positions are conflated with the political forces in Islamabad which flout the rule of law, especially given the obvious potency of both the lawyer revolt there and sympathy for tribal sentiment in the north.

8. Emily Wax of the Washington Post reports that the trade route connecting Jammu-Kashmir with Pakistan, and thus to the most convenient port city of Kashmir, was opened after 61 years of being shut. It is only open 2 days a week and just 21 products are allowed to be transported via the route, but surely it is a step in the right direction. Especially after the commissioning of the dam in Jammu-Kashmir earlier this month has exacerbated the fuel crisis in Pakistan.

9. Mongolia Web News has the story that India is looking to source uranium from Mongolia.

"Currently, India’s nuclear power plants are only running at half their capacity due to a shortage of uranium-based fuel."

10. Re: jboss's suggestion yesterday on Follow the Money, Winnie Lee at Platts reports that Chinese oil companies PetroChina and CNPC are interested in purchasing foreign oil companies hit by the financial crisis. Angolan assets owned by Marathon were mentioned.

11. Peter Fritsch at the Wall Street Journal reports that new oil from Africa may be too expensive to be produced at current prices. The article mentions that Angolan production has gone down, and sources the country's oil minister as stating that this was a result of an accident at an offshore block. Maybe, but we knew as early as September 16th that this was going to take place--I suspect compliance with the OPEC directive at the September 9th meeting. But the article cites many other issues--exogenous from the technical issues of the geology--most especially security, which has been an endemic issue throughout the continent. Some new oil is inland, which requires the construction of pipelines, which are especially expensive to build and maintain ... providing for their security is notoriously difficult (see all the speculation regarding the BTC recently.) Also, in the absence of a strong national state structure, oil wealth tends to exacerbate difficulties in securing the King's Peace further. Fritsch mentions a case in Uganda where the E&P company, UK's Tullow Oil, analysis has the project--which would require a 750 mile pipeline--profitable only at $80/b or more. (h/t Gregor.us)

12. Chris Giles and Neil Dennis at the Financial Times report that the Governor of the Bank of England, Mervyn King, said that the UK was entering a recession likely to be prolonged. The rate setting committee of the Bank of England also announced it had voted unanimously to reduce the benchmark lending rate by 50 basis points to 4.5%. Mr. King said, “The age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return.”

13. Lisa Baertlein at Reuters reports that an analysis released by Wal-Mart shows that purchases are spiking around the time shoppers receive their paychecks. This appears to be the case even for baby-formula, which suggests that increasing numbers of people are finding it hard to pay for food. Eduardo Castro-Wright, Wal-Mart's CEO, said that the company's most recent poll of shoppers found that personal financial security was the number one issue for the vast majority--80%. (h/t Yves Smith, Naked Capitalism)

14. Meena Thiruvengadam at Real Time Economics reports that the Federal Reserve will increase the interest rate it will pay on funds deposited at the bank in excess of the deposit insurance requirement from 0.75% below the Federal Funds Rate to 0.35% below. The passage of the emergency financial stabilization bill allowed the Fed to pay interest on excess deposits immediately. Apparently this was ahead of schedule, as the Fed was slated to begin doing so come 2011. The linked post includes the full statement from the Fed. Neil Irwin at the Washington Post reports that yesterday the Fed established a program which will make up to $540 billion available to buy assets from money market funds so as to prevent the funds from experiencing any cash crunches and thus being short squeezed.

15. Eric Dash at the New York Times reports that Wachovia reported a $23.9 billion loss today.

16. The EIA reported that stocks of crude oil were up 3.2 million barrels, somewhat above the historical average. Stocks of gasoline were up 2.7 million barrels and distillate were up 2.2 million barrels, both now at about the bottom of the historical average. Analysts expected a 2.9 million barrel build in crude stocks, according to Platts' survey Tuesday. Taken in isolation, this would put downward pressure on prices.