Daily Sources 8/3

NETHERLANDS TO LEAVE NATO

Robert H. Reid at the Washington Post reports that the Netherlands became the first NATO country to withdraw its troops from Afghanistan this Sunday.

"Canada has announced that it will withdraw its 2,700 troops in 2011, and Polish President Bronislaw Komorowski has promised to pull out his country's 2,600 troops the year after."

EURO ZONE MANUFACTURING PMI WAS 56.7 IN JULY

Prieur du Plessis at Investment Postcards from Cape Town reports that

"The Euro Zone Manufacturing PMI of 56.7% for July released by Markit yesterday was even better than the earlier flash estimate of 56.5% − a number that surprised on the upside. Despite all the gloom and doom about the prospects for the euro zone, growth of both manufacturing production and new orders accelerated to the fastest growth since April while employment rose at its fastest rate in 26 months."

For a table of PMIs and their trends, click on the link.

CHINA'S US DOLLAR HOLDINGS NOT OUR PROBLEM

Yves Smith at naked capitalism pours cold water on the notion that Chinese holdings of large amounts of US dollar reserves is somehow the US's problem.

KUWAIT COMFORTABLE WITH $75 - $85 /B OIL

Bloomberg reports that Kuwait is comfortable with oil prices in between $75 and $85/b.

"'We are satisfied with the range of $75 to $85,' Sheikh Ahmad Al Abdullah Al Sabah said in Moscow on Tuesday. 'We don’t anticipate any cuts but we do encourage other OPEC countries to be more compliant.'"

MANUFACTURING PMIs FOR EMERGING ECONOMIES POINT TO GROWTH SLOWING

Prieur du Plessis at Investment Postcards from Cape Town notes that "the Markit Manufacturing PMIs for emerging economies generally point to growth slowing in the manufacturing industries in the respective countries." For a table of PMIs and their trends, click on the link.

TREASURY SECRETARY SAYS THE RECOVERY IS WITH US

Treasury Secretary Timothy Geithner has an op-ed at the New York Times entitled Welcome to the Recovery. My guess is that its more than a tad premature, but it's worth reading.

CONSUMER SPENDING STAGNATED IN JUNE

Timothy R. Homan at Bloomberg reports that consumer spending stagnated in June, with purchases unchanged after a revised downward increase of 0.1% in May. The savings rate increased to 6.4%.

PENDING HOME SALES FELL BY 2.6% IN JUNE

Peter Boockvar at the Big Picture reports that "[a]fter dropping a whopping 30% m/o/m in May after the expiration of the tax credit, Pending Home Sales unexpectedly fell by 2.6% in June vs a forecasted rise of 4%."

WORLD BANK PAPER CONCLUDES THAT BIOFUELS NOT THE CAUSE OF GRAIN PRICE SPIKE OF 2006-2008; WORST DROUGHT IN 50 YEARS IN RUSSIA DRIVING UP GRAIN PRICES AGAIN

Renewable Energy World.com reports that a new white paper from the World Bank concludes that biofuels were not responsible for the spike in grain prices from 2006 - 2008. Although the report concludes that ethanol was a factor, it points to a number of other factors that caused the price spike, including energy prices, speculation in the futures market, and poor weather conditions in certain areaas. Meanwhile, Maria Kolesnikova at Bloomberg reports that Russia is facing the worst drought in fifty years is threatening the winter grain sowing plans.

"Wheat jumped to a 22-month high in Chicago trading yesterday, extending a 38 percent advance in July that was the biggest since 1973."

Daily Sources 7/22

1. DO COAL STOCKS INDICATE GLOBAL RECOVERY?; WTO SAYS GLOBAL TRADE TO CONTRACT 10% IN 2009

Thomas MacLeod yesterday at Seeking Alpha deduced from the performance of global coal ETF KOL, the US DOW Coal Index, and the global steel ETF SLX that energy consumption globally is up and thus is the global economy beginning a rebound.

"The commodity that we believe is more representative of pure changes in economic fundamentals is coal. It is difficult to manipulate, its supply is not so affected by political or natural events and it is comparatively difficult and expensive to store, which effectively weeds out speculators.

Moreover, coal is a genuine industrial commodity with over half of the world’s electricity generation being powered by coal fired power stations. It is integral in the production of steel and can be converted to produce crude and other industrial chemicals.

In order to analyze the behavior of coal we look at the movement of coal stocks relative to major market stock indices. This eliminates the impact of stock market movements so we can ascertain the movement due to changing expectations of coal demand and supply. In essence, outperformance of coal stocks suggests global economic expansion."

Of course, the performance of coal stocks does not represent a one-to-one ratio to consumption. The latest data on coal volumes shipped by train, for example, still shows 8% down year over year, which suggests that in North America, anyway, it is difficult to deduce a rebound on the basis of coal volumes. Meanwhile, Jonathan Lynn and Kazunori Takada at Reuters reports that the WTO has forecast that world trade will shrink by 10% in 2009.

"The WTO said however the contraction appeared to be slowing.

'Our figures showed that Asian countries may be leading a recovery in global trade,' [Director General Pascal] Lamy told a news conference in Singapore, where he was attending a two-day Asia Pacific Economic Cooperation (APEC) trade meeting."

2. IMF SAYS CHINA COULD STAND MORE STIMULUS IN CONTRAST TO WORLD BANK ASSESSMENT, CHINA INDICATING THAT IT WILL USE ITS FOREIGN CURRENCY RESERVES TO FUND CHINESE FIRM EXPANSION OVERSEAS, IN PARTICULAR RESOURCE PLAYS, CHINESE OIL IMPORTS IN JUNE WAY UP IN CONTRAST TO OFFICIAL COMMENT THAT STOCKPILING OVER

Timothy R Homan at the Bloomberg reports that the IMF has indicated in its first executive-level review of China in three years that there is scope for more fiscal stimulus in that country.

"The IMF’s assessment is a clash with the World Bank, the international development-aid agency also based in Washington, which last month advised China to delay until 2010 any additional stimulus. It also comes as China is already recording an acceleration in its expansion, and as its central bank takes steps to avert bubbles in stock and property markets."

In the April G-20 meeting in London, the Obama administration secured from the IMF a pledge to open up the selection process for the executive directorship of the organization in return for opening up the process for the head of the World Bank, traditionally an American. Some expect China to win the top spot when the next head of the World Bank is selected, but in order for Beijing to have had a real shot, it needed to open up the country to official review from the international financial institutions again. Meanwhile, Brad Setser has some remarks on the recent report that China intends to use its reserves to support the overseas acquisitions of Chinese firms.

"That of course is China’s right. China clearly has more reserves than it really needs, and thus can take some risks with its reserves.

But it also has consequences. If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad."

Kate MacKenzie at FT Energy Source notes,

"In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

'Everyone is saying we should go to the western markets to scoop up [underpriced assets],' said Chen Yuan. 'I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.'"

Meanwhile, Platts notes that Chinese apparent oil demand is up in June. I have reconfigured their data into a barrels per day format:



3. GERMAN ROLE AT ECB MAY BE ESPECIALLY PROBLEMATIC FOR COORDINATING GLOBAL RECOVERY, ECB ARGUES THAT ITALY'S ADOPTION OF THE EURO HAS CUSHIONED THE COUNTRY'S ECONOMY FROM ITS POLITICAL INSTABILITY

Jörg Bibow at the New America Foundation has an interesting piece on the German role in determining monetary policy for Europe and why it is presenting a serious obstacle to an effective global response to the financial crisis. Key excerpts:

"Within German 'stability culture' the Bundesbank's part was to enforce discipline, both budgetary discipline and wage discipline. The result was not only low inflation, but inflation lower than inflation of Germany's trading partners. And that is an important factor within any system of pegged nominal exchange rates: over time a country with relatively low inflation gains in competitiveness which is boosting its export performance. Stability policy worked well under the Bretton Woods regime, establishing both Germany's export-oriented growth strategy and the Bundesbank's claim to fame as inflation fighter."

"Exporting the German model to Europe through the Maastricht regime meant inflation would be low across Europe, while all countries would try to balance their budgets at the same time. When German stability policy was jointly applied across Europe in the early 1990s, the predictable result was domestic demand stagnation and rising unemployment. Even by 1996 it looked as though EMU was not going to fly because stagnation kept budget deficits above the 3% ceiling across the continent. Luckily, the US 'new economy' boom and strong US dollar came to the rescue, and eleven countries qualified in the spring of 1998 to launch the euro in January 1999. In other words, laboring under the Maastricht constraints, Europe failed to generate sufficient homemade demand growth, but benevolent external forces allowed the euro to get off the ground just on time."

"What does all this mean for the collective action problem which, as I said at the start, the world is facing today? Recovery from the ongoing global crisis requires everyone to pay their dues and pull their weight. Built into the German model is a strategy to rely on the recoveries of others to sponsor one's own. The German model has become the European model (pace the U.K). ECB president Jean-Claude Trichet said as much in 2004 when Euroland was last hoping for external sponsors of recovery: 'Growth starts with exports, then passes on to investment and then to consumption. That is the normal sequence for Europe in this phase of the cycle.' (FT 22 April 2004). The trouble is that Europe's economy is as large as America's or even larger, and the German model wholly unsuitable for a large economy. In addition, Europe has its hands full with its own homemade crises, crises which are largely the consequence of the German model as well. Recent statements made by key German policymakers clearly indicate that enlightenment is not a realistic prospect."

Bibow makes the especially uncharitable comment that perhaps Berlin needs to relearn the lessons of the Great Depression, but there he clearly misses the point. Perhaps Belin needs to unlearn the lesson, which clearly has as its main pivot the notion that hyperinflation led to the political instability which eventually ushered in the NAZIs to political ascendancy. That (nastiness) aside, the piece is worth reading. Meanwhile, the European Central Bank has published a working paper by Marcel Fratzscher and Livio Stracca which argues that the adoption of the euro has insulated Italy from its political instability.

"The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks."

(I am obliged for both of these pieces to Eurointelligence.)

4. NETHERLANDS THREATENING TO BLOCK ICELAND ACCESSION TO THE EU IF IT DOES NOT COMPENSATE DUTCH SAVERS ON LOSSES

NRC Handelsblad reports that Dutch Foreign Minister Maxime Verhagen is threatening to block Iceland's bid to join the European Union, unless Reykjavik meets its obligations to compensate Dutch savers.

"According to the agreement Iceland has to repay €1.3 billion to the Netherlands and €2.3 billion to the UK. The British and Dutch governments spent that money to compensate savers for the €20,000 the Icelandic government had guaranteed for those saving with Icelandic banks. The Icelandic government agreed to repay those damages in the form of a loan, but parliament could block that deal, as some members of the Althing have threatened to do.

'A solution to the problems surrounding Icesave could speed up the handling of the Icelandic application for EU membership," Verhagen said. He added it is "absolutely necessary' that Iceland approves the agreement to 'show that Iceland takes EU guidelines seriously.'"

5. GEORGIA SEEKING AMERICAN ARMS

Philip P Pan at the Washington Post reports that Georgian President Mikheil Saakashvili yesterday indicated in an interview that Tblisi is seeking a weapons deal with the United States.

"In a wide-ranging interview, Saakashvili said that discussions about a weapons deal remained at 'very early stages' but that he planned to press Biden to speed up delivery of antiaircraft and antitank systems, saying such weaponry was 'purely defensive' and 'would make any hotheads think twice about further military adventures.'

'I think the decision to help us is there,' he added, noting recent meetings between Georgian and US defense officials. 'It's a matter of speeding up the process. . . . We want the country to still be around when those things start to arrive here. That's ultimately what's right now at stake.'

The United States has been working to train and modernize the Georgian military for more than a decade, but Russia has warned strongly against new arms shipments to the former Soviet republic, which it routed in a brief war last year."

6. PAKISTANI SUPREME COURT ASKS FOR MUSHARRAF REPRESENTATION ON CASE CONSIDERING WHETHER EMERGENCY MEASURES IN 2007 WERE CONSTITUTIONAL, ISLAMABAD OBJECTS TO CAMPAIGN IN AFGHANISTAN, GERMAN INVOLVEMENT HEATS UP, PAKISTAN ASKS FOR ADDITIONAL INTEL SUPPORT FROM US AND WARNS THAT DEAL WITH INDIA COULD START ARMS RACE

BBC News reports that Pakistan's Supreme Court has decided that former President Musharraf should be represented in a case before it over whether or not the emergency rule imposed in November 2007 was constitutional.

"'This is the first time in Pakistani history that the court has taken cognizance of such action. In the past, the courts have tended to condone military takeovers,' a former chief justice of Pakistan, Saeeduzzaman Siddiqui, told Dawn News TV.

The BBC's Ilyas Khan in Islamabad says that the court apparently issued the notice to Mr Musharraf following the refusal on Tuesday by the attorney-general, who represents the government, to defend the former president's position in the case."

Meanwhile, Eric Schmitt and Jane Perlez at the New York Times report that Pakistan is objecting to expanded combat plans in Afghanistan.

"Pakistani officials have told the Obama administration that the Marines fighting the Taliban in southern Afghanistan will force militants across the border into Pakistan, with the potential to further inflame the troubled province of Baluchistan, according to Pakistani intelligence officials.

Pakistan does not have enough troops to deploy to Baluchistan to take on the Taliban without denuding its border with its archenemy, India, the officials said. Dialogue with the Taliban, not more fighting, is in Pakistan’s national interest, they said."

Matthias Gebauer and Shoib Najafizada at Der Spiegel report on German forces increasing involvement in the fighting in Afghanistan:

"The Bundeswehr is supporting the Afghans with around 300 members of the Quick Reaction Force (QRF). Their primary role is to help secure the area around the fighting and provide reconnaissance.
...
[T]he Bundeswehr has also become considerably more assertive. For the first time, Marder tanks--which have heavy firepower and were only recently relocated from Mazar-e-Sharif to Kunduz--have been deployed.
...
According to SPIEGEL ONLINE sources, missiles are also being fired by German fighter jets in northern Afghanistan for the first time. Following a first deployment of fighter jets on June 15 in northern Afghanistan by the ISAF international security force, most supplied by the United States, Afghan forces requested so-called 'air support' for a second time on Sunday.

Such air support had long been considered taboo in northern Afghanistan."

Meanwhile, Joshua Partlow at the Washington Post reports that Pakistani Prime Minister Yusuf Raza Gilani today has called on the US to provide real-time intelligence and other military support for the Pakistani effort against the Taliban, without relying on attacks from US drones. Both American national papers mention that Islamabad is concerned about the recent end use monitoring deal made with India, suggesting that it could spark an arms race.

7. KURDISTAN COMMISSIONS NEW REFINERY

Eric Watkins at the Oil & Gas Journal reports that Kurdistan has commissioned a new refinery near Arbil which will originally process 20 kb/d, ramping up to 40 kb/d by the end of the year. The refinery is one of several planned for the area, with plans to have total throughput capacity of about 200 kb/d. "Refinery director Baz Karim said the new facility is operated by private Kurdish investors Kar Group, and will process crude from the Khurmala Dome oil field ... ."

8. IRANIAN CONSERVATIVES RESPOND TO RAFSANJANI LETTER, LOTR TELLS AHMADINEJAD THAT HE NEEDS TO WITHDRAW SON IN LAW AS VP PICK

The best round up on recent maneuvering between elites in the aftermath of the Iranian elections is at Juan Cole's Informed Comment. The Leader of the Revolution has warned against further civil disobedience on Monday and includes an excerpt of his speech as translated by the Open Source Center. A representative of the LOTR at the Revolutionary Guards has indicated that support for the LOTR has foiled the plots of outsiders--Cole includes an excerpt from his speech as translated by the OSC. He also includes an excerpt of conservative cleric Ayatollah Mohammad Yazdi's recent charges that Rafsanjani has undermined the revolution as translated by the OSC. Press TV--an English-language state media organ of Iran--on Tuesday reported that the LOTR has told Ahmadinejad that he must undo the selection of his son-in-law as Vice President.

9. HAGUE RULES ON NORTH-SOUTH SUDAN BORDER

Stephanie McCrummen at the Washington Post reports that the Hague has issued a ruling on the disputed south-north border in the Sudan, striking a compromise.

"The ruling by the Permanent Court of Arbitration awards control of a lucrative Chinese-run oil field in the region of Abyei to the Sudanese government but defines the region's boundaries in a way that is politically beneficial to the south.

Officials from the south and President Omar Hassan al-Bashir's ruling party quickly promised to respect the ruling, which analysts called a major test of the fragile 2005 peace deal that ended the bloody north-south civil war, one of Africa's longest-running conflicts.

'Both parties have agreed to accept the boundaries,' said Majok Guandong, Sudan's ambassador in Nairobi. 'We think there will be no maneuvering by either side.'"

The ruling leaves a smaller working oil field in the territory of the south and defines the territory as being mostly populated with the Ngok Dinka, a nomadic tribe which identifies itself with the south and will likely vote to join it in the referendum on independence from Khartoum in 2011.

10. NIGERIA SAYS NIGER DELTA UNREST CUTTING OFF 1 MB/D IN SUPPLY

Platts reports that Nigeria's Oil Minister Rilwanu Lukman yesterday told the media that the country is losing approximately 1 mb/d in production due to continuing strife in the Niger Delta.

"Lukman told leaders of the ruling People's Democratic Party in Abuja that Nigeria's oil production had dropped to between 1.4 million and 1.5 mb/d, well below its assigned OPEC quota and far off from the 2009 budget benchmark of 2.29 mb/d, according to a Thisday newspaper report Wednesday.

'We have production capacity of 2.3 mb/d but because of problems in the Niger Delta, we cannot meet our target. This year's budget is based on having 2.2 mb/d. So, we are short of a million barrels,' the minister was quoted as saying.

'Our target is 4 million barrels in 2010, presently we have 37 billion barrels in our reserve. The target for next year's production is 4 mb/d,' Lukman said."

11. BRAZIL TO SELL DOLLAR DENOMINATED BONDS, SIGNS NUCLEAR ENERGY MOU WITH MOSCOW

After all the hoopla about the replacement of the dollar as the reserve currency, Andre Soliani and Carla Simoes at Bloomberg report that Brazilian Treasury Secretary Arno Augustin has said that Brasilia plans to sell dollar denominated bonds on the overseas credit markets shortly.

"The country will tap the market more than once before yearend and look to sell securities maturing in more than 10 years, Augustin ... said in an interview with Bloomberg Television in Brasilia today.

'We will certainly issue foreign bonds more than once in the second half, seeking to lengthen the debt’s profile and create conditions' for companies to sell bonds, Augustin said. There is investor demand for bonds maturing in 30 years, he said.

Brazil plans to tap international credit markets as speculation the global recession is easing fuels demand for higher-yielding assets."

As a counterpoint, today the Latin American Herald Tribune notes that Russian media yesterday reported that Russia and Brazil have signed a MOU on nuclear energy cooperation.

"The pact calls for the development of uranium prospecting technology and the design of new reactors, as well as the design and construction of nuclear research reactors.

The agreement opens the way for the production of radioisotopes for use in agriculture and the pharmaceutical industry, as well as the training of nuclear energy experts.

Russia and Brazil agreed to create a working group for atomic research and development projects."

12. US PLANS TO INCREASE PRESENCE IN COLOMBIAN MILITARY BASES ROILING NEIGHBORS

Simon Romero at the New York Times reports that a plan to increase the American presence at three military bases in Colombia is drawing the ire Bogota's neighbors.

"Venezuela, Ecuador and Nicaragua, which are members of a leftist political alliance that is led by President Hugo Chávez of Venezuela and backed by his nation’s oil revenues, have all criticized the plan, saying it would broaden the military reach of the United States in the Andes and the Caribbean at a time when they are still wary of American influence in the region.

Despite a slight improvement in Venezuela’s relations with the United States in recent months, Mr. Chávez has been especially vocal in lashing out at the plan. Speaking on state television here Monday night, he put Venezuela’s diplomatic ties with Colombia under review, calling the plan a platform for 'new aggression against us.'

Colombia’s foreign minister, Jaime Bermúdez, on Tuesday defended the negotiations, which are expected to produce an agreement in August, asking neighboring countries not to interfere in Colombia’s affairs. 'We never expressed our opinion in what our neighbors do,' he said, pointing to Mr. Chávez’s attempts to strengthen ties with non-Western nations. 'Not even when the Russian presence became known in Venezuelan waters, or with relations with China,' he added."

13. EIA SAYS COMMERCIAL CRUDE STOCKS DOWN, GASOLINE AND DISTILLATE UP--REGULAR GASOLINE PRICES DOWN, REFINERY UTILIZATION DOWN

The EIA reports that commercial crude oil stocks were drawn down by 1.8 million barrels in the week ended July 17 to 342.7 million barrels. Inventories are still above the five year historical range for this time of year. The draw down was smaller than the 2.1 million barrel fall expected as per the median expectation of analysts in a Bloomberg survey. Bloomberg also notes:

"In contrast to the Energy Department supply report, the American Petroleum Institute said late yesterday that stockpiles rose 3.1 million barrels last week, the first gain since April."

Gasoline stocks grew by 800,000 barrels and are now at the top of the five year historical range for this time of year. Distillate stocks grew by 1.2 million barrels and there are 32.4 million barrels more distillate in storage than there was this time last year, about 25.3% more. Refining utilization fell to 85.84% from 87.87% in the week previous. The national average price of regular gasoline fell to $2.463/gallon in the week ended July 20, just below the range where driving demand begins to fall in response to the price.

Daily Sources 6/5

1. BUNDESBANK FORECASTS GERMAN GDP TO CONTRACT BY 6.2% IN 2009

Der Spiegel reports that the Bundesbank expects the German economy to contract by 6.2% in 2009. The bank expects downward pressure on the economy to end by the close of 2009, but only forecasts GDP growth of 0.0% for 2010.

"The low point of the recession could be reached this summer, the forecast noted. Still, Bundesbank President Axel Weber said it was too early to breathe a sigh relief. The report added that unemployment will continue to rise in the coming quarters, and by mid-2010, the number of jobless is expected to be 1 million people greater than it was this spring--reaching a total of around 4.4 million unemployed persons, or 10.5%."

2. DUTCH EUROPEAN PARLIAMENT ELECTIONS BIG WINNER FOR ANTI-ISLAMIST 'PARTY FOR FREEDOM'

Der Spiegel reports that preliminary data on the Dutch European Parliament elections show Geert Wilders' "Party for Freedom" would get four of 25 Dutch seats in the legislature, making it the second largest Dutch party represented in Brussels.

"Wilders, who has become popular in the Netherlands running on an anti-Islam and anti-political establishment platform, promised voters he would be tough on immigration and criticized Turkey's bid to join the EU. 'Should Turkey as an Islamic country be able to join the European Union? We are the only party in Holland that says, it is an Islamic country, so no, not in 10 years, not in a million years,' Wilders said."

3. RUSSIA TO CONSIDER SETTLING CHINESE TRADE IN LOCAL CURRENCIES, GAZPROM AND E.ON FINALIZE ASSET SWAP DEAL

Lyubov Pronina at Bloomberg reports that Russian President Medvedev has joined Brazil and Malaysia in the number of countries considering settling international trade with China in their respective domestic currencies. Meanwhile, Nadia Rodova and Anna Shiryaevskaya at Platts report that Gazprom and Germany's E.ON Ruhrgas have signed an asset swap agreement with E.ON receiving 25% of Severneftegazprom, a Gazprom subsidiary developing the Yuzhno-Russkoye oil and
gas field.

"Following the deal Gazprom will own 50% plus six ordinary registered shares of Severneftegazprom; Germany's BASF will own 25% minus three ordinary registered shares and three preferred shares without voting rights; and E.ON will own 25% minus three ordinary registered shares and three preferred shares without voting rights, Gazprom said.

In turn, the agreement gives Gazprom will take E.ON Ruhrgas' 49% stake in Gerosgaz, which owns 2.93% of Gazprom.

'By implementing this asset exchange transaction, Gazprom and E.ON have once again demonstrated a successful development of long-term Russian-German cooperation in the energy sphere,' [Gazprom CEO] Alexei Miller said in a statement."

The Yuzhno-Russkoye oil and gas field is thought to have 856.2 billion cubic meters of gas and 20.35 million metric tons (~148.6 million barrels) of oil and gas condensate reserves.

4. RIO TINTO BOARD REJECTS CHINALCO BID

David Barboza and Michael Wines at the New York Times report that in a meeting in London Thursday, the board of Rio Tinto rejected an offer of $19.5 billion by the Aluminum Corp. of China, or Chinalco, to take a 15% stake in the company. Chinalco's currently has a 9.3% share of the company. Political opposition to the deal in Australia began early on. In the middle of May, Chinalco revised its offer down from a 18.5% stake to 15--see Daily Sources 5/21 #2.

"Chinalco said it regretted the decision and had worked hard to try to revise the deal to reflect changed market conditions, as well as the response from shareholders and regulators.

'As a result, we are very disappointed with this outcome,' Chinalco’s president, Xiong Weiping, said in a statement."

Rio Tinto will combine its iron ore assets in Australia with those of BHP Billiton.

5. CHINESE MALE-FEMALE RATIO DRIVING UP 'BRIDE PRICES', INCREASINGLY A TARGET OF CONS

Mei Fong at the Wall Street Journal reports that the male-female ratio (120-100) in China has pushed up the dowries--or "bride price"--of potential brides so much that they have become the target of con artists.

"While there are no nationwide statistics, wedding scams have occurred before, but usually isolated cases. Mr. Tang, Xin'an's Communist Party secretary [Xin'an is a village of 14,000 in Shaanxi province], says he has never before seen such clusters of cases. Most of the 11 families involved lost an average of 40,000 yuan (~ $5,862 or roughly GDP per capita in purchasing power parity terms). Officials consider these to be fraud cases. So if caught, the women could serve jail time, according to police."

The story provides more anecdotal evidence for the case made by Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI that the one child policy in China has made the society even more one of saving than in the past--see Daily Sources 5/28 #2.

6. GLOBOVISIÓN PRES TO BE CHARGED WITH 'USURY'

Fabiola Sanchez at the Associated Press reports that Venezuelan prosecutors have charged the president of Globovisión, the sole opposition television station remaining in the country, Guillermo Zuloaga, of "usury."

"Trade Minister Eduardo Saman accused Zuloaga of keeping the cars off the market while waiting for their price to rise--involving a possible violation of foreign exchange rules that give importers access to dollars only if they aren't used to gain a 'disproportionate advantage' over rivals.

It was not clear if Zuloaga received dollars that way from the government, but importers who violate those terms can be prosecuted under Venezuelan usury law."

Last week Hugo Chávez said that the Supreme Court, attorney general, and telecommunications chief should take action against "poisonous media" or resign. Meanwhile, Platts reports that PdVSA said in a statement that it had taken over 45% of all private oil services companies operations in the country since nationalizations began again two weeks ago. "So far, around 76 companies have been nationalized, including the local units of Williams International."

7. CHILE TO COMMISSION LNG GASIFICATION PLANT BY END OF MONTH, EXXON SIGNS CONTRACTS TO BUILD LNG EXPORT FACILITY IN PAPUA NEW GUINEA

SAI reports that Chile will commission its 2.5 million tonne/year LNG-10 million cubic meter natural gas liquefaction plant in Quintero at the end of the month.

"The first vessel carrying LNG to Chile from Atlantic LNG’s facilities in Trinidad & Tobago is due to arrive at the plant owned by Chilean energy company ENAP, Endesa Chile, Metrogas and BG Group before the end of June."

Meanwhile, Russell Gold at Environmental Capital reports that Exxon Mobil has signed two construction contracts in the last 24 hours which lay the groundwork for building an LNG export facility in Papua New Guinea.

"Exxon didn’t cut its capital expenditures program during the oil-price drop, but it’s still noteworthy when they push a couple big high-cost projects ahead. And while Exxon didn’t really slow its spending, others did. But projects are looking more financially robust now because costs are falling. The big energy consultant IHS/CERA updated its upstream operating cost index today: it’s down 8% from six months ago. Meanwhile, capital costs are down 9%.

The question haunting oil circles is whether enough new investment will be undertaken to head off a major supply crunch in coming years as demand for black gold grows in Asia and elsewhere. The McKinsey Quarterly, a publication from the consulting group, recently warned that the 'tight demand–supply balance seen at the end of 2007 could return sooner than many observers might have anticipated' as oil companies--state owned and publicly traded--ease up on capital spending."

All of which may be true, but even if there is a supply shortfall does duly develop in 2010, that shouldn't have the effect of pushing up price on oil for delivery next month.

8. NEW U.S. EMISSIONS REGULATIONS PUSHING CANADIAN OIL SANDS PRODUCERS TOWARD ASIAN MARKET

Gary Park at Platts reported (on May 13) that Canadian oil sands operators are looking for Asian participation as the US Congress considers legislation which could limit the purchase of fuels produced by large carbon emitting processes. There are three key competing pipeline plans for taking oil sands products to the Pacific--Enbridge's 525 kb/d Northern Gateway pipeline, Kinder Morgan's 400 kb/d expansion to its 300 kb/d Trans Mountain pipeline and Kinder Morgan's 400 kb/d Northern Leg Expansion to Kitimat.



As Park reports:

"There has been no more public display of those problems than the roller-coaster efforts since 2005 by Canadian pipeline giant Enbridge to open the door to Asia through its 525 kb/d Northern Gateway pipeline, with 80% of volumes targeted for Asia and the rest for California, although the California option may disappear if the state bans fuels derived from 'dirty oil,' such as oil sands.

The initial plan involved a memorandum of understanding with PetroChina to aggregate 200 kb/d of oil sands production in return for a possible 49% equity stake in the C$5.2 billion venture.

It came to an acrimonious end in mid-2007, with PetroChina refusing to extend its MOU with Enbridge and accusing the Canadian government and producers of not doing enough to support Northern Gateway and allow energy trade between Canada and China.

Enbridge CEO Pat Daniel refused to abandon an idea that had already cost about C$100 million to develop a regulatory application.

'We decided enough of this fun ... we need to have customer support,' he said.

So he embarked on frequent selling trips to Asia, pointedly excluding China, shifting his focus to potential customers in South Korea, Japan, Taiwan and Singapore.

In the process, Enbridge secured financial commitments from unidentified producers and refiners to carry the proposal through Canada's National Energy Board and pay for the initial development costs.

Daniel said Northern Gateway is now a 'broad-based, industry-wide initiative ... we offered 50% of the equity to those companies supporting the project and we've had very good uptake on that.'"

Well worth reading in full. Perhaps the story can be said to put the recent report by the Council on Foreign Relations explaining that the "well-to-wheel" carbon footprint of developing bitumen deposits is "only" 17% more than conventional oil in context--see Daily Sources 5/22 #8.

9. ICAP SHIPPING SAYS 7 SUPERTANKERS USED AS STORAGE TO UNLOAD

Alaric Nightingale at Bloomberg reports that Simon Chattrabhuti, a London-based analyst at ICAP Shipping, in an email note today said that a notice of redelivery had been issued for seven supertankers currently being used for oil storage. In late May, Frontline Ltd. estimated that as many as 60 supertankers had been chartered for oil storage.

10. SOVEREIGN DEBT ISSUES TO CLIMB PRECIPITOUSLY, MAY EXPOSE COUNTRIES FAVORING SHORT-TERM DEBT TO "ROLL-OVER" RISK

Gillian Tett at the Financial Times notes that the projected amount of debt to be issued by OECD countries this year is at $12 trillion, up from $9 trillion in 2008.

"So deep in the bowels of western [Debt Management Offices, or DMOs], some officials are now scanning the calendar and wondering how they can organize all those looming debt sales. Most governments hold auctions on particular days of the week and there are only 52 weeks in the year.

Thus, even if the DMOs cancel their summer holidays--which some will--it may be tough to schedule all these looming sales. No wonder some western government officials are starting to mumble about the risk of 'auction fatigue', or the chance that investors get so overwhelmed with these sales that they go on strike. Nor is it little surprise that some western government officials are quietly debating whether they can can dramatically expand the size of individual auctions, to get these bonds sold, without creating a market glut, or panic.

Thus far, thankfully, there is little sign of any such panic."

"[T]he average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70% of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely 'rollover risk'."

Tett also notes that a number of European countries have average debt maturities of less than five years, including Norway and Hungary. A must read.

11. U.S. UNEMPLOYMENT CLIMBS TO 9.4%, FALL IN TEMP EMPLOYMENT SLOWS, BUT 12 MO MOVING TREND STILL DOWNWARD

Peter S Goodman and Jack Healy at the New York Times report that the US lost another 345,000 jobs in May, pushing the headline unemployment rate to 9.4%.

"[W]age growth has been stagnating even as gasoline and medical costs rise, putting pressure on household finances. Wages were 3.1% higher in May than a year ago, but that growth slowed drastically this year. In April and May, average hourly wages grew just 0.1%, to a seasonally adjusted $18.54, from $18.52, according to the Labor Department. Wages for manufacturing workers fell 0.1%."

The broader U-6 unemployment rate, which includes "marginally attached" workers, rose to 16.4%. Barry Ritholtz at the Big Picture notes that the fall in temporary help has flattened out, though the year over year loss for May is of 26.9%.



Jesse's Café Américain plots a chart of the 12 month moving averages of job growth from the middle of '04:



Jesse comments: "We will get a little more optimistic when the longer term trend turns higher."

12. REGIONAL FED PREZES GETTING NERVOUS ABOUT POTENTIAL INFLATION, TRADERS SEE 67% CHANCE FOMC WILL RAISE FED FUNDS RATE IN NOV MEETING

Sudeep Reddy at Real Time Economics reports that there are signs that some Federal Reserve policy makers are becoming nervous about the potential for inflation. Atlanta Fed President Dennis Lockhart recently told Market News that the central bank must be "anticipatory" and shouldn't wait too long to tighten monetary policy. Earlier this week, Kansas City Fed President Thomas Hoenig warned of "significant" inflationary pressures.

"Mr. Lockhart has suggested that the Fed eventually could start raising rates--he says it’s not time yet--while maintaining an expansionary policy through other programs. The Federal Open Market Committee’s most recent policy statement said the federal funds rate is likely to remain at 'exceptionally low levels ... for an extended period.' The FOMC may soon be discussing what constitutes an extended period."

Susanne Walker and Dakin Campbell at Bloomberg report that US treasuries fell, driving two year yields to an eight month high, on speculation that the FOMC will raise rates later this year.

"Traders see a 67% chance the Fed will raise its target rate for overnight loans between banks at its November policy meeting. The bets increased from 25% a week ago, according to futures traded on the Chicago Board of Trade. 88% of traders see no change in the rate at the central bank’s meeting this month."

Daily Sources 4/14

still working on redrafting the format of Daily Sources ... all comments welcome

1. CHINA PUBLISHES HUMAN RIGHTS GOALS

China yesterday published its "National Human Rights Action Plan of China (2009-10)," which emphasized economic, social, and communal rights though it did outline some aims more in line with traditional western notions of individual human rights--most significantly legal rights of defendants.

"The 22,000-word, two-year plan outlines the government's aim for broader access to social security, health care and education. The death penalty will be 'strictly controlled and prudently applied,' it states, adding that defendants will be guaranteed fair trials. Forced confessions by torture and the mistreatment of detainees will be prohibited. These rights are to be 'promoted and protected' within two years, the document said."

Some international human rights groups criticized the document as being vague and simply reiterating commitments already made, but I rather think the point is that Beijing accepts them as goals. Humans are, after all, teleological creatures, and in order to plot a course to B from A, one must first figure out what B is. (Indeed, this feature of human life is what Machiavelli meant by "the ends justify the means.") The fact that the government accepts a) that Enlightenment and Magna Carta-based rights are in fact rights, entitled to legal protection and b)

"'China has a long road ahead in its efforts to improve its human-rights situation,' the document acknowledges"

is a very important step forward for liberty generally--and the step itself potentially undermines the legitimacy of the regime itself. (Loretta Chao in the Wall Street Journal.)

2. NORTH KOREA PULLS OUT OF NEGOTIATIONS ... WITH EVERYONE

North Korea reacted to the official condemnation by the UN Security Council Monday of its satellite launch by announcing its withdrawal from the six party talks--with China, Japan, Russia, South Korea and the US--which aim to denuclearize the nation and restart its nuclear program:

"'We have no choice but to further strengthen our nuclear deterrent to cope with additional military threats by hostile forces,' the statement [published today by the North Korean Foreign Ministry] said. It also hinted that the North would conduct more satellite tests, saying it will 'continue to exercise its sovereign rights to use space.'"

(Associated Press: "N. Korea to boycott six-party nuclear talks.") The response of to the statement by US and the other members of the six party talks has been to refer to the official condemnation. From the US State Department briefing today:

"[L]et me just say I know you all have a lot of questions about North Korea. I don’t have very much at all today that I’m going to give you. And I know you’re going to come at me with a lot of questions from various angles, but I just want to basically refer you back to the UN Security Council presidential statement that was issued. And this presidential statement made very clear the position of the UN Security Council plus Japan. And as you know, the statement calls for an early resumption of the Six-Party Talks, a verifiable denuclearization of the Korean Peninsula, and full implementation of the joint statement of 2005. I don’t have much more for you right now. At some later point, we’ll have more to say, but right now, that’s all I have."

3. TAIWAN LIKELY TO REVERSE NUCLEAR POWER BAN ON EMISSIONS CONCERNS

Taiwan has scheduled a two-day "state conference" beginning tomorrow which will bring together 205 government officials to debate whether Taipei should overturn its eight year old ban on new nuclear power plants:

"'Nuclear power is an inevitable option because we want to cut carbon emissions,' Tu Yueh-yuan, chief engineer of state-run Taiwan Power Co., said on April 2. The company has room to add as many as 10 reactors at its existing nuclear power plants, she said. To authorize that, [Taiwanese President] Ma [Ying-jeou] would have to reverse a decision by his predecessor, Chen Shui-bian."

The key problem facing the relatively small island nation vis-a-vis expanding its nuclear power capacity is how to safely dispose of the waste. (Yu-huay Sun: "Taiwan Energy Talks Pit Ma Against Nuclear Opponents," Bloomberg News.)

4. BEIJING'S LATEST ALTERNATIVE CURRENCY MOVE TAKES PLACE IN A WORSENING ECONOMIC ENVIRONMENT--AND IN THE PLACE MOST AFFECTED

The latest move in the question of an alternative to the dollar was made by Beijing last week when it decided to allow five of its largest trading cities--Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan (four of which are in Guandong Province)--to settle cross-border trade deals in renminbi.

"The yuan settlement move may be a potentially huge boon to Chinese firms, which can sidestep foreign exchange risk without having to buy derivative products to hedge their currency exposure.

But it could be doomed to failure if Beijing can’t convince foreign counterparties to China’s trade that getting paid in yuan is in their own best interest.

That’s not going to be easy. Under current rules, if firms or individuals outside of China were to hold yuan, they wouldn’t be allowed to directly invest it in China’s capital markets. And as for hedging currency risk, Shanghai’s forwards and swaps markets are equally off-limits."

(See Denis McMahon: "The Yuan Abroad: Useful If Strong," China Journal and Denis McMahon: "Beijing Aims to Expand Foreign Trade in Yuan," The Wall Street Journal.)The State Council has asked for the cities involved to submit regulations proposals for the pilot program. It has yet to announce a date for the program to commence. The news comes on top of the recent story that preliminary estimates of GDP growth for Guandong Province in the first two months of 2009 are at 5% and 5.5% for the first quarter, 5% less growth than seen last year.

"Guangdong’s import and export dropped 25.9%, year on year, in January and February, and 22.9% in the first quarter. Guangdong’s foreign trade dependence is as high as 155%, more than double China’s average."

(China Stakes: "Export Plummet Shock: A Guangdong Tiger Under Water," h/t Yves Smith at naked capitalism.) Meanwhile, Cao Jianhai, a professor at the Chinese Academy of Social Sciences, said that the rebound in Chinese property markets was likely unsustainable and that residential property prices were likely to fall by 40 to 50% from their levels in 2008.

"'Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation,” said Mr Cao, known as one of the 'three swordsmen' of the real estate market because of his influence as an official economist."

(See The Financial Times: "Property prices in China set to halve.")

5. SINGAPORE AND ASEAN 5 POSTING HORRIBLE ECONOMIC GROWTH NUMBERS

Rebecca Wilder notes that Singapore's Ministry of Trade and Industry today announced that it had downwardly revised its 2009 GDP growth forecast from between -2% and -5% in January to between -6% and -9% in April. The revision was made on the base of an advance estimate for first quarter GDP of a 11.5% contraction. Ms. Wilder helpfully produces a graph plotting the annual GDP growth (on a quarterly basis) of the ASEAN 5:



(Her post is worth a look: "Singapore is dropping quickly; dismal growth expected for the ASEAN countries" at News N Economics.)

6. TOTAL'S VENEZUELA GAMBIT ... RISKY AND SEEMS TO IGNORE THE REFINING PICTURE IN THE ASIA PACIFIC ... MEANWHILE RUSSIA AND BRAZIL TAKING MARKET SHARE ON OPEC CUTS

Following the visit of Hugo Chávez to China, the CEO of CNPC, Jiang Jiemin, said he would submit a plan to establish a joint refinery with the PdVSA in Guangdong province. The refinery would have a throughput of 20 million tonnes a year (~400 kb/d) and be 51%-owned by CNPC and 49% by PdVSA. Given that the refinery would be sophisticated, it could make the import of larger volumes of Venezuelan crude--a major goal of the Chávez administration, more viable as most new sophisticated refining capacity on or coming on line in China already has dedicated supply--mostly from the Saudi Arabia. However, there is reason to doubt that these ideas will go forward as planned:

"In May 2008, Chinese state media reported that CNPC subsidiary PetroChina entered into a joint venture agreement with PDVSA to build a 400 kb/d refinery in Guangdong province, configured to process Venezuelan heavy oil.

Under the agreement, witnessed by Chávez and Chinese Vice Premier Hui Liangyu, the crude is to be sourced from the Junin 4 block in the Orinoco belt.

At the time, officials said that the joint refinery, Venezuela's first such investment in China, would advance Chávez's goal of shipping to China 1 mb/d of oil by 2011, or 13% of current Chinese oil demand.

Reports vary on just how much oil Venezuela actually ships to China. Last May, Ramirez said shipments amounted to 500,000 b/d of oil, while Chinese state media reported 300—380 kb/d of products and 80 kb/d of crude."

(Eric Watkins: "China, Venezuela agree to speed up increased oil shipments," The Oil & Gas Journal.) That said, it is reported that senior officials from CNPC, PdVSA and Total SA are scheduled to meet next month in Caracas to discuss a potential 20 year contract to send 200 kb/d of Venezuelan oil to China, possibly starting in 2013, and with volumes rising beyond that.

"CNPC is talking to Total about a package involving a joint bid for Orinoco oil assets, building an upgrader to process the heavy oil produced in Venezuela and shipping it to a CNPC-PDVSA refinery to be built in Guangdong, southern China, a CNPC official told the news agency.

Total declined to comment, but a company spokeswoman told Dow Jones that the company had extensive links with China and confirmed that 'we are in discussions with CNPC on a variety of projects.'"

(Upstream online: "Caracas lines up three-way Orinoco pact.") In February Total CEO Christophe de Margerie told reporters in London that investment in Venezuela was preferable to Brazil, because there was less competition in Venezuela--see Daily Sources 2/13 #9. The statement was somewhat mystifying because, after all, the reason there is less competition in Venezuela is because Chávez has a habit of nationalizing your investments. However, if a project were done in conjunction with Chinese national oil companies, and increased economic integration with China is a goal of Caracas because Chávez believes Beijing may be able to offer military-political defense of his regime from an inevitably hostile US, then perhaps Total may be able to feel better protected against loss of its assets. Indeed, de Margerie may even feel that Chávez would not just be less likely to alienate Paris because of its habitual gad fly approach to US international policies, but also because of the cultural affinity that his first party--The Fifth Republic Movement--claimed with France (see my first post Venezuela vs ExxonMobil). That would be a reasonable strategy--an extremely risky one in my view, but international oil companies are rather experienced in taking such risks.

In the meantime, Brazil and Russia have taken advantage of the supply cuts made by OPEC to take a larger share of the US oil import market (which itself is shrinking).

"US imports from the Organization of Petroleum Exporting Countries fell 818 kb/d, or 14%, to 5.02 million in January from a year earlier, according to the latest monthly report from the Energy Department. At the same time, imports from Brazil more than doubled to 397,000 and Russia’s increased almost 10-fold to 157,000, a trend that continued in February and March, according to data from each country."

The story puts the data in a very strange way, but the latest monthly import data on the EIA website shows that Russian imports grew to 516 kb/d in January from 382kb/d in December (or 35%) and Brazilian imports grew to 450 kb/d in January from 225 kb/d in December (or 100%). (That said, imports from Brazil had been as must as 354 kb/d as recently as October and imports from Russia had been as much as 490 kb/d in August, so although there may be a trend, it is not as pronounced as those percentages would imply. See: EIA: "US Imports by Country of Origin.")

"Russian overall exports climbed 6.3% in February and 2.2% in March, according to the Energy Ministry. Brazilian total exports more than doubled in both February and March, according to Brazil’s Trade Ministry."

(Mark Shenk: "OPEC Cuts Thwarted as Brazil, Russia Grab US Market," Bloomberg News.) Beyond that, Saudi Arabia has put a hold on its two new major export refinery plans--for Tanbu and Jubail--of 800 kb/d in total throughput, but still has a fairly aggressive schedule of capacity addition downstream. Reuters ran the numbers in a series of tables:





As you can see, a fair amount, 440 kb/d is inside China itself--and we can expect a considerable portion of the domestic export refinery plans to target the Chinese market. This is probably true of any excess capacity produced from its JV refineries in Japan and South Korea as well:



7. TURKMEN PIPELINE BLAST ALLEGEDLY DUE TO GAZRPOM'S RELUCTANCE TO HONOR CONTRACT TERMS ... MEANWHILE LUKOIL SEEKS BP'S STAKE IN CPC AND IS DRILLING OVERSEAS DUE TO MOSCOW'S RELUCTANCE TO GRANT MORE DRILLING RIGHTS

Turkmen President Gurbanguli Berdymukhamedov has accused Moscow of being behind the recent natural gas pipeline blast which cut off its exports through Russia to eastern Europe and wants an international investigation into the causes of the pipeline blast.

"'Turkmenistan's president [Gurbanguly Berdymukhamedov] has ordered the government to carry out...an international study to investigate the causes of the incident,' the [Turkmen Foreign] ministry said in a statement."

In a televised speech at a Cabinet meeting the President said:

"We won't allow them to hurt our image as a reliable supplier of energy resources to global markers."

Gazprom has refused to comment on the issue, but Russian Foreign Minister Sergei Lavrov described the explosion as "purely technical." Evidently, Gazprom reduced intake by a full 90% without informing their Turkmen counterparts in advance. This was allegedly done because Gazprom at this time cannot recoup the cost of Turkmen gas, which it reportedly contracted for on December 31, 2008 at $340/tcm (~$9.61/MMBtu.) Yesterday, UK front month natural gas contracts closed at £0.2934/therm (~$4.31/MMBtu). Front month Brent closed at $52.14/b or about $8.99/MMBtu. Urals spot on Friday closed at $50.34/b or about $8.68/MMBtu. (The actual terms of the Turkmen contract are unknown, but it is thought they are tied by some formula to the price of oil, with a floor and a ceiling price.) (See: Alexander Vershinin: "Turkmen leader: Russia must pay for pipeline blast," Associated Press and Nadia Rodova: "Turkmenistan wants international experts to study gas line blast," Platts.) Meanwhile, Lukoil CEO Vagit Alekperov told Bloomberg in a televised interview that the company will seek to buy out BP's stake in the Caspian Pipeline Consortium.

"'Now we need to tie up the formalities and receive permission from the Kazakh government,' Alekperov said. 'I plan to be in Kazakhstan from April 25-30 where I’ll meet with the Kazakh president and I’ll raise that question in the hope of getting a positive answer.'"

Chevron, the operator of the Tenghiz field which is supplies much of the CPC pipeline's throughput, said in February that it intends to increase output in the field to 400 kb/d this year. Shareholders in the consortium plan to invest $1.6 billion to double pipeline capacity to 1.3 mb/d from 2013. (Stephen Bierman and Ellen Pinchuk: "Lukoil to Seek Kazakh Approval to Buy BP’s CPC, Tengiz Stakes," Bloomberg News.)Lukoil also is planning to drill for oil offshore the Ivory Coast and Ghana.

"'After the outstanding discoveries made in the recent years on the sea shelf of Ghana, this area is one of the most promising for exploration in West Africa,' Andrei Kuzyaev, head of Lukoil Overseas Holding Ltd., said in a statement on April 2."

Evidently a part of the thinking behind Lukoil's overseas acquisitions is that Moscow is slowing down the number of licenses to drill it is offering domestically. The number of auctions for oil licenses offered by Moscow last year fell to 147, or by half.
(Stephen Bierman and Ellen Pinchuk: "Lukoil to Drill in Africa as It Urges Russia to Offer Licenses," Bloomberg News.)



8. POLAND TO SEEK $20.5 BILLION CREDIT LINE FROM IMF

IMF Managing Director Dominique Strauss-Khan send an email statement to reporters saying that Poland was seeking a one-year credit line from the institution of $20.5 billion.

"Poland will become the second country after Mexico to use the flexible credit line as its economy faces the sharpest slowdown in almost a decade. The zloty lost almost a third of its value from a record high in July as investors sold riskier emerging-market assets amid the global credit crunch.

'This is the reflection of our cautious and responsible economic policy,' Finance Minister Jacek Rostowski told journalists after the government’s weekly meeting. 'This will help protect the zloty against uncontrolled depreciation that we saw during the first two months of this year. The consequences will be very positive for Poland.'

The loan will raise foreign reserves by almost a third, help cut Poland’s debt-servicing costs and facilitate access to international financing, he said.

'If Poland follows Mexico, maybe other countries would be willing to arrange a credit line,' said Ralph Sueppel, chief economist and strategist at London-based hedge fund BlueCrest Capital Management Ltd., which manages about $2 billion in emerging-market assets. 'The advantage for the Poland is that it provides support at a time when dollar funding is short.'"

(Marta Waldoch and Ewa Krukowska: "Poland to Ask IMF for Credit to Shield Economy, Zloty," Bloomberg News.)

9. CAIRO LOSING PATIENCE WITH HIZBULLAH ... HIZBULLAH MAKES OUT THAT CAIRO IS SUPPORTER OF TEL AVIV

The BBC reports that Egypt has accused 49 suspects of being agents of Hizbullah and planning hostile operations on its soil. Egyptian security forces are searching for 13 additional suspects on the Sinai Peninsula. Michael Collins Dunn comments:

"Part of the surprise here — actually a clever tactical move — is that Nasrullah did not offer the usual flat denial of involvement, but portrayed Hizbullah as trying to relieve the siege of Gaza, thus reminding the world that Egypt's keeping the Rafah crossing closed is as much responsible for Gaza's suffering as Israel's closure of the other crossings. Popular opinion inside Egypt has generally been critical of the government's policies on Gaza, and Hizbullah is playing to that.

Of course, there's a certain disingenuousness to Hizbullah claiming it does not carry out operations in other countries and admitting that it had agents operating in Sinai. But by rationalizing their presence rather than denying it, Nasrullah subtly shifts the debate from one of violating Egyptian sovereignty to one of spotlighting Egypt's keeping Rafah closed."

(see BBC News: "Egypt 'hunts Hezbollah suspects'," and Michael Collins Dunn, "Egypt/Hizbullah Feud Heating Up," MEI Editor's Blog.)

10. IRAN EMBARKS UPON STRATEGY OF MAKING AMICABLE NEGOTIATIONS AS POLITICALLY DIFFICULT TO PURSUE AS POSSIBLE

The US is continuing its strategy of engagement with Iran, as evidenced by yesterday's US Press Briefing:

"QUESTION: Separate issue. On Iran, Javier Solana spoke to Mr. Jalili and it seems that Iran is welcoming what they say – you know, they hope to be a constructive dialogue with the P-5+1. I just wondered whether you had any details on Solana’s call and whether you, you know, welcomed their welcoming of talks?

MR. WOOD: Yeah, I mean, of course, we welcome the fact that they’re, you know, interested in having a dialogue. And you know, I would refer you again to the sincere offer of the P-5+1 to provide Iran with what we believe is a very good, substantive package of incentives. We want to deal with Iran on this issue. It’s an important issue to the international community. And Iran needs to show the international community that its nuclear program is a peaceful one. Right now, the international community is very skeptical about that. But as I’ve said, we want to directly engage Iran on a range of issues, and we encourage Iran to continue – well, we encourage Iran to come forward and provide the international community with all of the assurances that it requires to be convinced that Iran is pursuing a peaceful nuclear program. But as I said, we remain skeptical about it."

And David Sanger at the New York Times reports that the US and its European allies are preparing "proposals" to drop the former US insistence on a rapid shut down of nuclear facilities in the early stages of negotiations with Tehran. But, in the meantime, Tehran appears to be doing much to make the realization of such negotiations more difficult. It has tried Roxana Saberi, a US-Iranian dual citizen and reporter, for espionage in a closed door trial with the verdict expected in two weeks. She has been imprisoned since late January for charges of purchasing alcohol originally. The charges have swiftly escalated to espionage. (The Associated Press: "Iran Says U.S. Journalist Has Been Tried Behind Closed Doors.") Today President Mahmoud Ahmadinejad has announced Iran will launch a satellite soon--on a missile with a range of up to 1,500 km (930 miles). Satellites pose a concern because they can be fitted with weapons and the technology is the basis for ICBMs. (And satellites have also proven to be of particular concern to Moscow.) (Hossein Jaseb and Hashem Kalantari: "Iran Plans to Send Bigger Satellite Into Space," Reuters.) And the Islamic Revolution Passdaran Guards Corp (IRGC) published a statement accusing Amsterdam (!) of attempting to instigate a "color revolution" in Iran via its support of internet websites.

"The statement, released by the 'IRGC Center for Organized Cyber Crimes,' claims, ‎‎'Hostile countries have demonstrated increasing interest in utilizing cyber space with the ‎expansion of the Internet, supporting the creation of websites, blogs and internet radio ‎and television networks.'

The IRGC’s statement identifies the 'Dutch Project' as one of the main soft overthrow ‎threats against the Islamic Republic, noting, 'One such country, which has supported the ‎opposition movement financially in recent years, is the Netherlands, which passed a ‎budget addendum in 2005 sponsored by Farah Karimi, an Iranian-born representative in ‎the Dutch parliament and a member of the leftist Green Party.' ‎

In another part of the IRGC statement, it is claimed that the Dutch budget is part of the ‎‎'long-term and strategic planning along the ideology of NATO,' which is 'pursuing the ‎agenda of global imperialism by absorbing vast capital, expert human resources and ‎political networks, setting up a group of expert journalists from the domestic and foreign ‎opposition with the help of the British, political and diplomatic support from the Dutch, ‎and with planning and secret budgets from the United States.'"

(Rooz online: "Revelations against Dutch Projects‎--Passdaran Guards Corp’s Statement on 'Media Overthrow'.) And Tehran has also given Shell and Repsol until May 20 to "clarify their involvement" in the Phase 13 of the South Pars project.

"'If subsequent to the expiry of the deadline these companies do not make clear their involvement in the Persian LNG project, talks will begin directly with Chinese (companies),' Seifollah Jashnsaz, managing director of the National Iranian Oil Company (NIOC), told the ISNA news agency.

'Presently not much remains to the end of this deadline,' he said, without giving further detail."

(Hashem Kalantari and Jonathan Gleave, "Iran gives Shell/Repsol deadline on LNG project," Reuters.)

11. SWAT VALLEY ADOPTS SHARIA ... TALIBAN EXPANDING TO PUNJAB

Pakistani President Asif Ali Zadari has signed into law legislation which introduces sharia law into the Swat Valley. The Taliban has been de facto in control of the region for some time now. The agreement, it should be noted, maintains the federal judiciary as the court of appeals--and thus superior to the Sharia courts. (See: BBC News, "Pakistan passes Swat Sharia deal.") Meanwhile, Sabrina Tavernise, Richard A. Oppel Jr. and Eric Schmitt at the New York Times report that the Taliban is making inroads in Punjab, the most populous region in Pakistan and the region at the heart of the recent dispute with Nawaz Sharif.

12. RED SHIRT PROTEST IN THAILAND SHUT DOWN BY MILITARY

The Red Shirt protests in Thailand have reportedly come to a halt after a large military presence intimidated the bulk of the protesters.

"'I want to save the people,' Jatuporn Phromphan, one of the protest leaders, said as he walked up to surrender to police with a grim-faced band of supporters. 'But I will continue to fight for democracy.'"

Evidently the military has either decided that it needs to create a sense of stability or it is backing the so-called Yellow Shirts. (Tim Johnston: "Thai Protesters Give Up to Avoid Further Violence Troops, Protesters Clash in Bangkok," The Washington Post -- includes a slide show.)

13. US MARITIME STRATEGY GOING FORWARD

Professor Tom Fedyszyn gave a copy of his power point presentation illustrating the evolution of the thinking behind US grand naval strategy going forward to Steve Clemons at The Washington Note, who made it available to all. Key excerpt:

"Today’s Maritime Strategy “Bottom egg” = Obama Direction

- Maritime security
- Maintenance of global commons
- Promotion of free trade
- Building partnerships
- Anti-piracy
- Humanitarian assistance
- Greatest threat to world instability is economic recession
- Need for US to cooperate and build partnerships
- World trade is cornerstone of strong economy
- US provides strong moral leadership
- Less implied concern over international power rivalries"

Very much worth a look.

14. RETAIL SALES DOWN, CORE CONSUMER PRICES FLAT ... SO MONEY SUPPLY AIN'T GROWING ALL THAT MUCH ... IN THE MEANTIME THE EIA FORECASTS INDUSTRIAL DEMAND FOR NATURAL GAS WILL DROP BY 7.4% IN 2009

The Commerce Department announced today that retail sales had fallen by 1.1% in March from a year earlier.

"Excluding autos, retail sales fell 0.9% after a 1% rise in February. That also was worse than analysts' forecasts of a flat reading for last month.

Sales at appliance stores fell 5.9% last month and furniture stores reported a 1.7% decline. Sales at specialty clothing stores fell 1.8% and dipped 0.2% at general merchandise stores, a category that includes Wal-Mart Stores Inc., Target Corp. and Macy's."

"Meanwhile, the Labor Department reported that wholesale prices plunged 1.2% in March as the cost of gasoline, other energy products and food fell sharply.

Gas prices fell 13.1%, the steepest drop since December, while food costs dipped 0.7%. Excluding volatile food and energy prices, the Producer Price Index was unchanged, below analysts' forecasts of a 0.1% rise."

(Associated Press: "Retail sales tumble unexpectedly in March; Consumer spending subdued amid rising unemployment.") IN the meantime, the EIA released its forecast today that natural gas consumption by the industrial sector is expected to decline by 7.4% in 2009 from 2008. The new forecast cut the average price forecast for natural gas delivered to Henry Hub at $4.24/Mcf.

"[The] EIA said it expects LNG imports to increase to about 480 Bcf this year, from 352 Bcf in 2008. Lower global economic activity and new liquefaction capacity in the Middle East and elsewhere should boost US imports."

(Joel Kirkland: "Industrial sector gas use could decline 7% in 2009: US EIA," Platts.) Not an especially rosy picture of near term economic growth from an official government agency, in other words.

Daily Sources 1/16

1. James T. Areddy at the China Journal reports that Shanghai firm Data Driven Marketing Asia surveyed 4,500 people in five cities across China and found that 60% of middle class consumers have already cut spending or plan to this year.

"In Shanghai, 64% of respondents to DDM’s survey said yes to the statement 'my company is not as busy as before' and almost a third in China’s commercial capital said their employer has already laid off workers. Forty-two percent of Shanghai consumers furthermore predicted the economy would be 'bad' in the next 12 months, compared with 19% saying so in Beijing, where consumer sentiment remained the strongest in the survey. Over the next five years, 60% of Shanghai residents and 71% of Beijing people said, economic conditions will be good."

And in a Financial Times piece published Monday and reproduced by RGE Economonitor Micheal Pettis argues that US consumers must increase their savings by at least 6% of GDP to bring their balance sheets to the historical midpoint, and that Chinese consumption must grow by 25% in order to offset increased US savings. China has, under this take, considerable excess production capacity which it is likely going to continue to attempt to export--just as the US did in the 1930s. But, attempts to resurrect growth on foreign consumption is likely to result in protectionist measures. Well-worth reading in full.

Ambrose Evans-Pritchard at the UK Telegraph blogs that Albert Edwards--an analyst at Societe General who hews to the Austrian school of economics--recently published a note arguing that the Chinese economy is imploding, which will scare the regime in Beijing, pushing them to devalue the yuan to create export-based jobs, and lead to a trade war.

"Mr Edwards said investors have a "touching faith" that China's authorities are in control of events.

'Could the economic situation in China become so bad that it threatens the regime itself? Of course it could. But before being swept away in a tidal wave of worker unrest it has one key tool in its economic armoury it has used before. MEGA-DEVALUATION. China has a track record of such things. At the end of 1993 the authorities devalued the yuan by 33pc.'

A replay would be the surest route to a Smoot-Hawley II."

Uncharacteristically of Evans-Pritchard, he does not think this alarmist outlook likely, displaying a touching faith in the authorities in Beijing. And Brad Setser at Follow the Money gives a quick take on the just-released November treasury international capital (TIC) data, showing that Beijing has cut down on long term US debt (and cut out agencies altogether), but substantially increased their purchases of short-term US debt. The graph he drew up makes the point eloquently (courtesy of CFR):



Setser calculates that China's total US treasury holdings are up by $29.1 billion, but reallocated from long term to short term instruments. This may have had something with 3 month bills yielding zero for some time last month.

In a response to an analysis by Wang Toa at UBS that I noted at the time (see Daily Sources 1/8 #7), Victor Shih at RGE Economonitor thinks that unemployment will likely reach 50 million people in China by the end of 2009.

"Even if the unemployed force reaches 50 million, the Chinese government would only have to pay (50 million*100dollar*12 months) 60 billion USD (408 billion RMB). That is a substantial sum, but China can surely handle it for two to three years, suffering perhaps slightly lower credit ratings. However, the notion that migrant workers have less ability to act collectively is unfounded based on everything that we know about unrests in China. All of the rebellions in Chinese history were led and carried out by peasants, including the one that put the current regime in power. Besides 1989, the largest domestic disturbance took place in rural Renshou County in the mid 90s, which saw the deployment of tens of thousands of troops. Furthermore, unlike the layoffs in the 90s, which mostly affected middle-age or elderly SOE workers, the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People's Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, "overall investor confidence" will be lost."

Well worth reading in full. And Li Yanping at Bloomberg reports that James McCormack, the Hong Kong-based head of Asian sovereign ratings for Fitch, said in a teleconference today that the Chinese economy likely will face a hard landing.

"'The 6 percent number is already what we would call a hard landing in China, meaning rising unemployment and the need for an aggressive policy response,' McCormack said. 'Social unrest is a big unknown.'"

McCormack thinks that exports might decline as much as 6% in 2009, down from growth of 17.2% in 2008. (h/t Yves Smith at naked capitalism.)

2. Platts reports that Vladimir Putin told the media that the volume of natural gas required to operate Ukraine's pipeline infrastructure would cost $730 million in the first quarter of 2009.

"Putin said Ukraine requested 140 million cubic meters of gas to fill the gas export pipelines and 21 million cu m/day to ensure gas compressing stations operations."

That's 2,030 million cubic meters altogether, or $359.60/thousand cubic meters (tcm) for the so-called "technical gas." Moscow is currently asking Ukraine to pay $450/tcm for natural gas not used to run the pipelines. Gazprom CEO Alexei Miller also told the media today that he was trying to put together a consortium of European companies to pay for the technical gas. Italy's ENI has already agreed to join the consortium, Germany's E.ON Ruhrgas and France's GDF Suez are "actively considering" it, and Austria's OMV, Germany's Wingas, and the Dutch company Gasterra have all been invited to join.

In the meantime, Platts reports that Yevgeniy Fedorov, the head of the State Duma committee for economic policy and enterprise, told journalists that the inauguration of President-elect Obama will likely bring an end to the gas dispute. The MP said,

"A political calculation shows that after January 20, when Obama and (incoming US secretary of state Hillary) Clinton take office, the US pressure will considerably ease and this will create conditions for solving the gas conflict."

Russians are evidently extremely suspicious of an agreement signed between DC and Kiev just as the gas negotiations were taking place. Reportedly France has declined to take part in the summit this weekend saying that sufficient conditions for negotiations were not there. Meanwhile, Alexander Medvedev, deputy chairman of Gazprom, has an opinion piece in the Wall Street Journal giving his case.

"What the world has witnessed recently is arguably the most serious breach of transit obligations ever, creating a stranglehold over the supply of gas to the whole of Europe."

Worth reading, but when all is said and done, Gazprom really did not do enough to try and affect the tenor of the narrative of the dispute in the American media, which was, I think, a grave miscalculation.

3. Joel Kurtzman of the Milken Institute has an op ed in the Wall Street Journal where he argues that Mexico is in danger of becoming a failed state as it loses its drug war. (This echoes a similar op ed in the Los Angeles Times which appeared yesterday by Denise Dresser.)

"But the path forward will be a difficult one. Not only must Mexico fight its drug lords, it must do so while putting its institutional house in order. That means firing government employees who are either corrupt or not willing to do the job required to root out corruption. It will also likely require putting hundreds, or even thousands, of police officers in jail."

Fair enough, but all this talk ignores the white elephant in the room: the root of the problem is US drug law itself, which targets providers and not consumers, and by refusing to come to terms with a failed policy of prohibition, the US is exporting instability to its neighbors.

4. Jens Erik Gould and Hugh Collins at Bloomberg report that the Banco de Mexico reduced the benchmark interest rate by 0.5% to 7.75%.

5. Richard Katz, the editor of the Oriental Economist Alert, has an opinion piece in Wall Street Journal Asia in which he argues that the Japanese stimulus program is far too small.

"Since September, two successive prime ministers have offered two small stimulus plans. The second package, just passed by the Lower House of the Diet on January 13, provides for an actual increase in deficit spending of a mere 1% of GDP. That's a drop in the bucket compared to Japan's downturn. Worse yet, the proposed fiscal 2009 budget -- to begin on April 1 -- provides no new stimulus. Talk of an increase in spending by 6.5% is misleading because it compares fiscal year 2009 to the initial budget for fiscal year 2008. The final budget for fiscal 2008, including the two supplementary budgets, is actually a bit higher than proposed spending in fiscal 2009."

Well worth reading in full.

6. Mark Shenk at Bloomberg reports that the IEA estimates consumption will shrink by 0.6% to 85.3 mb/d in 2009.

7. Glenn R. Simpson and Jay Solomon at the Wall Street Journal report that Iran is trying to import from China treated metals which can potentially be used in missile weapons systems. Among the metals sought are tungsten copper, titanium, and specialized aluminum sheets. The UAE have apparently intercepted more than one of these shipments and reported them to US officials. Given that Iran is one of the UAE's larger trade partners, this is very significant, perhaps showing that the Emirates are uncomfortable with Iran's nuclear program, or perhaps showing that they want to curry favor with Washington as they pursue a nuclear power deal with the US. There is no way to conclude from the metals themselves that they have the sole end use of weapons systems, they merely can be used for such.

8. Richard Meade at Lloyd's List reports that the United States and Kenya are nearing a deal where piracy suspects captured off Somalia would be delivered to Nairobi for prosecution.

9. Mary Jordan at the Washington Post reports that Americans abroad now have a new cachet with the election of Barack Obama, reversing hostility seen for a long time under the Bush Administration. In a way it's a silly piece, and popularity isn't necessarily a good in and of itself, however, it does mean that the US will have an easier time building international coalitions and political will for action dealing with international problems than it has in a long time. And that is a good in and of itself if you are primarily concerned with the national interest.

10. Reuters reports that US headline consumer price inflation fell by 0.7% in December. On a year over year basis they rose by 0.1%.