Daily Sources 1/9

1. Ben Hall at the Financial Times reports that at a Paris "conference on capitalism and ethics" President Nicolas Sarkozy and Chancellor Angela Merkel both signaled that the US should not seek to impede European efforts at tighter financial regulation.

"Ms. Merkel told the conference that she would "react very strongly" if the financial community tried to block government efforts to tighten regulation. "We must not repeat the mistakes of the past," she said."

Tony Blair, who was co-hosting the conference, called for "complete review of . . . global financial supervision."

2. Eurointelligence points out that when the Bank of England cut rates to 1.5%, it was to the lowest number seen in the history of the bank itself. That means in 315 years! The Bank of England was chartered in 1694.

3. Peter Hirschberg and Saud Abu Ramadan at Bloomberg report that Israel and Hamas have each rejected the terms of the cease fire ordered by the UN Security Council. The Security Council voted yesterday 14-0 for a resolution immediately demanding a cease fire. The US abstained. Hamas fired a set of rockets into Israel a few hours later.

4. Philip P. Pan at the Washington Post reports that Russia has agreed to begin supplying the Ukrainian natural gas pipeline network provided that supply is monitored by the EU.

"'Our impression is that the Ukrainian side fears that such a mechanism will be created, because we very well know that thefts of Russian gas did not start yesterday. This practice has continued for many years,' Gazprom chief executive Alexei Miler told reporters in the Black Sea resort of Sochi after meeting with his Ukrainian counterpart."

Vladimir Putin responded to accusations about the crisis being the result of maneuvering inside middleman company RosUkrEnergo by acknowledging that Gazprom owns half of the organization, but stating that Moscow was unaware of who on the Ukrainian side owned the other half! Nick Comfort and Kateryna Choursina at Bloomberg report that the breakthrough came "talks in Brussels yesterday involving Miller, his counterpart at NAK Naftogaz Ukrainy, Oleh Dubina, and EU Energy Commissioner Andris Piebalgs." James Kanter and David Jolly at the New York Times warn that the deal is not a done deal quite yet--Ukraine has yet to sign the agreement.

5. Eric Watkins at the Oil & Gas Journal reports that the Medgaz consortium has completed the subsea pipeline connecting Algeria to Spain. Medgaz is comprised of Sonatrach 36%, Cepsa 20%, Iberola 20%, Endesa 12%; and GDF Suez 12%. The pipeline has a capacity of 8 billion cubic meters/year and should come onstream in mid-2009.



You can take a virtual tour of the submarine pipeline here. (Heh, I love this stuff.)

6. Platts reported that CNPC began filling its 6.29 million barrel crude oil reserve at Shanshan county in Xinjiang province December 22 a CNPC official indicated on January 7. The reserve is being filled with crude from the Tarim oil field and the 10 million mt/year (200,000 b/d) Sino-Kazakhstan pipeline.

"[China's] current SPR storage capacity of 19.7 million cubic meters, or 136 million barrels, is equivalent to around 42.5 days of the country's import demand, based on the November data.
...
The State Council said in 2007 that China should build up its SPR to an equivalent of 120 days' import demand.

The International Energy Agency in November 2006 suggested the equivalent to 90 days' import demand."

Below is a slightly outdated map of the Central Asian energy pipelines network. (By outdated, for example, China's "West-East Pipeline" was completed a few years ago if I remember correctly. The Russian pipeline to the Pacific would now follow a different route.)



This map shows where the Tarim Basin is and the main route of the West-East Pipeline.



7. Brad Setser reports that Taiwan's exports in December were down 40% year over year and that South Korea's exports were down 17.4%. Taiwan's imports were down 45%; South Korea's fell by over 21%.

8. William Sim at Bloomberg reports that the Bank of Korea cut its benchmark lending rate by 0.5% to 2.5% today.

"The government said yesterday it will provide an additional 50 trillion won in loans and credit guarantees to small businesses.

It has allocated about 140 trillion won, or 15 percent of GDP, in tax cuts, extra spending and liquidity injections."

Meanwhile, Seyoon Kim and David Tweed report that the deputy finance minister, Shin Je Yoon, told the journalists that South Korea was seeking to increase the size of the $30 billion swap agreement with the Fed and extend the maturity.On October 29 the Fed established dollar swap lines with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore (see Daily Sources 10/30 #4.)

"The won has gained 12% since reaching its decade low versus the dollar on Nov. 21.

The US arrangement 'was a turning point' for the won, Shin said. 'The swap line showed that the US cares about the Korean market.'"

9. Christian Schmollinger at Bloomberg reports that Saudi Aramco will cut shipments in contracts with refiners in Taiwan and Japan by 10%.

"'This shows that they are really serious since this, I think, actually puts them below their quota,' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. 'As OPEC cuts back on their term, it means buyers will have to come back to the spot market.'"

10. Vandana Hari, Pradeep Rajan and Sharmilpal Kaur at Platts report that the Indian union Oil Sector Officers Association have called off part of their strike. The rest are expected to follow suit shortly. The total refining capacity of IOC and BPCL is about 1.4 mb/d--India's total, after the commissioning of the new Jamnagar facility--is around 2.8 mb/d. My back of the envelope estimate is that the strike took a little less than 400 kb/d of capacity offline, or about 14% of total capacity, which, I believe, is substantially more than India's surplus refining capacity.

11. Gregory Viscusi at Bloomberg reports that the US Navy has told the media that it appears that a ransom has been paid for the Sirius Star supertanker and is about to be released. $3 million has allegedly been paid to the hijackers.

12. Dow Jones reports that Ecuadorian Mining and Oil Minister Derlis Palacios told the journalists that Quito is asking Tehran for a $280 million line of credit to invest in its oil infrastructure. The minister said the money was needed mostly for expanding the country's pipeline network and that he was confident that Iran would make it available to them. It certainly would be interesting if they did, but all signs point to Iran facing a budget crisis of its own given the low oil price environment and I am not sure how the administration would justify such an outlay to a country which had just defaulted on its debt to the Majlis.

13. Stephen Power at the Wall Street Journal reports that the Bush Administration is preparing to issue a final directive to federal agencies which would order them to determine how much of the Arctic Circle the US can claim sovereignty over.

"'The purpose of the Arctic policy is to recognize that the U.S. has important and strategic interests in the Arctic region,' [White House spokesman Gordon] Johndroe said. 'Many countries have been aggressively pursuing their interests in the Arctic . . . The US, as an Arctic nation, has competitive interests in the region, and we need to be a player there along with all the other arctic nations.'"

The US Geological Survey estimates the Arctic Circle contains estimated 1,670 trillion cubic feet of natural gas and 90 billion barrels of oil.



At 2008 rates of consumption, 90 billion barrels of oil would last the US 12.3 years. It would meet the oil needs of the world for 2.9 years. Global proven reserves of natural gas stand at about 6,046 trillion cubic feet just now. Last year there were some international grumblings about Russian explorations and claims in the Arctic.

14. James Morgan at the BBC reports that Prof. David Battisti at the University of Washington and Prof. Rosamond Naylor, director of Stanford University's Program on Food Security and the Environment, have collaborated on a report published in Science Magazine which calculates "there is greater than 90% probability that by 2100, the average growing-season temperatures in the tropics and subtropics will be higher than any temperatures recorded there to date." Such higher temperatures in the tropics would cut yields on staple foods like maize and rice by 20 to 40%. 2100 is some time away, but, for example, record temperatures experienced in Europe during the Summer of 2003 cut the crop yields of France and Italy by one-third. Meanwhile the AP reports that the credit crunch will lower the rice yield in Asia as food prices fell, but the food was produced by previously high cost fuel and fertilizer, thus causing farmers to take a bath. Since they did not do well, they are looking for credit to plant new crops, but cannot find it, which should push up prices for rice given lower production. The Philippines has just lowered its rice production estimates by 4% for 2009 given the difficulty farmers are having in obtaining credit.

15. Sudeep Reddy reports that in absolute terms the unemployment report was the worst seen since WWII with employers cutting 524,000 jobs in December and the November job losses revised upwards to 584,000 from the 533,000 reported earlier. However, the Minneapolis Federal Reserve Bank has data showing that in relative terms jobs losses so far are considerably less than 1981, 1960, 1957, 1953, and, yes, 1948. (Man, I thought the 50s were full employment Beaver Cleaver days that everyone except for non-conformists yearn for! Sure doesn't look that way from those numbers.)



16. Barbara Sard at the Center on Budget and Policy Priorities published a report yesterday which argues that" the number of people in 'deep poverty'--with incomes below half of the poverty line--will rise by an estimated 4.5 – 6.3 million if unemployment reaches 9%," which is what Goldman Sachs has forecast for 2009. That would mean between 900,000 and 1.1 million families which would be put at housing risk and potentially made homeless. She cites data from a number of areas:

" * In July - November 2008, compared with the same period in 2007, the number of families entering New York City homeless shelters jumped by 40 percent.
* Massachusetts reports a 32 percent increase between November 2007 and November 2008 in the number of homeless families residing in state-supported emergency shelters.
* In Connecticut, family homeless shelters turned away 30 percent more families due to lack of bed space in September 2008 than in September 2007.
* Hennepin County, Minnesota (Minneapolis) reports a 20 percent increase between the first 10 months of 2008 and the comparable period in 2007 in the number of homeless families in emergency shelters.
* Los Angeles County reports a 12 percent increase between September 2007 and September 2008 in the number of families receiving welfare assistance who are known to be homeless."

1.1 million families made homeless, if I understand correctly, would translate into an additional 3.5 million people made homeless, or 1.2% of the population. This would not be good for political stability. The full report is here.

17. Tara Siegel Bernard at the New York Times reported yesterday that average mortgage rates have fallen to 5.01% for the week ended January 8. That is down from a high of 6.7% over the Summer and 5.87% a year ago. "'Refinance activity continues to be strong, but purchase inquiries are relatively static,' said Cameron Findlay, chief economist at LendingTree."

18. Rebecca Wilder has a nice graph at her blog--News N Economics--illustrating monthly changes in vehicle miles driven versus the average price of gasoline:



Wilder cites a Gallup poll which indicates that 64% of Americans changed their driving habits in response to the high cost of gasoline. The poll also confirmed that people with lower incomes are more responsive to price changes:

" * 69% of Americans making < $30k/year drove less when gas prices were surging, while 19% drove more when gas prices fell.
* 56% of Americans earning > $75k/year drove less when gas prices were surging, while just 8% drove more when gas prices fell."

It is a piece worth reading in full.

19. Liam Denning at the Wall Street Journal reports that people who want to get in on the oil contango profits might do so by purchasing tanker futures, and paper trades spiked 40% to WS63 yesterday. I'd be awful reluctant to do so given the demand numbers, however.

Spot Life CL Feb 09

Well, I got to this a bit later than I would have liked, but below you will find the reported causes table for the first twelve days of CL Feb 09's spot life.

The big stories have been Gaza and the potential for a new Arab oil embargo ... and a sharp crescendo (from nearly zip) in the drums for war with Iran. OPEC may in fact actually abide by its new production quotas, though Iran does appear to be cheating so far. Considerable tension between Pakistan and India following the Mumbai terror attacks, though both have gone some ways to reassure the world that they do not want war. 26 or so VLCCs have been chartered for storage to capture profits from the giant contango, and as many as 10 more are being negotiated for. And Gazprom makes the New Year's resolution that it will be paid the market rate for its natural gas from Ukraine, sending a nice belated Christmas gift to Eastern Europe as winter temperatures fall below 0ºF. India's oil workers effectively cripple the countries state-owned refining business, taking four of IOC's seven refineries offline and cutting BPCLs production (at its two refineries) in half. Premiums for diesel in Europe spark cross-Atlantic arbitrage, with traders seeing as much as 3.6 million barrels being booked from the US.

That would seem enough to put a lift in oil's life, no?

No. Because there was more dismal, plus tons of abysmal, data about the world's economies--most especially the US, where banks have been recapitalized to lend to credit-worthy debtors, but there just are not that many credit-worthy debtors to lend to and China, which is hoping to export it's way out of this mess, but to whom, exactly, given that everyone that buys is broke and everyone who sells wants to export out of this mess?

But the politics do seem to have provided some resistance to the downward slide.



The giant contango of 2008 has continued apace, but now the differential between the front and second month contracts has widened considerably to $4.81/b at the close of trading January 8 or 11.5% of the front month price. The differential between Feb 09 and Jun 09 is $11.13/b or 26.7% of the front month price. The differential between Feb 09 and Feb 10 is $18.28/b or 43.8% of front month. The differential between Feb 09 and Dec 16--nearly at the end of the curve--is $35.54/b or 85.2% of front month. As you can see from the graph below, the differential seemed to be in the process of narrowing some from Christmas eve to January 6, after which is promptly stretched right back out.

On January 7 the EIA report showed that crude stocks were full well beyond the historical range for this time period and had grown by a whopping 6.7 million barrels--meaning that there are not a lot of places you can put oil if you want to store it. Thus, it has become difficult to take advantage of the future price unless you can either afford to rent a supertanker or happen to have one of your own. Thus many speculators cannot, well, speculate (even though profiting off the contango isn't speculation so much as simple arbitrage.) Hence the steepling of the contango.



Crude doesn't seem to be following the euro dollar exchange rate, nor does the euro appear to be following crude. (I've always thought this was a bit of correlation causation confusion myself, but just to keep track the euro lost 3.8% against the dollar at interbank rates for the period considered--December 22-January 8--and crude gained 4.5% during that time.)



Substitutable product differentials are below. As you can see for a moment on Christmas eve natural gas was trading at near parity to crude oil on a Btu basis--but it didn't last for long. The heating oil (which is pretty much interchangeable with diesel) contract shows a healthy spread over crude. The Russo-Ukraine dispute and Gaza conflict probably gave it a bit of a boost after January 1, but if the storage tanks for diesel are to the brim in Europe and the Russo-Ukraine dispute is resolved, then it might well narrow again. (Heating oil is a substitute for natural gas.) Gasoline was less expensive than crude until the New Year's too, and probably got a boost for similar reasons as diesel, though it's still hard to see how you could make a profit off of making gasoline from sweet light crude in the US at these prices.



And the CFTC commitment of traders report would, as far as I can tell, be bullish, given that commercials are hedging against a fall in the price of oil and non-commercials are betting it will go up. 5.54% of traders were net long or short for the December 30 reporting date, and we have seen similar shares in the last two commitment of traders reports as well. I have been led to understand that this is especially unusual, and that the only other times we've really seen that sustained in the past is early this year and late April - early May.



I took another look at price volatility and had to amend my graph slightly, but the conclusion remains the same. In terms of the number of days where you have seen the price of oil go up or down five or more percent 2008 was not unprecedented. 1986 and 1990 were both years with a similar number of spikes and troughs in price. In fact, on average price volatility for crude oil was significantly greater than it had been in the past from 1996 on--which I suppose means that the "great moderation" never took place in terms of oil derivatives.



However, in absolute terms we haven't seen fluctuations like this since 1984. I plotted out price volatility in terms of average $/b change in both nominal and in 2008 dollars and found that 2008 had twice as much $/b change as any year previous. (I'd like to check this against the great oil shocks of 1967, 1973, and 1979, but I don't have access to daily spot prices going back that far.)



You can see that from this graph, courtesy of Wikipedia, derived from the BP data for average yearly price going back to 1861 in 2007 dollars and nominal dollars that there is some reason to want to test this claim.

The Famed Iranian Pistachio

I can now report that I have tasted a handful of pistachios hailing from Iran.

(In a deal made in the Clinton Administration, Iran can legally export pistachios and rugs to the United States. However, the tariffs on pistachios are reportedly punitive in order to nurture the Californian pistachio industry.)

I will say that they are a bit more buttery than the ones I usually get at Trader Joe's--which I believe buys em from Californian farmers--but the whole Iranian pistachios are to American pistachios as Champagne is to Thunderbird analogy is, um, more than a bit of a stretch.

Still, it was awful nice to finally get a chance to try em.

Daily Sources 1/8

1. Ralph Atkins at the Financial Times reports that the European Central Bank does not look set to cut the benchmark interest rate any further.

2. The Bank of England cut its benchmark lending rate by 0.5% to 1.5%. Real Time Economics carries the full text of the bank's statement. Excerpts:

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
...
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.
...
[T]he Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate."

3. Kevin Rudd, the Prime Minister of Australia, has an opinion piece in the Financial Times which argues that the need to coordinate monetary policy and fiscal stimulus internationally is unprecedented.

"The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation."

Well worth reading in full.

4. Jann Bettinga and Oliver Suess at Bloomberg report that Commerzbank will receive a second bailout from Berlin, less than three months after the first. The bank, Germany's second-largest, will receive €10 billion (~$13.7 billion) from the government in return for 25% of its shares, plus one. It received €8.2 billion last November (~$10.4 billion at that time.)

"The capital injection will boost the combined Commerzbank- Dresdner Bank’s core capital ratio, a key measure of solvency, to about 10 percent, Commerzbank said. Germany’s bank-rescue fund, called Soffin, will buy 1.8 billion euros of Commerzbank shares and provide the rest of the money as a loan."

5. Edward Hugh at Fistful of Euros reports that German exports in November fell "12% year on year, while imports fell 5.6% on the month and 0.9% from a year earlier."

"And problems with indutrial output, emplyment and exports are not the only difficulty facing Germany, since a sale of 10-year bunds yesterday lured the least demand in six months as investors began to show increasing nervousness in the face of the coming flood of government securities, raising the prospect of increased borrowing costs across the European economies.

Investors bid a total of 5.2 billion euros for the bonds on offer, illustrating a reluctance to purchase which prompted the Bundesbank to retain some 32 percent of the securities."

The problem of selling sovereign debt will not be unique to Germany, and likely more critical for emerging markets selling US dollar denominated debt. (see Daily Sources 12/31 #9) Hugh's analysis is helpful, as usual.

6. David Yong at Bloomberg reports that Pacific Investment Management Co. (PIMCO) managing director and co-head of emerging-market investment, Curtis Mewbourne, wrote in a note on the company's website that "Default probabilities for countries like Brazil, Korea, Mexico and Singapore remain very low." Yong summarizes the analysis thus:

"Debt sold by countries with large enough financial reserves to stimulate economic growth and access to support from the Federal Reserve’s $120 billion of currency swap lines will outperform ....
...
Pimco is most bullish on countries that have the resources or can borrow to stimulate their economies as exports slump, according to Mewbourne. He highlighted China’s $585 billion stimulus package and Russia’s $186 billion program."

Meanwhile, Lilian Karunungan and Kim Kyoungwha at Bloomberg report that Asian currencies are falling in the face of dropping US demand.

"'The export numbers were shockingly weak,' said Mitul Kotecha, Hong Kong-based head of global currency strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. 'In an environment where exports are under significant pressure, the authorities will be content to see some depreciation, as long as it’s not a rapid fall.'"

7. Brad Setser at Follow the Money believes that Chinese appetite for US debt has not disappeared but has shifted from a basket of Agencies and US Treasuries to just US Treasuries.

"Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero."

Well worth reading in full. Meanwhile, Tao Wang of UBS argues that the unemployment situation facing China is unlikely to cause civil unrest, suggesting that it is hardly unprecedented.



Wang argues that these job losses are cyclical and not structural as they were in 1998 and that actual unemployment in the early 2000s was in excess of 10% in addition to an estimated 20 million migrant workers returning to the agricultural sector between 1998 and 2002, for lack of jobs elsewhere. He also thinks Beijing is more prepared to face the problem head on now.

Shanghai Stakes reports that vacancy levels for A-level commercial buildings in Shanghai have risen from 5% at the beginning of 2008 to 15.4% now.

"In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
...
Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer."

Meanwhile, Nisha Gopalan at the Deal Journal reports that Hong Kong billionaire Li Ka-shing's charitable foundation sold 2/5s of its entire stake in the Bank of China Wednesday. This is just a few days after UBS sold its stake in the company and as the Royal Bank of Scotland looks set to sell its 4.3% holding. (h/t Sky Canaves at China Journal for these last three items.)

Meanwhile, Li Yanping at Bloomberg reports that Chinese exports probably fell by the most in a decade in December, dropping by 5.3% from a year earlier using the median prediction of a survey of economists carried out by the wire service.

8. Winnie Lee at Platts reports that China's Ministry and Land and Resources said that the country's dependence on oil imports is likely to rise to 60% by 2020. Currently imports account for about 50% of China's oil requirement. The ministry expects the country to consume about 500 million metric tonnes of oil annually by 2020, or 10 mb/d. Of that 300 million metric tonnes will need to be imported, or 6 mb/d.

"To enhance supply security, the country has set a goal of discovering about six oil fields with reserves of 100 million mt and between six and eight gas fields with reserves of 100 Bcm.
During the 2011-2015 period, China is targeting a discovery of another 10 oil fields with reserves of 100 million mt and eight to 10 gas fields with reserves of 100 Bcm, the ministry said in the forecast document."

The story also reports that the Ministry suggests the establishment of strategic oil reserves, by which it is likely meant that the Ministry suggests the establishment of more strategic oil reserves.

9. Shiva Lingam at Platts reports that the strike by India's Oil Sector Officers Association, a union of mid-level oil industry employees, is in its second day and having a significant effect upon petroleum product supply in the country, creating fuel shortages in southern India and for the airlines. Indian Oil Corp. has been forced to shut four out of its seven refineries and military personnel have been sent to "man major oil installations." Production is down 30% at IOC and 50% at Bharat Petroleum Corp. Ltd.--state-owned refiners. This is extremely interesting because India's energy supply security strategy is now fundamentally based on importing more crude than required to produce the domestic petroleum product requirement and then exporting the surplus product. India consumes about 2.5 mb/d of oil, and this strike, if it continues, could have a considerable effect upon global oil prices.

10. Tim Johnston at the Washington Post reports that Kaing Khek Iev, aka Duch--the head of the Khmer Rouge's Tuol Sleng torture center in Phnom Penh, will likely go on trial starting March. Other Khmer Rouge leaders are unlikely to be tried until 2010.

11. Graham Bowley at the New York Times reports that the UN has suspended food shipments to the Gaza strip after a delivery driver was killed in an Israeli attack. Also rockets were fired into northern Israel from Lebanon in response to the Gaza offensive. The UN Security Council is reportedly close to a resolution calling for a cease fire in the strip.

"The break-through was reached after a delegation of high-ranking Arab ministers overcame the reluctance of the United States, Britain and France in calling for the cease-fire, the diplomats said."

Israel welcomed international efforts to secure a "durable" cease fire.

12. The BBC reports that the president of the Vatican Council for Justice and Peace, Cardinal Renato Martino, "accused both sides [in the Gaza conflict] of only thinking of their own interests while innocent people paid the price." In remarks made online, the Cardinal said:

"Defenseless populations are always the ones who pay. ... Look at the conditions in Gaza: more and more, it resembles a big concentration camp."

Relations between the Vatican and Israel have reportedly been strained recently as the Pope has made clear that he wants to beatify Pope Pius XXII. Pius XXII was Pope during WWII and is widely accused of having turned a blind eye to the holocaust. Meanwhile, Sameer N. Yacoub at the Associated Press reports that Muqtada al-Sadr has called for reprisals on US forces in Iraq in response to the Israeli offensive in Gaza. Al-Sadr is a Shi'a Islamist populist which some link to Iran, though the cleric has explicitly rejected the Khomeini vision of "the guardianship of the Islamic jurist." I regard him as a real threat to the legitimacy of the Iranian government, as I have explained in Law and Revolution in Iran. (h/t Informed Comment for both of these stories)

Former US President Jimmy Carter has an opinion piece in the Washington Post entitled, "An Unnecessary War."An important excerpt:

"[In April 2008, w]e knew that the 1.5 million inhabitants of Gaza were being starved, as the U.N. special rapporteur on the right to food had found that acute malnutrition in Gaza was on the same scale as in the poorest nations in the southern Sahara, with more than half of all Palestinian families eating only one meal a day.
...
Palestinian leaders from Gaza were noncommittal on all issues, claiming that rockets were the only way to respond to their imprisonment and to dramatize their humanitarian plight.
...
We were unable to confirm [that a truce had been agreed upon in June] in Jerusalem because of Israel's unwillingness to admit to any negotiations with Hamas, but rocket firing was soon stopped and there was an increase in supplies of food, water, medicine and fuel. Yet the increase was to an average of about 20 percent of normal levels."

Well-worth reading in full.

13. Pamela Constable and Candace Rondeaux at the Washington Post report that Mahmud Ali Durrani, the Pakistani National Security Adviser, was fired by Islamabad after admitting in a CNN interview that the evidence provided seemed to show that all 10 gunmen in the Mumbai attacks had roots in Pakistan. Meanwhile, in an interview with Der Speigel,

"[Foreign Minister Shah Mahmood] Qureshi and Pakistan's intelligence chief, Lt. Gen. Ahmed Shuja Pasha, said Wednesday that the country's security forces are subservient to civilian authority and committed to supporting democratic rule. 'It is completely clear to the army chief and I that this government must succeed,' Pasha said of Zardari's administration. 'I report regularly to the president and take orders from him.'"

The intelligence chief had also said that Pakistan has no desire to fight a war with India, wants cooperation with New Delhi, and views terrorism as the real enemy of both. In Afghanistan, Pakistan's foreign minister unequivocally denied that Pakistani government agencies had been involved in the attacks on Mumbai. Well worth reading in full.

14. David Osler at Lloyd's List reports that the US Navy plans to dedicate a task force--to be known as Combined Task Force 151--to anti-piracy duty in the Gulf of Aden. Initially this should mean that some of the ships in Combined Task Force 150, which is part of "Operation Enduring Freedom" or the invasion of Afghanistan and later anti-terror efforts, will be redeployed to CTF 151. Osler quotes a CTF 150 spokesman as saying,

"The primary role of CTF 150 was not to chase pirates, in a nutshell... There are nations who would prefer to stick with CTF 150 and not step outside those paramaters, and there are other nations who would be happy to step outside those parameters, but cannot."

Keith Wallis, also at Lloyd's List, reports that the Aso Administration is working on legislation to change the Japanese Constitution so as to allow it's armed forces to join the anti-piracy effort off the Somalian littoral. The government plans to submit the language to Parliament by March. (Sadly, you need a subscription to read the entire article, but the big news is linked, or so I imagine, given that I have not subscribed.)

15. David Jolly at the New York Times reports that a tentative solution may have been found to the Russo-Ukrainian gas dispute. Alexei Miller, CEO of Gazprom, has agreed to a proposal whereby the company would begin supplying natural gas via the Ukrainian pipeline infrastructure once EU monitors were in place to independently verify the volumes so as to ensure that Ukraine would not siphon off supply. Naftogaz CEO Oleh Dubyna told Reuters, "Naftogaz guarantees it will pump in full the volumes received, on the condition that Gazprom will guarantee and supply technological gas for Ukraine’s gas transit system to function." A certain amount of gas is required to keep the pipeline compressors functioning. Jolly reports that EU monitors could be in place by Friday. José Manuel Barroso, the president of the European Commission, has said that both Prime Ministers Putin and Tymoshenko have agreed "in principle" to the deal and

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem. So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

16. Marianne Stigset at Bloomberg reports that Norway's Petroleum Directorate expects crude output to fall to 110.8 million cubic meters, or 1.9 mb/d, in 2009 from 122.7 million cubic meters, or 2.11 mb/d in 2008. Production is expected to fall to 94.4 million cubic meters in 2013, or roughly 1.63 mb/d.

"Norwegian fields 'have a robust economy at $50 to $70 a barrel of oil,” [Bente] Nyland, [head of the Directorate,] said in an interview. 'Should prices fall below $50, without production costs going down, projects may be postponed.'"

17. Ian James at the Associated Press reports that Citgo announced it would continue its program of donating heating oil to the poor in American urban centers Wednesday, after it was announced that the program would be suspended. (see Daily Sources 1/5 #8) I am certainly pleased to hear that Chavez has decided to use Venezuela's oil wealth to continue his aid program to the American poor, but have to wonder how the Venezuelan poor are taking the news.

18. Alexander Kwiatkowski and Alaric Nightingale at Bloomberg report that Citigroup's Phibro LLC has hired a one million barrel capacity tanker to sit off Scotland as storage in order to capture profits from the current giant contango in the oil futures markets.

19. Paula Dittrick at the Oil & Gas Journal reports that ExxonMobil's recent annual Outlook for Energy: A View to 2030 forecast global energy demand to increase at an annual rate of 1.2% through 2030. Two key findings include:

a) "Transportation, currently responsible for more than half of total oil demand, is expected to expand substantially globally. From 2005-30, demand in developed countries is expected to be relatively stable because efficiency improvements will offset demand from an increasing number of vehicles. In contrast, demand for transportation fuels in developing countries will likely more than double." and
b) Oil, natural gas, and coal will continue to provide about 80% of the world's energy needs through 2030 because of their abundance, affordability, and availability."

I must get myself a copy.

20. In other foreboding news about the global economy, Janet Porter at Lloyd's List reports that the shipping industry is still being bogged down by inability to secure letters of credit.

"A great deal of cargo is stuck on the quayside unable to move, according to Inchcape Shipping Services chief executive Claus Hyldager."

Worth reading in full, though the article isn't entirely convincing as to why banks would be so leery of something as fundamental as a letter of credit.

21. Jon Kamp and Jessica Hodgson at Real Time Economics have another gloomy indicator for the prospects of the global economy, Intel's second warning this quarter that it will have received $8.2 billion in the fourth quarter, a 20% drop from the third.

"'If you’re an individual or a corporation, chances are you’re an Intel customer,' BMO Capital Markets analyst Brian Piccioni said. 'The fact that they’re not doing well is a good indicator of broader economic weakness.' ... The fact that a company with the size and reach of Intel has been unable to predict the scale of its problems or to swerve the worst of the downturn, has prompted broader concern about the rest of the economy."

22. Stephanie Rosenbloom at the New York Times reports that December sales in stores that have been open for at least a year--known in the retail industry as "same-store sales"--were down at an annual rate of 0.9% according to Ken Perkins, president of Retail Metrics. (The story does not make explicit whether this is year over year or from the month previous percentage changes.) Retail chains experienced a 2.7% year over year decline in sales in November.

"Sales in November and December are closely watched because they account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group."

23. The AP reported that the Labor Department announced that initial jobless claims fell by 24,000 to the seasonally-adjusted number of 467,000 for the week ended January 3. This was less than most economists had expected. However, the number of people who continued to claim jobless benefits grew 101,000, to 4.61 million--the highest number seen since 1982.

24. Nancy Trejos at the Washington Post writes that the American Bankers Association reported yesterday that delinquencies on auto loans and home equity lines of credit rose to 3.25% and 1.15%, respectively, in the third quarter.

"James Chessen, ABA chief economist, said. 'With one million jobs lost in the first three quarters and 2 1/2 million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters.'"

The Association also found that delinquencies on credit card debt dropped 0.34% to 4.2%, which might be because the credit card companies increased the amount of debt they have simply written off. (see Daily Sources 1/7 #17)

25. Andrew Taylor at the Associated Press reports that the Congressional Budget Office estimates the deficit for the 2009 budget will reach $1.2 trillion.

"The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1."

The CBO estimate does not price in Obama's stimulus proposals.

Daily Sources 1/7

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

Long, but worth reading if you have the time.

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

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

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

New York and North Carolina are reportedly experiencing similar difficulties.

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

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

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

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

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

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

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

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

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

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

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

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