Spot Life CL Jan 09 (Entire)

CL Jan 09 expired today, below is the reported causes table for the last six trading days. Most of the news was about the OPEC meeting, which announced a very large allocation cut on the 17th, and the potential that Russia, Azerbaijan, and Kazakhstan all might join in on restricting supply. The market did not respond in the expected fashion, but rather dropped. That appears to be because there is no available storage for oil, so no one will take delivery to carry, which put even more downward pressure on front month today. Monday, the price of oil looks to jump by about $10/b, as February 09 becomes front month. (The price of Feb 09 went up half a buck or so today as the price of Jan 09, the front, fell about two and a half bucks.) The rest of the news, which appears to have been the determining factor in price for the most part, is a sharply slowing global economy.



The contango narrowed a bit from December 5 to 11, but apparently the absence of any on ground storage available combined with traders trying to exit the contract before expiry, combined to push Jan 09 down as the contract moved to closure. But if you look at Feb 09's differential to Dec 16, it still looks narrower than what we saw between Jan 09 and Dec 16 a month ago. That said, the contango is still steep as all hell.

For the record, the differential between Jan 09 and Dec 16 is $41.58/b, or 122.8% of the price of front month. The differential between Jan 09 and Jan 10 is $22.10/b, or 65.2% of front month!



Below is the price of crude (left-hand side) versus the interbank exchange rate of the euro and the dollar and sterling and the dollar (both of which are right-hand scale). As has been suggested, crude should become more expensive as the dollar loses value relative to world economies. Lack of storage and financing troubles are apparently preventing the realignment. The Euro has appreciated 15.3% versus the dollar since November 21; Sterling has appreciated 3.4% in that time.



For the hell of it, I've added a chart on the yen dollar interbank exchange rate (right hand scale) vs Jan 09 CL (left hand scale). Since CL Jan 09 became front month, on November 21, it has lost 32.2% of its value. (If you think that Feb 09 better represents the price of light sweet crude today, crude has lost 15.2% from November 21.) The yen has appreciated $0.000859 since November 21, or 8.2%.



The commitment of traders report for the week ended December 16 should indicate that prices will rise. Commercials are net short, which suggests they are hedging against a fall in price, and non commercials are net long, which suggests that they are betting on a rise in price. 5.49% of open interest held is held by traders net long or short--percentages we haven't seen since April and May. Historically, these percentages are very unusual in any case, although we have seen a lot of them this year.

Daily Sources 12/19

1. Platts reports that UK Energy and Climate Change Secretary Ed Miliband told a press conference after international oil talks held in London today that "Lower oil prices are something the world economy needs at the moment." He declined to directly address OPEC's production cut yesterday, but said "Whatever your views of the price...the volatility has been bad for everyone." Remember that Prime Minister Brown visited the Gulf states in late October, ostensibly to convince them to make larger contributions to the IMF so they might help stabilize the world economy. (see Daily Sources 10/30 #11) This took place after his remark on October 17 that it was scandalous that OPEC was considering production cuts in the current global economic environment. (See Daily Sources 10/20 #1 B) Platts reports that Saudi Oil Minister Ali Naimi said in the talks that Riyadh's price target of $75/b meets the needs of both consuming and producing countries.

"Earlier Friday, asked when he expected world oil prices, currently well below $50/b, would recover, Naimi said: 'When the economy recovers... If you have no cash, what do you spend your money on? Food or gasoline?'"

Juan Pablo Spinetto and Jeb Blount at Bloomberg report that Brazil’s Energy Minister Edison Lobao echoed Naimi's support for $75/b price target in London after the meeting, saying

"Up to this point prices have been tolerated, but below where they are today the world runs the risk of undersupply. We are of the conviction that $75 a barrel is very reasonable."

Rowena Mason at the UK Telegraph also reports that Naimi and Abdalla El-Badri, secretary-general of OPEC, told the London Energy Meeting that the UK, and I infer Europe generally, needed to cut their petroleum product taxes in order to support the price, given that lower prices will suppress new production. Winnie Zhu at Bloomberg reports that China announced today it will increase its fuel oil consumption tax paid by refiners and importers to 0.8 yuan/liter (~$0.11745/liter or $0.445/gallon or ~$13.78/barrel) from 0.1 yuan/liter effective January 1.

Brown himself opened the conference with a speech in which he said,

"'visionary internationalism' was needed to stamp out volatility, which he described as 'one of the most pressing problems' for the world today. 'Wild fluctuations in market prices harm nations all round the world,' [he] said. 'They damage consumers and producers alike.'"

In the meantime, Catrina Stewart at the Associated Press reports that the World Bank's chief economist in Russia, Zeljko Bogetic, suggested today that oil averaging $30/b for the next two years would be a "nightmare scenario for the global economy."

"'The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it's possible even to envisage Russia's return from a creditor to international organizations to a borrower,' [Bogetic said.]

At $50 a barrel, Russia could drain much of its reserve funds and run budgetary deficits, but would not face a "meltdown" scenario, Bogetic said."

2. Michael Kitchen at MarketWatch reported yesterday that the Aso Administration will submit to the parliament a bill authorizing the purchase of up to 20 trillion yen (~ $226 billion) in stocks on the Japanese stock market. The government plans to submit the bill in January with an eye toward beginning purchases by March. Lindsay Whipp at the Financial Times reports that the Bank of Japan today reduced its benchmark interest rate by 20 basis points to 0.1% from 0.3%.

"The BoJ also moved to increase its outright buying of Japanese government bonds to ¥1,400bn ($15.7bn) a month from ¥1,200bn. The central bank will also add floating-rate, inflation-linked and 30-year bonds to its buying operations, and will also temporarily buy commercial paper outright."

3. Tom Barkley at Real Time Economics reports that the Institute of International Finance forecast yesterday that the global economy would contract by 0.4% next year, after posting 2% growth in 2008.

"Mature economies will lead the way into the recession, expected to decline 1.4% in 2009, while emerging markets are forecast to grow 3.1%. The euro-zone economy is forecast to contract 1.5%, with the U.S. economy seen declining 1.3% and Japan falling 1.2%."

4. China's People's Daily reported today that the China Electricity Council recently released data showing that electricity consumption in the country from January through November grew by 6.67% year over year. Residential consumption grew by 12.75% year over year while industrial consumption grew by about 5.27%.

5. Jonathan Weisman at the Wall Street Journal and Lori Montgomery at the Washington Post write that the Obama team is fashioning a stimulus plan which would amount to about $850 billion.

6. Sudarsan Raghavan and Qais Mizher in the Washington Post reports that opposition members in the Iraqi parliament are accusing the al-Maliki administration of using security forces to make politically-motivated arrests designed to instill fear in his political opponents. Worth reading in full.

7. Walter Pincus at the Washington Post reports that the US Army began advertising this week for a private company to oversee private security firm operations in Afghanistan. It has been pointed out elsewhere, especially by historian William H. McNeill of Chicago University, that the use of mercenaries has historically proven to be at times the most cost effective means of the state projecting force. He regards this outsourcing as a change driven by the infrastructural requirements of modern warfare, and not something to be feared. I, however, find this trend--and the trend away from a citizen army overall--frightening, and a threat to democratic values. McNeill's central examples come from the Italian city states of the Renaissance and the wars of the Reformation just following. I would point out that this move to outsource force project coincides neatly with a erosion of prisoner of war treatment standards and the relegation of military service to the working poor. (That is, I'm still with Machiavelli--whose idea of a citizen army informed Napoleon--on this one.)

8. Will McCants at Jihadica reports on recent publications by jihadi groups which postulates that the reason the Western powers have not cracked down hard on piracy in Somalia is because the West prefers that the pirates be in charge of the country rather than al-Shabaab, the Islamist movement in the country which has garnered the most international jihadist support. And some Western analysts have indeed suggested that support for the pirates is preferable to allowing al-Shabaab to govern the region. I do not think, however, that a tenable solution to the problem will come without recourse to an association dedicated to the establishment of a rule of law in the region. I am afraid that that may mean the best option would be to choose from among the other Islamist movements vying for power in Somalia and supporting them, in return for some means of negotiating US, European, and Gulf state interests.

9. Mark Helperin argues in the Wall Street Journal that two incompetently prosecuted wars has eroded US deterrence power. Although I think his description of the threats to look for are wrong, I think his description of the situation engendered by the wars in Iraq and Afghanistan is a fair one. Worth reading.

Daily Sources 12/18

1. Platts reports that the China's National Development and Reform Commission has cut the guideline ex-refinery prices (ie, wholesale prices) for gasoline by 13.9% to about $94.97/b (~ $2.26/gallon), for diesel by 18.1% to about $97.64/b (~$2.32/gallon) and jet fuel by 32.2% to about $93.56/b (~$2.22). The new prices include the new consumption taxes which will come into effect on January 1, 2009. (See Daily Sources 12/5 #1.) (To put that in context yesterday reformulated gasoline for delivery in January traded at $1.0055/gallon on NYMEX. Diesel for delivery in January traded at $1.4425/gallon.) This move looks more to me like an attempt to tamper demand than to stimulate it, especially if Beijing does not allow the yuan to appreciate versus the dollar.

2. Victor Shih--assistant professor of political science at Northwestern University--has an op ed in the Wall Street Journal which points out that of the four trillion yuan stimulus package, only a quarter is to be financed via the central government's budget. The rest is to be financed by the banks.

"It gets worse. Local governments have announced a further 20 trillion yuan in investment to "supplement" the central package. Assuming both Beijing and the local governments stick to these spending targets, banks will be under enormous pressure to finance trillions in state-sponsored projects in the next two years. With so much money to push out the door, risk management will almost inevitably take a back seat. Banks that had made enormous strides toward global best practices were compelled by central pressure to greatly boost credit in the last two months of this year."

At this stage, has the US government recapitalized US banks with big stakes in Chinese banks now set to "voluntarily" finance a Chinese stimulus program? Worth reading in full.

3. Maureen Fan at the Washington Post reports that in a speech to the party today Chinese President Hu Jintao said:

"We must forcefully implement all the measures to further expand domestic demand and promote economic development and properly handle the international financial crisis and other risks rising from the international environment."

He also pledged to fight any international interference in Chinese internal affairs and that China "will never copy the Western political system."

4. Alexander Kwiatkowski at Bloomberg reports that Olivier Jakob, managing director of Petromatrix GmbH in Switzerland, suggests that crude prices have yet to react to the recent steep fall in the dollar versus the euro and other world currencies.

5. The Associated Press reports that the Venezuelan Energy Ministry announced today their production allocation cut at OPEC was 189 kb/d. It is not clear if this is from current production or from actual production in September 2008, which was the number which OPEC cut from yesterday. If from September, the number would suggest they have been asked to cut an additional 60 kb/d from the October cut of 129 kb/d to a total production allocation of 2.281 mb/d.

6. Bomi Lim at Bloomberg reports that South Korea plans to set up a fund in January to purchase lenders' preferred stocks and bonds. The government plans to raise 20 trillion won (~ $15 billion) from the central bank and private investors.

7. Arthur Laffer--the dean of supply side economics--has an op ed in the Wall Street Journal which asserts that efforts to make the US oil independent would require new taxes which would cripple the economy. Though I am not prone to agree with Laffer about, well, anything, his points about nuclear power, offshore drilling, and the hollowness of the overall "energy independence" effort are fair, and in my estimation, useful critiques. That said, the best methods which we can pursue toward the worthy goal of reducing our exposure to overseas political vagaries include offshore drilling and nuclear. Worth reading.

8. Susan Wilson at Tech.Blorge asks whether biofuels are economically viable in the current price environment without subsidies and finds that they are not. (h/t naked capitalism.) What she seems to miss is that they will always require policy support unless they can approximate the economies of scale that oil has. And that they will always be vulnerable if they are on a small scale.

For example, the other day there was a story about making biodiesel from coffee grounds. They estimate they can make 340 million gallons of biodiesel from spent grounds. That sounds like a lot. But here is how they got the number: the world produces 16 billion pounds of coffee a year. 15% of that coffee is in fact oil. There are 2204.6 pounds in a metric tonne, so 16 billion pounds means roughly 7,259,528 metric tonnes of coffee. 15% of that is 1,088,929 metric tonnes of oil. There are roughly 6.9-7.8 barrels per metric tonne of diesel, using 7.8 you get 8,493,647 barrels of diesel. There are 42 gallons per barrel, you get 356 million gallons of diesel a year. OK, but the US consumes about 20 million barrels of oil a day, which is 840 million gallons of oil--not diesel--a day. A day. The US consumes a quarter of the world's oil, and I'm not sure, but maybe about the same amount of coffee. So that would be 89 million gallons of diesel a year, which is less than a week's worth of American demand for diesel. Consider, now, that all those coffee grounds are consumed all across the country, and would have to be picked up, and you begin to see the problems with the numbers here. Of course, perhaps coffee retailers might be able to make a small side business off of turning their waste grounds into diesel, and every little bit helps, but the most important part of the economics of this is that it is from a waste product, which is not the case with many plant feedstocks for biofuels.

9. Mriganka Jaipuriyar at Platts has the story that Thailand has dramatically cut its reliance on imports of petroleum products as a result of alternative fuels policy initiatives embarked upon in 2006 or so. From January through October 2008 the country imported 2.6 million barrels (~ 8.5 kb/d) of oil products, down 71% from imports in the same period for 2006. This is a strange story, given that the EIA estimates that Thai refining capacity is about 729 kb/d, total oil production is 348.6 kb/d, and their total oil consumption was 929 kb/d in 2007, which suggests that even with refinery creep oil product imports are at least around 150 kb/d. The story also gives total crude oil imports as 846 kb/d.

Daily Sources 12/17

1. OPEC announced a large cut in production quotas today.

"[OPEC] agreed to cut 4.2 million barrels a day from the actual September 2008 OPEC-11 production of 29.045 mb/d, with effect from 1 January 2009, with Member Countries strongly emphasizing their firm commitment to ensuring that their production is reduced by the individually agreed amounts."

OPEC always strives to make it difficult to understand what it is they are doing, exactly. In any case, the numbers cited above give a 24.845 mb/d production quota. The implied target from November 1 was 27.306 mb/d, sdo that is a cut of 2.461 mb/d. (The reason the November 1 target is referred to as an "implied" target is because we only had the numbers for how much the organization wanted to cut, not the previous OPEC allocation numbers. Those numbers had to be deduced by various methods with competing results.) As it stands, the OPEC has given no idea of how the members will split up the cut, though the bulk of it would likely have to come from Riyadh.

2. Maher Chmaytelli and Fred Pals at Bloomberg report that Russian Deputy Prime Minister Igor Sechin told the media today that Russia will consider cutting crude exports by 350 kb/d if the OPEC cut does not prove sufficient to arrest the price decline. Sechin indicated that Kazakhstan may also cut supply. Azerbaijani Oil Minister Natig Aliyev also told reporters today that Baku is willing to cut supply by as much as 300 kb/d. If you add just the Russian and Azeri potential cuts to OPEC's cut of 2.461 mb/d, you would get a reduction in supply of 3.061 mb/d or about 3.6% of daily global oil demand (assuming 85 mb/d.) The delay on the part of Russia, Kazakhstan, and Azerbaijan to see the effect on price may have something to do with the opacity of OPEC's data and cuts--though one shouldn't rule out the possibility that they were privy to details in Oran. I definitely suspect that the delay in changes to their reserves accounting is related to this issue.

That said, unless and until Russia announces a cut in coordination with OPEC, so far my talk about a major realignment of Russian interest calculations has been much ado about nothing. ITAR-TASS reports that Sechin told journalists that Russia is seeking "permanent observer" status at OPEC.

3. Emma O’Brien at Bloomberg reports that Roland Nash, the chief strategist at Renaissance Capital, told her in an interview that Bank Rossi will allow the ruble to fall whenever the dollar is weakening.

"'It’s pretty clear that every time there is dollar weakness they will allow a devaluation now,” Nash said in an interview today. “They don’t want instability in the ruble- dollar rate because that’s what defines economic stability in Russia.'"

The Yen is at historic highs versus all currencies and the dollar has weakened some versus the euro of late.

"Banks including Germany’s Commerzbank AG and Troika Dialog, Russia’s oldest investment bank, are calling for a one-off depreciation of as much as 20% to prevent speculators from continuing to bet on further ruble weakness."

4. This Week in Petroleum reports a 500 kb build in crude oil stocks for the week ending December 12, near the top of the five year historical average. (Platts did not make their survey of analyst expectations freely available to the public this week--which is too bad, given that they were helpful for understanding the way the market reacted, despite chronic mis-prediction on the part of Wall Street analysts.) Gasoline stocks built by 1.3 million barrels and are at the bottom of the five year historical average. Distillate stocks jumped by an impressive 2.9 million barrels, putting them in the middle of the historical average--stocks have leapt up from historically very low levels in recent weeks, the build for the week ending December 5 was a striking 5.6 million barrels, so the reported over the last two weeks was a combined 8.5 million barrels! (see Daily Sources 12/10 #9) Considered in isolation, stock builds should have a depressing affect on market prices. Furthermore, the way these data are behaving is making me suspect that all or nearly all easy on-ground crude oil storage is taken, though we are still below the top of the five year historical average. If there is no place but tankers to place crude in storage, very few market participants will purchase crude in anticipation of future prices or to capture the current contango, which is way steeper than cost of carry. That also would put downward pressure on front prices as it makes the market shallower as a percentage of buyers are out of it for the time being.

Moreover, Katharine Fraser at Platts reports that US gasoline demand fell by 3.5% to 8.91 million b/d year over year in November, according to the American Petroleum Institute. That decline is substantially more than the 2.1% decline reported by MasterCard advisers on December 3 for the four week period ending November 28. (see Daily Sources 12/3 #14)

5. Lester Pimentel and Matthew Walter report that various analysts think that Rafael Correa's decision to default on Ecaudor's debt will inevitably lead to Ecuador abandoning the dollar, which it adopted as its own currency in 2000 (along with Panama and El Salvador) in order to curb inflation. It is not clear to me how much a new fiat currency from Quito would fetch on markets, though perhaps both scenarios for the dollar--inflation or deflation--would prove unpalatable for Ecuador in any case.

6. The China Daily, an official publication of the government of the People's Republic of China, ran an editorial today entitled "Keys to the Treasury" which warned:

"China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis."

But then it goes on to say:

"With few options to invest its increasing reserves safely and profitably, China may thus have to buy more US Treasury securities in spite of growing domestic skepticism that such purchases may incur huge losses later.

Besides the undesirable consequences that reducing purchases of US Treasury bills will have on global markets, it is also a bad idea to sell them before the world economy can restore stability.

If creditors stop recycling the dollars they accumulated back into US, interest rates in the US would rise to undermine that government's efforts to bailout distressed financial institutions and companies.

In a time of crisis, expanded government spending financed by foreign capital may be necessary to prevent the worst from happening.

Yet, as more and more creditor countries introduce their own stimulus packages to boost domestic demand, the US government should not expect continuous inflow of more cheap foreign capital to fund its one-after-another massive bailouts.

The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds.

Instead, it should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon."

Worth reading in full.

7. Andrea Dudikova and Yon Pulkrabek at Bloomberg report that the Czech central bank has cut its benchmark lending rate by 0.5% to 2.25%.

"'The Czech economy is slowing sharply and needs looser policy conditions,' Michal Brozka, an economist at Raiffeisenbank in Prague, said in a note. 'We continue to see the rate dropping to 1.5 percent by mid-2009.'"

8. China Daily reported that a "military source" told them on Tuesday that Beijing is set to send ships, and perhaps troops, to support the international piracy suppression effort off Somalia. The China Daily story emphasizes that Beijing is being lobbied by Somali representatives to do just that:

"'We hope China joins the efforts of the international community in supporting the Somali government,' the Somali Ambassador to Beijing, Mohammed Awil, said on Monday."

(h/t Information Dissemination)

9. Laurie Goering and Alex Rodriguez at the Chicago Tribune write about a report dated October 2008 by Grain--a non-profit based in Spain--which shows that food security concerns are driving several nations to purchase overseas farmland.

"Important grain producers like India, Vietnam and Indonesia within the last year cut off exports of key crops such as rice and wheat to ensure supplies at home, boosting prices worldwide and raising concerns about potential shortages.

Now countries like Saudi Arabia say they would prefer to be in charge of their own grain production rather than relying on their vast cash reserves to buy what they need, particularly when cutting out the middleman can reduce costs by 20 percent or more, experts say. Fast-developing countries like China, in turn, see demand for food at home outstripping their ability to produce it in years to come and want to line up supplemental supplies with some of their huge foreign currency reserves built up through trade surpluses."

The Chicago Tribune report is well worth reading in full. (h/t Gregor MacDonald) The Grain report can be found here. It identifies China, India, Japan, Malaysia, South Korea, Egypt, Libya, Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates as nations that are seeking overseas farmland in an attempt to improve their food security situation. Grain provides a detailed breakdown of these investments in the categories of both state and private investments here. Though the alarmist tone of the report can be irritating, the annex is a pretty good summary of the manifestation of this food security strategy worldwide and worth reading.

An important caveat to their conclusions of course is that as of now few of the countries pursuing these strategies have the military reach to enforce the export of foodstuffs from the nations where they have purchased farmland. (As opposed to, say, England's capability vis-a-vis Ireland during the Great Potato Famine.) Should one of those countries face a food shortage, an accountable government will ensure that the food produced there stays there. The trouble, of course, is that there are plenty of unaccountable governments, especially in Africa and central Asia where much of the farmland is being purchased. The Sudan, for example, is a target for farmland purchases even as it chronically seeks international food relief.

Daily Sources 12/16

1. Maher Chmaytelli and Ayesha Daya at Bloomberg report that Saudi Arabian Oil Minister Ali al-Naimi told journalists today in Oran that "there will be a cut in production of about 2 million barrels." To borrow a phrase, the Saudis are the "deciders." The question now, it seems, is just how will Russia coordinate a production cut with whatever the cartel announces tomorrow. Platts reports that Igor Sechin, Russia's First Deputy Prime Minister in charge of oil, will meet with OPEC governors later today in Oran, Algeria. Energy minister Sergei Shmatko is with Sechin, as well as a coterie of senior executives from Lukoil, Rosneft, Surgutneftgaz, TNK-BP and Gazpromneft.

If Russia coordinates with OPEC, together they represent a little over 50% of total world crude supply. Eric Watkins at the Oil & Gas Journal reported yesterday that the current President of OPEC, Algerian Oil Minister Chekib Khalil, said "We always wanted [Russia] to join OPEC." He went on to say that "We expect concrete support from [Russia.]"

In this context Platts has the fascinating story that Russia will delay the introduction of a new reserves methodology to 2012. The new methodology would have more closely synchronized reserves accounting with Western methods which account for things such as whether or not, given the prevailing price environment, it would be profitable to develop any given oil deposit. These accounting methods "shrink" reserves in low price environments and "grow" them in high price environments. The Russian natural resources ministry spokesman indicated that the agency expected valuations of reserves held by Russian companies to grow under the new methodology. However, given cooperation with OPEC--and the potential decision at the top that Russian interests are more closely aligned with commodity exporters than the developed world--it looks like decisions about increasing transparency will be put off. Synchronizing Russian reserves accounting with the West would have clearly been in the interests of consumers as opacity is one of the central difficulties plaguing the oil markets.

Also today, Alexander Kwiatkowski at Bloomberg reports that OPEC, in their monthly oil market report, predicted that global oil demand would fall by 150 kb/d to 85.68 mb/d in 2009. The organization predicted that the call on OPEC, or demand for crude produced by the cartel, will fall by 700 kb/d to 30.22 mb/d. It also forecast that non-OPEC supply would fall by 170 kb/d in 2009.

Anthony DiPaola and Camilla Hall at Bloomberg report that the Saudi Arabian Monetary Authority reduced its main benchmark lending rate to 2.5% from 3% today.

"The step was taken 'to ensure adequate system liquidity to meet genuine domestic credit demand and in view of evolving global developments,' the central bank said in a statement."

The Saudis peg the Riyal to the dollar and have seen inflation slow somewhat recently from an annual rate of 10.9% in August to a rate of 10.4% in September. (Edmund Andrews at the New York Times reports that the Federal Open Market Committee cut the federal funds rate by between 0.75 and 1%, bringing it to a range of between 0-.0.25%.)

Hector Igbikiowubo, Yemie Adeoye and Victor Ahiuma-Young at the Nigerian Vanguard report that there is a crisis brewing as petroleum products marketers are refusing to import product given the current exchange rate at which the central government is making payments via the subsidization program. The government owes marketers a huge sum on backdated subsidization payments, but appears to be ready to pay that debt at an old stipulated rate of $1 to 118 Nigerian Naira. The problem is that today on free exchanges the dollar--which is what oil and oil products contracts are generally denominated in--fetches from 127-135 Naira. The marketers are also worried that prices may be set to rise given the upcoming OPEC decision and that the debt repayment at the old rate would further erode their ability to purchase product at prices inflated by the OPEC decision.

In the meantime, Alaric Nightingale at Bloomberg reports that Jens Martin Jensen, interim CEO at Frontline Ltd, told her in a telephone interview that oil companies have booked about 25 VLCCs to store crude. Although all may not be fully loaded, the 25 VLCCs can potentially hold 50 million barrels of oil, or about 59% of a day's worth of global consumption. 25 vessels account for 5% of a global fleet of 502 vessels. The companies are using the tankers to store the crude so they can take advantage of much higher forward prices on the futures markets--an unusual phenomenon known as "super contango."

2. Joellen Perry at Real Time Economics has a brief analysis which reports that the policy of the European Central Bank looks to now diverge from US Fed policy. It now sounds as if ECB governors want to see how the easing policy so far will pan out--do I hear echoes of Peer Steinbrück?--and wants to focus on jump starting bank lending again. Perhaps this is a case of prisoners' dilemma given that there is no certainty as to what the incoming US Administration will do. Short post worth reading in full.

3. Nipa Piboontanasawat and Kevin Hamlin at Bloomberg report that China's central bank governor Zhou Xiaochuan indicated at the Financial Stability Forum in Hong Kong today that the bank was likely to reduce benchmark lending rates again this month.

4. Eurointelligence reports that the Frankfurter Allgemeine has a scoop this morning, having obtained an internal memo from the German economics ministry containing a forecast which was intended to be made public in its annual economic report due January of a contraction in 2009 of 3%. That would be the worst economic showing for the country since the end of WWII. The memo estimates an 1.25-1.75% contraction will have taken place in the fourth quarter 2008.

5. In an interesting story given Ecuador's decision to default on its sovereign debt yesterday, Takeo Kumagai at Platts reports that Japan's Inpex took at 40% stake in onshore Block 18 in that country from a subsidiary of Petrobras. "The 1,138 square km block is located in Oriente Basin in eastern Ecuador and pumps 30 kb/d of crude oil with an average API of around 28."

6. Xinhua reports that the China Natural Resource Committee announced on Sunday that a major natural gas field containing about 100 billion cubic meters was recently discovered in northern Xinjiang.

7. Bret Stevens suggests in an opinion piece that the US ought to purchase Pakistan's nuclear arsenal and the industrial support complex for it for $100 billion to be dispersed over 10 years. The money would only be discharged if Islamabad remained democratic and secular government and would be supplemented by military aid and the explicit extension of the US nuclear umbrella to Pakistan. The idea is unworkable, but the piece is well worth reading in full nonetheless--it gives a pretty good account of the role the bomb plays in the national consciousness (there is a national holiday dedicated to it), what strategic dilemmas possessing it resolves, and the situation general all over Pakistan.

8. In odd news, the Associated Press reports that Kenya has decided to impose sanctions upon the UN-backed leadership of Somalia as its control of the country crumbles in the face of Islamist insurgents. In the meantime, the United Nations Office on Drugs and Crime [UNDOC] published a press release today suggesting that "ship riders" from countries neighboring Somalia should be placed on naval assets policing the sea lane, so that pirates could be delivered over to them as authorities who would then take the suspects to trial in their home country. The organization also points out that the piracy problem will ultimately need be tackled by making their hold on land impossible. You might be somewhat skeptical as to whether nations like Yemen, Kenya, Ethiopia, Eritrea, Djibouti, and Tanzania are all that interested in spending considerable sums trying and punishing Somali piracy suspects. Furthermore, you might doubt that the regional judiciaries would welcome the inevitable human rights criticisms that would follow from Western nongovernmental organizations. And I wouldn't blame ya.

In the meantime, Andrew Spurrier at Lloyd's List reports that Anne Sophie Avé, the head of the French shipowners organization, wrote:

"[O]nly co-ordinated and efficient action by states removes the temptation for foreign shipowners to outdo the violence of the attacks by embarking uncontrollable mercenaries whose commercial interest is that the situation should persist."

Yes, mais oui, shipowners should take the flags of states that do not have navies to protect them so that shipowners will not have to pay for the cost of those navies, but clearly shipowners should not be forced to pay for private protection even if unwilling to contribute to public protection, for private protection would have an interest in perpetuating the problem! Not for nothing they say that shipping is the most global market of em all.

9. Jack Healy at the New York Times reports that the Labor Department announced today that consumer prices fell at a seasonally-adjusted rate of 1.7% in November from October. The basket of prices was led by energy prices, which fell by 17%. Food and beverage prices rose by 0.2% and clothing prices were up 0.3%. Prices for finished goods fell by 2.2%. Excluding food and energy prices, producer prices grew at 0.1% in November.

10. Morton Abramowitz, former US Ambassador, career diplomat, and head of the Carnegie Endowment for International Peace, proposes that President-elect could make a significant change in American foreign policy if he simply decided to appoint mostly career diplomats to the post of Ambassador. Exceptions could be made for those non-diplomats who nonetheless are especially suited to the job. Typically 30-40% of US ambassadors are not career diplomats, but chosen for political reasons. A very reasonable suggestion--well worth reading.

11. Fouad Ajami in the Wall Street Journal delivers a critique of the international affairs school of realism, which is the position, it seems, of much of Obama's foreign policy team, ironically enough. My personal views are close to those of the so-called realists, but Ajami makes the important point that history, as it unfolds, may push the Obama Administration to undertake similar--idealist, or neo-con--overseas efforts. In particular, he points out that if you thought that Iraq's borders were "artificial"--in the sense of not representing the physical boundaries of the residence of a political unit bound together by ethnicity and language--then have a gander at Afghanistan. As events progress it will be difficult for calm humility to prevail with those who make the decisions.

I would add that there appear to me to be several neo-cons in his advisory team, and that the language of neo-conservatism appeals to the American notion of itself in a way that the cautious, and reluctant to commit, and fundamentally self-serving thought process of "realism" never will. In that sense, interventionists are fundamentally better equipped to exploit the news of the day to push their agenda in any Administration than are realists. Ajami couldn't be more right in thinking so.

Well-worth reading.