Saudi Arabia

Paint is drying, so what is the best way to break the monotony? Why with renewed Iran war speculation of course. Sure enough, here comes Saudi Arabia to the rescue. From Reuters: "Saudi Arabia has ordered its citizens to leave Lebanon “immediately”, the state news agency reported in an SMS alert on Wednesday. “The Saudi Arabian embassy in Lebanon calls all Saudi citizens to leave Lebanon immediately,” the alert said, without elaborating." Making an imminent Iran attack far less likely, however, is an article in Bloomberg titled "Israel Plans Iran Strike; Citizens Say Government Serious." Of course anyone expecting Israel to launch a strike with every paper in the world blasting the above title as a headline may as well buy some Las Vegas 10,000 square foot haciendas because housing has "bottomed." For now however Brent is leaning on the side of caution, and is back to all time highs in EUR terms.

With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.

Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable. It is no secret that many governments object to the sanctions and are willing to deal outside of normal channels for a reduced price.  If the Iranians should use the new private traders to dump a few million barrels of oil onto the market at a sharply discounted price, they just might encourage one of these governments to openly defy the United States for a bargain. As a persecuted minority, the Shia have learned that the weaker in a conflict must employ cunning rather than muscle. It is the inherent weakness of the alliance that is Iran’s strength.  The unwillingness of Washington to pressure supposed allies and the simple fact that there are buyers willing to defy the sanctions secretly reveals the cracks in the system.

American Officials Admit that the U.S. Is a Huge Sponsor of Terrorism

The latest development in yesterday's Bulgarian bus bomb explosion, is the identification of the alleged bomber. According to Times of Israel he is Mehdi Ghezali, "reportedly a Swedish citizen, with Algerian and Finnish origins. He had been held at the US’s Guantanamo Bay detainment camp on Cuba from 2002 to 2004, having previously studied at a Muslim religious school and mosque in Britain, and traveled to Saudi Arabia, Afghanistan, and Pakistan. He was also reportedly among 12 foreigners captured trying to cross into Afghanistan in 2009."

Just because there is already an overflow of confidence in the financial system, here comes the Senate's Permanent Subcommittee On Investigations with a 340 page report detailing how HSBC "exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls." Of course, since HSBC is one of the world's largest banks, what it did was not in any way unique, and it is quite fair to say that every other bank has the same loose anti-money "laundering" provisions. What HSBC was likely most at fault for was not providing sufficient hush money to the appropriate powers in the highest US legislative administration. But at least tomorrow we will have yet another dog and pony show, accusing that HSBC did what the NAR does every single day. Because let's not forget that the National Association of Realtors lobbied for and received a waiver for anti-money laundering provision regulations: after all how else will US real estate remain at its current elevated levels if not for the drug, blood, and fraud money from various Russian, Chinese, and petrodollar kingpins, mafia bosses and otherwise rich people who need to launder their money in the US, in the process keeping Manhattan real estate in the stratosphere? But one can't possibly pursue the real truth if it just may impair the fair value of that backbone of honest, hard-working US society: still massively overpriced housing in a world in which those who need mortgages will never get them.

Those trigger happy US sailors are causing some diplomatic headaches again for Hillary Clinton who this time has no Syrian anti-aircraft missiles to blame, by firing on a friendly ship, killing one and injuring three, off the coast of Dubai. Per the AP: "A U.S. Consulate official in Dubai says an American vessel has fired on a boat off the coast of the United Arab Emirates, killing one person and injuring three. The official gave no further details, but it appears the boat could have been mistaken as a threat in Gulf waters not far from Iran's maritime boundaries. An Emirati rescue official confirmed the casualty toll. The officials spoke on condition of anonymity because of the sensitivity of the incident between the two allies. The U.S. Navy's 5th Fleet, which is based in Bahrain, said it was investigating the Monday shooting. The U.S. Embassy in Abu Dhabi had no immediate comment." So far so bad, but where it gets even worse is that over the weekend, Russia finally decided to make its own voice heard in the middle east, and after over a year of the west condemning Syrian "eradication" of its own insurgents and keeping Russia on the defensive, Russia has decided to shine a light on none other than America's favorite regional ally: Saudi Arabia, which as we reported recently, has once again taken to quelling religious protests in Qatif and other eastern cities. Apparently Russia has had enough of this one-sided reporting of regional "insurgencies."

• Looks like the troops won't be steamrolled: JPMorgan Blaming Marks On Traders Baffles Ex-Employees (Bloomberg)
• The Goldman "Huddle" goes to Blackrock - Surveys Give Big Investors an Early View From Analysts (NYT)
• At least housing has bottomed: London House Prices Plunge As Supply Rise Adds To Lull (Bloomberg)
• Christine Lagarde and Nicolas Sarkozy embroiled in new corruption inquiry (Telegraph)- at least that fraud they created: Others helped them create it.
• Heat Leaves Ranchers a Stark Option: Sell (NYT)
• Merkel Gives No Ground on Demands for Oversight in Debt Crisis (Bloomberg)
• The euro skeptics have the best lines again (FT)
• Wen Says China’s Economic Recovery yet to Show Momentum (Bloomberg)
• Europe’s Banks Face Tougher Demands (FT)
• Madrid Region To Sell 100 Office Buildings Amid Austerity (Bloomberg)
• China eases taxes for foreign companies (FT)

Malaysia's state-owned oil and gas company just made a multibillion-dollar bet that Canada will choose to export its shale gas riches. Even though the odds of securing permission to export liquefied natural gas (LNG) from the Canadian west coast are still pretty poor, the costs of such an endeavor immense, and the timeline in question very long, Petronas is putting $5.5 billion on the table – far more than it has ever spent on an acquisition before – to secure a large foothold in the British Columbia shale gas scene.

It's yet another sign that things are getting serious in the global race for resources.

UPDATE: Disturbing video of the bloody reality on Saudi streets tonight

Remember Qatif - the "weakest" Saudi authoritarian link, whose daily protests, many of them violent, threatened to topple the government last spring when soaring global food inflation set the MENA region on fire and led to the overthrow of numerous regimes in the Mediterranean rim? It's back, only this time not based on food price concerns, but inflamed religious tensions, arising from the arrest, and shooting, of a senior religious opposition figure, Shia cleric Ayatollah Al-Neme. As of minutes ago, Redha Al-boori reports on Twitter, that there have been at least two casuualties as a result of confrontation between Saudi forces using live ammo and protesting Shiites.

What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD. If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD. This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S. This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial. No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere.

One of oil's most important characteristics is its fungibility, which means that a barrel of refined oil from Texas is equivalent to one from Saudi Arabia or Nigeria or anywhere else in the world. The global oil machine is built upon this premise – tankers take oil wherever it is needed, and one country pays almost the same as the next for this valuable commodity. Well, that's true aside from two factors that can render this equivalency void. In fact, crude oil prices range a fair bit according to the quality of the crude and the challenge of moving it from wellhead to refinery. Those factors are currently wreaking havoc on oil prices in North America: a range of oil qualities and a raft of infrastructure issues are creating record price differentials. And with no solution in sight, we think those differentials are here to stay.

All you need to read.

Coming into the weekend, most were focusing on key events coming out of Greece and France, possibly Egypt, but nobody expected that Saudi Arabia would be thrown into the fray. That just happened, however, following news that Saudi Arabia's Crown Prince Nayef bin Abdulaziz al-Saud has died in Geneva, according to Saudi state television, citing a royal court statement. The news has sent Saudi shares sliding, because now 89-year-old King Abdullah must nominate a new heir for the second time in nine months. And the last thing the middle-east region needs, not to mention the world's biggest oil producer, needs is more geopolitical uncertainty.

All you can read.