Saudi Arabia

The global economy remains on shaky ground.  China’s manufacturing activity contracted for its 5th straight month, the US recovery is still very early to call, and the euro zone debt crisis may not be finished. Eurozone PMI data is due later today which will show how the economy is doing after Greece averted default earlier this month. Thomson Reuters GFMS have said that gold at $2,000/oz is possible - possibly in late 2012 or early 2013. Thomson Reuters GFMS Global Head of metals analytics, Philip Klapwijk, featured on Insider this morning and advised investors to "buy this gold dip”.  Gold should be bought on this correction especially if we go lower still as we may need a shake-out of "less-committed investors." Klapwijk suggested that a brief dip below $1,600 is on the cards but the global macro environment still favours investment, notably zero-to-negative real interest rates and he would not rule out further easing by either the ECB or the Fed before year end.

All you need to read.

• So much for that: Obama to fast track southern portion of Keystone XL Pipeline (1600 Report)
• French Police Say They Have Cornered Suspect in School Shooting (NYT); French shooting suspect had been arrested in Afghanistan (Reuters); Suspect in French shootings says he’ll surrender to end standoff (Globe & Mail), Toulouse suspect escaped from Kandahar jail in mass Taliban jailbreak in 2008 (BBC)
• Bernanke Says Europe Must Aid Banks Even as Strains Ease (Bloomberg)
• Monti faces clash with unions over reform (FT)
• UK budget to balance tax breaks with austerity (Reuters)
• Romney scores big win over Santorum in Illinois (Reuters)
• U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions (Bloomberg)
• Bernanke Says Fed Failed to Meet Goals During Great Depression (Bloomberg)
• Revised tax deal reached on Swiss accounts (FT)

US Army General Wesleyl Clark stated one month after 9/11 that the US had already planned to invade Iraq, Syria, Lebanon, Somalia, Sudan, Libya and Iran. But could the real driving force behind these invasions not be about oil but about the almighty US dollar and gold?

Canada's natural resources minister told delegates at the International Energy Forum in Kuwait that his country was on the cusp of becoming an "energy superpower." Canada ranks No. 6 in terms of global oil production, but much of its crude exists in the form of oil sands. European leaders are considering a measure that would classify oil sands as an environmental issue, prompting Canada to threaten to take the issue to the World Trade Organization. With the U.S. political system in a deadlock over Canadian crude, the Ottawa government is now working to convince the international community that the global market is in jeopardy if polices "discriminate against oil sands."

Earlier this morning, there have been some completely unfounded speculation of a Chinese coup. And this is all. To get some additional color, we go to Chinese macro expert Andy Lees, who incidentally has have left the churn factory known as UBS, and is now at AML Macro Ideas. Here is his take.

All you need to read.

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

Heading into the North American open, EU stocks are seen lower across the board as market participants reacted to cautious comments from Moody’s rating agency on Spain, which noted that Spain’s fiscal outlook remains challenging despite easier targets. Still, the ratings agency further commented that easier targets do not affect Spain’s A3 government bond rating with a negative outlook. Separately to this, a BHP Billiton executive said that Chinese demand for iron ore is flattening, while according to China's state-backed auto association, China's vehicles sales this year will probably miss their growth forecasts. As a result, basic materials sector has been the worst performing sector today, while auto related stocks such as Daimler and VW also posted significant losses. The ONS reported that inflation in the UK fell to 3.4% in February, down from 3.6% in January. However, higher alcohol prices stopped the rate declining further. Going forward, the latter half of the session sees the release of the latest US housing data, as well as the weekly API report.

• BHP Billiton sees China iron ore demand flattening (Reuters)
• Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits (Bloomberg)
• State Capitalism in China Will Fade: Zhang (Bloomberg)
• Venizelos quits to start election campaign (FT)
• Fed’s Dudley Says U.S. Isn’t ‘Out of the Woods’ (Bloomberg)
• China Is Leading Foreign Investor in Germany (WSJ)
• Fed undecided on more easing: Dudley (Reuters)
• Martin Wolf: What is the real rate of interest telling us? (FT)

No conclusions here, just a simple chart showing monthly Saudi Arabia crude oil production based on OPEC data, which has been rangebound in a tight 8,000 - 9750 tb/d range, superimposed with Brent prices over the past decade. The last time Brent soared to record highs back in the summer of 2008, Saudi production peaked at 9,522 tb/d (despite similar promises for spikes in crude production and exports). During last spring's spike, Saudi produced around 9,000 tb/d. In the past two months, production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity, but not because speculators are evil incarnate as Nancy Pelosi will want her brainwashed fans to believe, but simply because for the most part they are Primary Dealers, and other entities attached at the hip to the Fed, who serve as Ben Bernanke's transmission mechanism of record liquidity being dumped into the system. Our advice: if anyone is hoping that Saudi Arabia can pump the 12,500 tb/d needed if Iran truly goes offline, buy a bike, as failure from Saudi to satisfy lofty demands will promptly send unleaded to new all time highs. Couple that with the Treasury debt ceiling fiasco in 5-6 months, and those Obama InTrade reelection contracts may seem a tad rich.

Last June (the 24th to be precise), it was announced that 60 million barrels of oil would be released from world reserves, with about half of that amount being taken from the SPR. Oil was trading at $91 when the announcement was made but actually rose in price - hitting $97 - before dropping to $88 once the surplus oil was introduced on July 15. 60 million barrels = $3 lower price. Hardly bang for the buck - especially as oil was back above $100 before the end of the year. As much as the SPR is seen by many to be the panacea for high prices, the lack of available additional supply from the world’s biggest producers is a far bigger concern; one which my friend Ronni Stoeferle from Vienna wrote a fantastic report on recently entitled “Nothing To Spare” (you can email Ronni HERE for a copy of the report which is an incredibly detailed piece of work). In it he took an in-depth look at some of the supply constraints facing the world and his conclusions are, to say the least, troubling.

Welcome to the global village.

In the Spring of 2011, when Libyan oil production -- over 1 million barrels a day (mpd) -- was suddenly taken offline, the world received its first real-time test of the global pricing system for oil since the crash lows of 2009. Oil prices, already at the $85 level for WTIC, bolted above $100, and eventually hit a high near $115 over the following two months. More importantly, however, is that -- save for a brief eight week period in the autumn -- oil prices have stubbornly remained over the $85 pre-Libya level ever since. Even as the debt crisis in Europe has flared. As usual, the mainstream view on the world’s ability to make up for the loss has been wrong. How could the removal of “only” 1.3% of total global production affect the oil price in any prolonged way?, was the universal view of “experts.” Answering that question requires that we modernize, effectively, our understanding of how oil's numerous price discovery mechanisms now operate. The past decade has seen a number of enormous shifts, not only in supply and demand, but in market perceptions about spare capacity. All these were very much at play last year. And, they are at play right now as oil prices rise once again as the global economy tries to strengthen.

Gasoline consumption in the United States has been dropping for years. In the last decade, vehicle fuel efficiency has improved by 20%, and the combination of that shift and a weak economy of late has pushed gasoline demand to its lowest level in a decade. At the same time, US oil production is at its highest level in a decade. Deepwater wells in the Gulf of Mexico and horizontal fracs in the Bakken shale have turned America's domestic oil production scene around. After 20 years of declining production, US crude output rates started to climb in 2008 and have increased every year since. With production up and demand down, the basics of supply and demand indicate that oil prices should be falling. Americans should be paying less at the pump. Instead, the average US price at the pump reached US$3.80 per gallon on March 5, after 27 consecutive days of gains. That's 26.7¢ above the old record for March 5, set last year. The price of gasoline has climbed 32¢ or 9.3% since February 1; analysts expect prices to continue rising, reaching a national average of something like US$4.25 per gallon. What gives? Is it all about Iran? Are speculators manipulating the market? Do any politicians have good ideas on how to "fix" the high cost of gasoline? And is there relief on the horizon?