Saudi Arabia

All you need to read and more.

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything. This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…   The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

European cash equity markets were seen on a slight upward trend in the early hours of the session amid some rumours that the Chinese PBOC were considering a cut to their RRR. However, this failed to materialise and markets have now retreated into negative territory with flows seen moving into fixed income securities. This follows some market talk of selling in Greek PSI bonds due to the absence of CDSs. This sparked some renewed concern regarding the emergence of Greece from their recovery. Elsewhere, we saw the publication of the BoE’s financial stability review recommending that UK banks raise external capital as soon as possible. This saw risk-averse flows into the gilt, with futures now trading up around 40 ticks.

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.