Crude Oil

The raging second Egyptian Spring isn't quite the webcast ratings bonanza it was when it first struck in 2011, which makes sense as the current Muslim Brotherhood government has the full backing of the US and thus it is in "everyone's best interest" to not follow how close to a counterrevolution the nation once again is. And while for the time being the country's most valuable asset, the Egypt-controlled Suez Canal Authority is in "stable" hands, that does not mean that the government, which today announced its foreign reserves had dipped precariously to only $13.6 billion, can't enforce inflation where everyone else says deflation reigns. As a result, as of May 1, the tolls for any crude oil and other liquid tankers will rise by 5%, while tolls for other commodities will increase by 2-3%. Expect said additional infrastructure costs to be promptly passed on to end consumers around the globe.

• Obama to meet with Goldman's Blankfein, other CEOs Tuesday (Reuters)
• Chinese Firms Shrug at Rising Debt (WSJ)
• McGraw-Hill, S&P Sued by U.S. Over Mortgage-Bond Ratings (BBG)... but not Moody's or Fitch
• Dime a Dozen: Dollar Stores Pinched by Rapid Expansion (WSJ)
• Dell Board Said to Vote Monday Night on $24 Billion LBO (BBG)
• BOJ Governor Shirakawa to step down on March 19 (Reuters)
• Alberta may offer more to smooth way for Keystone (Reuters)
• Facebook Is Said to Create Mobile Location-Tracking App (BBG)
• Barclays takes another $1.6 billion hit for mis-selling (Reuters)
• Apple App Advantage Eroded as Google Narrows IPhone Lead (BBG)
• Texas School-Finance System Unconstitutional, Judge Rules (BBG)
• World Risks ‘Perfect Storm’ on Capital Flows, Carstens Says (BBG)

Exxon reported 4Q profit at a five-year high boosted by its refining arm.  However, Delta Airlines (DAL) can’t tell a similar success story with its newly acquired refinery at Trainer, PA. 

To teach Chevron an excruciatingly painful lesson for its “serious willful” violations that caused 15,000 people to seek medical treatment. But a rounding error?

• Risky Student Debt Is Starting to Sour (WSJ)
• Political scandal in Spain as PP secret accounts revealed (El Pais)
• New York Times claims Chinese hackers hijacked its systems (NYT)
• Spain's Rajoy, ruling party deny secret payment scheme (Reuters)
• Iran crude oil exports rise to highest since EU sanctions (Reuters)
• BlackBerry 10’s Debut Fizzles as U.S. Buyers Left Waiting (BBG)
• Costs drag Deutsche Bank to €2.2bn loss  (FT)
• And the gaming of RWA continues - Deutsche Bank Beats Capital Goal as Jain Shrugs Off Loss (BBG)
• More fun out of London - Barclays, RBS May Pay Billions Over Improper Derivatives Sales (BBG)
• Hagel to face grilling by Senate panel on Mideast, budget (Reuters)

Since the peak in 2008, the Dow Transports and the price of crude oil has been extremely highly correlated. Whether this is due to the inextricable factor of central bank liquidity flushing 'money' into each and every market around the world - or an increase in the link between demand for energy and increasing transportation needs - it seems something has recently changed. Oil prices have been stymied in the last year as global growth slowed and in spite of a plethora of hot-spots for geo-political risk flares has been unable to see premia rise. On the other hand, the Dow Transports have screamed higher. Different this time? It would appear so... or is this a return to the anti-correlated (somewhat more sensible) energy-cost-to-transports world that existed before the crisis?

When one thinks of open-ended, "inflation targeting" one usually thinks of soaring markets, at least in nominal terms, exploding central bank balance sheet, and happy central planners. What one usually does not think of, is, well, inflation targeting. Because while the shadow banking financial system, perfectly devoid of deposits, has for now provided a sufficient buffer from trillions of reserve injections from spreading into the broader economy of the US and Europe, and has primarily impacted stock markets as unsterilized liquidity injections are used by banks to bid stocks, Japan has been far less lucky in this regard. As it turns out, the massive slide in the Japanese Yen in the past 2 months on nothing but ongoing promises of open-ended action, something Europe has perfected, and the US most recently enacted, may have already achieved its goal of pushing inflation. only not to the desired 2% level, but about 50% higher. Luckily, it is for such trivial things that nobody really every needs, such as fuel and consumer products - just ask the BLS.

The situation in Malgeria^TM continues to remain uncertain but the following updates should provide some color as to where they stand currently (and a primer on the initial French intervention). Critically, Stratfor warns that the escalation in Algeria will possibly lead to further militants crossing the Mali border, further endangering Westerners and energy infrastructure (which is important as Algeria is one of the largest exports of light, sweet crude oil in the world and a significant natural gas exporter to Europe).

There has been a very strong and concerted public-relations effort to spin the recent shale energy plays of the U.S. as complete game-changers for the world energy outlook.  These efforts do not square up well with the data and are creating a vast misperception about the current risks and future opportunities among the general populace and energy organizations alike.  The world remains quite hopelessly addicted to petroleum, and the future will be shaped by scarcity – not abundance, as some have claimed.

Just because the endless Israel vs Iran foreplay seems to no longer be exciting the world as much as it did all throughout 2010, 2011 and 2012 when military action seemed imminent over and over, it appears the world has a new geopolitical tension point: the recent incursion into Mali by French (and soon many other) forces, to protect "European interests" against "extremists" operating in the North, and as a corollary - the retaliation by the locals against Western Democratic powers. At least such is the simplistic plot line. Sure enough moments ago Reuters reported that islamist militants attacked a gas field in Algeria on Wednesday, claiming to have kidnapped up to 41 foreigners including seven Americans in a dawn raid in retaliation for France's intervention in Mali, according to regional media reports. The raiders were also reported to have killed three people, including a Briton and a French national. Subsequent reports indicate that the Algerian captives have been let go, and that this is purely an escalation against the invaders, an act which the US state department will harshly condemn at a 1pm press conference, and likely use as a catalyst to unleash US forces in the air or on the ground, to support the French campaign which at last check was going horribly.

How effective have the sanctions been in moderating Iran’s behavior up to now? Current indications are not much, despite the damage inflicted on the country’s economy. On 9 January Iranian President Mahmoud Ahmadinejad said that Iran should establish more processing industries in the oil and gas sectors to reduce dependency on exports of crude oil and that the budget plan for the next Iranian year of 1392 (to start on 21 March) envisaged less dependence on crude oil revenues as the government intends to replace crude oil exports with oil derivatives to allow the nation’s economy to participate in the oil sector’s lucrative downstream industry.... A regime that has weathered more than three decades of tumult in its efforts to construct an Islamic society seems unlikely in an energy-starved world to ameliorate its behavior solely to please the dictates of Washington, Brussels, the UN and Canberra. And oh, on 14 September 2012 the United States exempted Belgium, Britain, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain, and Japan from complying with the sanctions for another 180 days, a list that was expanded on 8 December to include China, India, South Korea, Malaysia, Singapore, South Africa, Sri Lanka, Turkey, and Taiwan.

Market Reform is required for futures market like agriculture and energy to avoid the Hedge Fund and Big Bank Malfeasance. 

So much for the US trade renaissance. After posting a better than expected October trade deficit of ($42.1) billion, November saw the net importer that is the US revert to its old ways, with a massive deficit of some $48.7 billion - the worst number since April, far more than the $41.3 billion in expectations, which makes it the biggest miss to expectations since June 2010, driven by a $1.8 billion increase in exports to $182.6 billion, and a surge in imports which rose from $222.9 billion to $231.3 billion. Specifically "The October to November increase in imports of goods reflected increases in consumer goods ($4.6 billion); automotive vehicles, parts, and engines ($1.5 billion); industrial supplies and materials ($1.3 billion); foods, feeds, and beverages ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.1 billion)." And with this stark reminder that the US has to import the bulk of its products, something which a weak USD does nothing to help, expect a bevy of lower Q4 GDP revisions, as this number may push Q4 GDP in the sub-1% category.

Even if the US economy really takes off in 2013, don`t look for oil and gasoline demand to overtake supply in the equation.

My thoughts on what is headed our way