The emerging markets are whining about quantitative easing and the Iranians are getting more desperate as their economy continues to tumble. The world is lowering demand expectations for oil and global production is close to a 15-year high. Hedge funds cut back bullish commodity bets and China’s inflation in near the lowest level in two years, yet oil is still holding its own.
It is possible that the oil market has already priced in the bearish news and the focus now is on those old bullish silver linings. The oil market is on hold on news that should crush the market, yet it is failing to make a substantial move lower. Perhaps the market is skeptical of the offer by Iran. The Iranians are feeling the heat as the sanctions are absolutely destroying the Iranian economy. Just as the EU was ready to slap more sanctions on the Iranian regime, the Iranians tried to cut a deal. Iran made an offer to suspend domestic production of medium-enriched uranium. It is doubtful that the EU will take the bait as Iran has made this type of offer before. Dow Jones report that the European Union's Foreign Policy Chief Catherine Ashton said Monday she hoped Iran would, "consider very carefully" offers to resolve the deadlock over its nuclear program. She said the EU would, "continue to put pressure on Iran to comply with its obligations." She hoped Tehran would "soon" return to the negotiating table after the country held several rounds of inconclusive talks with international negotiators over the summer. However, she didn't say whether any new date had been set for talks.
The EU is getting ready to ban imports of natural gas to Europe. The Energy Information Administration reports that Iran is a relatively minor and strictly regional exporter of natural gas via pipelines to three neighboring countries: Turkey, Armenia and Azerbaijan. Iran supplies less than 1 percent of global natural gas exports and has no current capability to export to global markets via liquefied natural gas (LNG) export terminals. Such capability is years away.
Turkey receives more than 90 percent of Iran's natural gas exports under a long-term contract. Armenia and Azerbaijan have swap arrangements with Iran that account for 6 percent and 3 percent of Iran's natural gas exports, respectively. Armenia exports electricity to Iran to compensate for the natural gas volumes it receives. Azerbaijan repays Iran for the natural gas sent to its Nakhchivan exclave by exporting similar volumes to northeastern Iran. EIA estimates that the average revenues from Iran's natural gas exports during the period July 2011-June 2012 were approximately $10.5 million per day, or about 5 percent of the estimated $231 million per day in revenues from crude oil and condensates exports over the same period. In 2010, natural gas exports accounted for less than 4 percent of Iran's total export earnings while crude oil and condensates accounted for over 78 percent. Iran imports more natural gas than it exports. Iran's imports from Turkmenistan alone exceeded its exports during the July 2011-June 2012 period. Iran, which also imports from Azerbaijan and injects natural gas to support oil production, has some ability to divert export volumes to domestic uses.
Restrictions on the imports of Iranian natural gas could reduce the bargaining power of all three importing countries with other suppliers. Impacts on the physical availability of natural gas are likely to vary. Under current and foreseeable market conditions, Turkey cannot make up for all volumes currently imported from Iran from other sources. Excess capacity on import pipelines from Russia and Azerbaijan and at its two LNG terminals has declined as overall natural gas demand has increased, and it cannot serve all areas currently receiving Iranian natural gas. Shortfalls are especially likely to occur during the winter, when demand peaks.
China’s economy slowed its inflation rate to a two-year low. The Chinese consumer prices rose 1.9 percent from a year earlier while the producer-price index dropped 3.6 percent. While this number shows that China’s economy is slowing dramatically, it also increases the odds that the Chinese will soon pump up the economy with a lot of cash. If they don’t then money will then flow into China as QE 3d is in full force.
The more things change, the more they stay the same. Ben Bernanke took heat on QE3D, but we have been there before. It was two years ago I wrote, “Ben Versus the Dragon.” I wrote, “The Chinese moved to increase interest rates and Big Ben Bernanke struck back defending quantitative easing and bashing the Chinese. Ben forced the issue with QE2 and now the Chinese are forced to raise rates! Now the question is will the Chinese rate hikes keep coming or will it be too little too late to cool their hot inflation? Right now I would say it is bordering on too little too late. Ben Bernanke lashed out at China saying they are causing global problems by preventing their currency from strengthening while their economy booms.
“The Fed felt it had no choice (but to print more money,QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency.” Chinese currency manipulation may help them in the short run, yet it could sow the seeds of economic problems in the future.
The Chinese may feel that they have to cheat the world to be successful by controlling their currency but the truth is that if they want to maintain their meteoric economic growth over the long run they would be better served by allowing the market, not the government, to moderate their economy. Chinese currency manipulation is creating a bubble that will burst if they make a misstep, causing major pain the future. Right now that may be hard to imagine as everyone on the globe is so bullish on China yet the recent correction and history is a reminder that things can change.
Chinese currency manipulation was just as much a factor in the global economic meltdown as was the Fed and the U.S. government's ill-fated Fannie and Freddie excesses. China's siphoning of jobs and wealth from other parts of the globe at a rate that was unfettered by moderation by a rising currency helped create imbalances. The huge influx of capital and by default artificially cheap goods, helped create and add to deflationary pressures in the U. S as well as other parts of the globe. That's not to say, of course, that cheap goods are not good because they are and they provide good things for the economy yet at the same time cheap goods on the back of a major budding economic superpower currency manipulation does not allow for an orderly fall in price which exports deflate. China's overprotective currency ways have exported deflation to other parts of the globe. The Fed has forced the Chinese hand. If they fail to allow their currency to float, then Mr. Bernanke will continue to print money and export inflation to China. The Chinese will have to raise rates which in a normal free market world would mean their currency can strengthen. I guess there is more than one way to get the Chinese to move to address the economic pain they are exporting to their partners.
This week we should see a rebound in gasoline stocks after a slew of refining issues eased up and the gas cracks rocked. Look for crude to fall by 2 million barrels. Look for gasoline to rise by 3.5 million barrels and distillate stocks up by 2.5 million barrels.
The Energy Information Administration may say your heating bill will be higher this winter.