Easy Money, Maintenance and Ambassadorial Mayhem Greet Oil Traders

The underpinning of the oil markets has been the unrest in the Arab world following the publication of cartoons  and airing of film that were disparaging to their sensitivities. Embassies are on high alert from France and Germany. The claim by Iraq that Iran is overflying their airspace with weapons for Syria was confirmed when Iraq stopped a plane overflying their territory from North Korea. The cargo was suspected of being arms for Syria.

To this end President Obama stated Thursday that a full pull out from the Middle East is impossible. Moreover, pictures from Benghazi have been seen showing the locals dragging the ambassador’s body through the streets before they murdered him. This runs counter to the claim by the administration that the locals were helping the ambassador by bringing him to the hospital.

A fight is brewing regarding Greece. Now there is a surprise. The Creditors namely the IMF, ECB and Germany are arguing who will bare the economic onus of another bailout for the country. Yet hope is remaining that Greece wil remain in the euro. We think this insane. The definition of insane: doing the same thing repeatedly expecting a different result.

Also the oil markets are supported by North Sea news. It appears that the maintenance on the Buzzard field will take more time than previously thought, but it is not too onerous. However what is concerning is that a Forties cargo due for delivery in October has been delayed until November. This heightens the view that supplies from North Sea are getting harder to come by. The backwardation for Brent has soared in the last two days. But by far the more explosive news Thursday was the statement by Fed President Kocherlakota. He stated that monetary action should be accommodative until unemployment reaches 5.5 percent. Many had thought that to be 7 percent.  This is open ended printing and it is being shared by the Central banks the world over. Who can debase their currency the fastest.

And so we begin this morning with risk bid.

CRUDE: Hi: 93.48; Low: 92.80

Nov has risen overnight on the back of a weaker dollar and stronger rbob. However, it stopped short of our target zone of 93.75. It also appears likely that Nov completed a leg to the upside at the 93.48 level. This model will allow Nov to retrace to the 92.00 level, which should be good support. The minor downside pivot is 91.69. We are buyer of the dip at 92.10 with the appropriate stop loss. Nov will continue to have resistance at 93.75, but with a break of 93.95 a rise to the key upside pivot at 94.65 is seen. We would be a seller at the first pass of that level.

BRENT: Hi: 111.11; Low: 110.08

North Sea maintenance and a delayed cargoes have move the backwardation sharply higher. The Nov/red Nov spread is out by nearly eighty cent a bbl from Thursday. However, it does appear that Nov has completed a corrective leg to the upside this morning. We look for Nov to retrace from 111.11. This is a buy the dip market. Nov will have minor support at 109.60 to 109.40. The minor downside pivot is 109.25. the key upside pivot is 111.50. With a daily settle above that mark Nov is signaling that the decline from 118.00 is through and a test of that high is likely.

RBOB: Hi: 2.9320; Low: 2.9050.

The explosion at the Vennz refinery has exacerbated an already tight Atlantic basin mogas market. This has propelled Oct more than 12 cents off the recent low of Wednesday. We look for this market o move higher. It is likely to trip the key upside pivot at 2.94. If this event occurs, Oct will rise to the 2.9750 to 2.98 zone. We are a buyer of the dip. There will be minor support at 2.900 to 2.8950. the minor downside pivot is 2.8850. the key support for the pattern is found at 2.8750 to 2.87 and this carries a downside pivot of 2.8650.

DIST: Hi: 3.1232; Low: 3.0979

At 3.1232 Oct has completed a leg to the upside. It is likely to back and fill before the RTH opening. We are a buyer of the dip. Oct will have initial support at 3.0880 to 3.0850. The minor downside pivot is 3.0750. Strong support for the pattern is 3.07 to 3.0650. The minor downside pivot is 3.060. With the break and settle on the key upside  pivot Thursday, Oct has shown that the decline is over. Our model suggests that following a small retracement there is likely to be a new high on the day. This is likely to eye 3.15 to 3.1550.

NAT : Hi: 2.827; Low: 2.803

This isa tricky pattern. However, we will err on the side of the bears. The formation on the daily appears to be a bear pennant developing. This model suggests that there will be a run to test the 100 DMA at 2.725. Oct will have initial resistance at the 2.84 to 2.85 zone. The minor upside pivot is 2.86. The key upside pivot is 2.92. If our model calling for lower prices is correct, Oct will confirm with a break of 2.76. The key downside pivot is 2.715. Breaking that level will suggest a fall to 2.64 or below. A daily settle below 2.72 portends lower prices for next week.

NEWS

In about-face, Fed official eyes low rates for years

(Reuters) – A Federal Reserve policymaker, who has long argued that pushing too hard to get Americans back to work risks inflation, pitched a bold proposal on Thursday to keep interest rates low until unemployment falls sharply.

The about-face by Minneapolis Fed President Narayana Kocherlakota gave a sign of how concerned the Fed is about the sluggish U.S. economy.

Kocherlakota, one of 19 U.S. monetary policymakers and a known hawk, suggested the Fed should keep rates low until the jobless rate drops to 5.5 percent. Though that would likely take four or more years, given the nation’s current 8.1 percent jobless rate, he said the U.S. central bank should keep its vow as long as inflation expectations stay under control.

In separate speeches around the country, two other top Fed officials also downplayed the risk that the central bank’s new and potentially massive asset-purchase plan would spark a run up in prices in the months or years to come. However, a fourth policymaker warned the Fed against aiming at any explicit jobless rate.

Last week, the Fed said it expected to keep its key federal funds rate near zero at least through mid-2015, and that it will retain such policy accommodation for “a considerable time after the economic recovery strengthens”.

Moving aggressively to boost the slow U.S. recovery and troubled labor market, Fed Chairman Ben Bernanke and the policy-making Federal Open Market Committee (FOMC) also unveiled a plan to buy $40 billion in longer-term securities per month until the labor market improves substantially.

“This specificity – about an event that may not take place for four or more years – will provide needed current stimulus to the economy,” Kocherlakota said in a speech in Ironwood, Mich.

Given the behavior of inflation over the last 15 years, unwanted inflation is unlikely to kick in until unemployment falls near that level, Kocherlakota told a group at the community college in this struggling former mining town.

“As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” he said. “The FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate.”

The U.S. economy grew just 1.7 percent in the second quarter, not enough to put a dent in the nation’s jobless rate, which has remained above 8 percent for three-and-a-half years.

St. Louis Federal Reserve President James Bullard warned that unemployment was a “fickle variable” and the central bank would be wise not to target a specific level.

“It can go up and down because of labor force participation changes as has happened in recent years and even the most recent employment report, where unemployment ticked down but for the wrong reasons,” he told reporters in South Bend, Indiana.

DWINDLING CONVENTIONAL OPTIONS

Fed officials are toying with the idea of giving more specific guidance on when it expects to tighten policy, for example by tying rate rises to specific levels of unemployment and inflation.

According to minutes of a meeting July 31-August 1, the Fed considered using economic yardsticks that would give financial markets a clearer picture of what policies lie ahead. The sharper focus on better ways to communicate reflects the central bank’s dwindling conventional options, such as interest rates, which have been at rock bottom since late 2008.

Chicago Fed President Charles Evans, who is one of the central bank’s most aggressive doves, has urged the Fed to pledge low rates until the jobless rate reaches 7 percent, unless inflation rises above 3 percent.

Economists polled by Reuters last week fingered 7 percent as the median level at which the Fed would consider halting its monthly purchases of mortgage-backed securities.

The speech on Thursday was a change in tone for Kocherlakota, who in April repeated his call for the Fed to start reversing its ultra-loose policy stance some time in the next six to nine months.

The “noted hawk now seems to be drinking the Bernanke cool-aid,” TD Securities economist Eric Green wrote in a note to clients. Kocherlakota’s speech “suggests greater unity in preaching the low for longer theme that Bernanke has drilled into the market.”

But Kocherlakota told reporters his views had evolved. He now sees more downward pressure on inflation than he had thought at the beginning of the year, and said he also no longer thinks that permanent factors play nearly as big a role in the elevated unemployment rate as he had thought.

As long as the two-year forecast for annual inflation runs between 1.75 percent and 2.25 percent, Kocherlakota said, and long-term inflation expectations remain stable, the Fed should be seen as meeting its price stability mandate.

In the last 15 years, he said, the medium-term outlook for inflation has never breached 2.25 percent, so it is unlikely that it would do so until the jobless rate falls “considerably” below its current 8.1 percent level.

RISKS AND CREDIBILITY

The Fed’s consensus prediction for 2015 – the farthest the forecasts go out – is for a 6 percent to 6.8 percent jobless rate, well above Kocherlakota’s 5.5 percent threshold.

Green, of TD Securities, said Kocherlakota’s plan risks exploding the Fed’s hard won credibility on stable inflation.

Also on Thursday, both Atlanta Fed President Dennis Lockhart and Eric Rosengren of the Boston Fed argued the inflation risks from the central bank’s third round of quantitative easing, or QE3, are manageable and offset by the potential benefits.

“I simply came to the conclusion on a net basis that (it) would help the economy,” Lockhart told reporters in Kansas City. “The potential risks associated with that were not severe and were, and will be in the future, manageable.”

Lockhart – who unlike Kocherlakota and Rosengren has a vote on Fed policy this year – said the risk of a serious bout of inflation was “remote,” despite critics’ concerns that the dose of new liquidity into the economy could stoke higher prices.

In the 12 months through August, overall U.S. consumer prices increased 1.7 percent, staying below the Fed’s 2 percent inflation target.

In Quincy, Mass., Rosengren argued that the risks of QE3 are considerably smaller and more manageable than doing nothing. The Fed is taking “appropriate and forceful action to help the U.S. avoid a prolonged economic stagnation,” he said.

The president of the Cleveland Federal Reserve Bank, Sandra Pianalto, completing the barrage of Fed officials speaking on Thursday, said the central bank would head off any threat of inflation that emerges from its actions and would keep a “sharp eye” on price pressures to make sure they stay tame.

Iraq blocks Syria-bound North Korean plane, suspects weapons cargo

(Reuters) – Iraq denied permission to a North Korean plane bound for Syria to pass through Iraqi airspace last Saturday because it suspected it could be carrying weapons, a senior official said on Friday.

Iraq on Thursday denied a Western intelligence report that said Iranian aircraft had flown weapons and military personnel over Iraqi airspace to Syria to help President Bashar al-Assad battle an 18-month-old uprising.

The allegation, reported by Reuters on Wednesday, said arms transfers were organized by the Islamic Revolutionary Guard Corps.

“Continuing the Iraqi government policy to investigate the passing of weapons to Syria through Iraqi land and air space, the Iraqi authorities prevented a North Korean plane from going to Syria, after they suspected that the plane was shipping weapons,” Ali al-Mossawi, media advisor to the Iraq’s prime minister, told Reuters.

Moussawi said the scheduled plane’s itinerary, from North Korea to Syria, was what had aroused suspicions but that there had been no contact between the Iraqi government and North Korea on the issue.

Mossawi said that despite repeated requests from the Iraqi side, the United States had not presented any evidence that Iranian civilian aircraft were shipping arms to Syria via Iraq.

“We have told the Iranians that we could search their planes any time, randomly, and whenever we get any evidence (that they are shipping weapons),” he said.

“We will seriously stop these plans (from passing through Iraqi space),” he added .

Although charges that Iraq has allowed Iran to send arms to Syria are not new, the report said the extent of such shipments is far greater and more systematic than has been publicly acknowledged, thanks to a deal between senior Iraqi and Iranian officials.

The report also said Iran was dispatching trucks overland via Iraq westwards to Syria.

Syria’s upheaval is politically tricky for Iraq’s Shi’ite Muslim-led government. Close to Assad’s ally, Shi’ite Iran, Baghdad has resisted joining Western and fellow Arab calls for the Syrian leader to step down while also calling for a reform process in Syria.

Iraqi leaders fear Assad’s fall would fracture Syria along sectarian lines and yield a hostile, hardline Sunni Muslim regime that could stir up Iraq’s volatile Sunni-Shi’ite mix.

Baghdad has reinforced key points along its 680-km (420-mile) desert border with Syria.

U.S. officials said earlier this month they were questioning Iraq about Iranian flights in Iraqi air space. On Wednesday, U.S. Senator John Kerry threatened to review U.S. aid to Baghdad if it does not halt such overflights to Syria.

 

Fight Looms on Greek Bailout

Creditors Must Negotiate Who Will Sacrifice to Save Athens From Bankruptcy, as Shortfall Worsens

By MARCUS WALKER and MATINA STEVIS

A confrontation is brewing among Greece’s international creditors over who will provide the financing needed to keep the country afloat.

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece’s bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece’s debt-service burden. That is intended to avoid a Greek bankruptcy that could force the country out of the euro and reignite financial panic across the currency bloc.

All sides, including Athens, are determined to keep Greece in the euro, officials say—they just don’t know how yet.

The trio must agree to a plan by November at the latest, when the government in Athens—already in financial arrears—could run out of money altogether.

The €173 billion ($226 billion) bailout plan agreed with Athens in March this year—Greece’s second bailout since 2010—is already badly off track, euro-zone officials admit. Greece has been waiting since June for its next aid slice of that package—a €31 billion payment from the euro-zone bailout fund and the IMF, as the country’s recession cuts deeper and longer than forecast.

The aid has been held, as months of political turmoil in Athens delay economic overhauls, including privatizations that were penciled into the bailout plan but haven’t happened.

In addition, Greece’s new government under Prime Minister Antonis Samaras is pressing for two extra years to implement pledged austerity measures. The implicitly higher government spending would contribute to a shortfall in Athens of up to €30 billion through 2014, a person familiar with the numbers said.

Greece has in recent weeks tried to persuade Europe that the two-year extension can be achieved without extra lending. Its creditors aren’t buying that. “Everyone knows more time means more money,” said a senior European Union official. “You can’t fool people.”

Northern creditor countries, led by Germany, the Netherlands and Finland are adamant that Greece won’t get more loans from them. Such loans would require the approval of Germany’s parliament, where Chancellor Angela Merkel fears many of her center-right allies would revolt, causing a government crisis.

Some euro-zone officials would like the ECB to extend the duration of Greek government bonds that it holds, or to promise to buy new bonds when existing ones mature, reducing Greece’s need for money. But many ECB officials strongly oppose such concessions, equating them with illegal central-bank financing of government debt.

The ECB is already facing accusations from the German Bundesbank that its offer this month to buy more bonds of struggling euro members such as Spain and Italy amounts to “monetary financing” of governments. That makes it less likely the ECB will show further flexibility toward Greece.

Greece owes the IMF about €9.5 billion in 2014 and €10.8 billion in 2015 in interest and loan repayments. One option being considered in Europe is to press the IMF to delay the repayments, easing Greece’s cash needs in the next few years. But the IMF board is already impatient with the Washington-based fund’s high exposure to the risky Greek bailout.

Athens could cover part of the gap by selling more treasury bills to private investors such as Greek banks, since it still has access to the short-term debt market. But investor demand is limited, and comes at a steep price: Greece had to offer a yield of 4.31% to sell 12-week bills this week.

Whoever blinks first among the creditors, extra lending will add to Greece’s overall debt and worsen the country’s solvency problem. The March bailout was meant to put Greek on track to cut its government debt from at least 160% of gross domestic product this year to 120% by 2020—a level Europe and the IMF see as “sustainable.”

The report by the “troika” of inspectors from the IMF, ECB and European Commission is expected to say Greece’s debt ratio won’t reach that goal on current trends. Unless Greece’s economy bounces back unexpectedly, that would leave no way around a restructuring of euro-zone loans to Greece at a later date that could cost taxpayers in Germany and elsewhere tens of billions of euros.

One option being discussed is for euro-zone governments to write off some or all of the €53 billion in bilateral loans that they lent Greece under its first aid program in May 2010. However, Germany and France aren’t keen on taking such a large hit.

In any case, such painful decisions are likely to be pushed into the future, as Europe looks for a way to keep the Greek crisis quiet while it strives to shore up investor confidence in the larger economies of Spain and Italy.

 

DATA POINTS

THERE ARE NO SIGNIFICANT DATA POINTS TODAY.