Nomura Thinks the Price of Oil could Hit $220. What Do You Think?

From the UK Telegraph:

Nomura's commodity team said oil prices risk vaulting to uncharted highs over coming weeks if chaos hits Algeria as well, reducing global spare capacity to the wafer-thin margins seen just before the first Gulf War.

On Wednesday, Brent crude rose more than 5pc to almost $112 a barrel, threatening levels that could derail the global economy. It closed at $111.25.

"We could see $220 a barrel should both Libya and Algeria halt oil production. We could be underestimating this as speculative activiites were largely not present in 1990-1991," said Michael Lo, the bank's oil strategist.

The warning came as Italy's ENI announced a suspension of supplies through Libya's gas pipeline, and a string of foreign companies evacuated staff and shut production. Libya holds Africa's biggest oil reserves and produces 1.6m barrels a day (b/d), mostly for export to Europe.

The German driller Winthershall halted its 100,000 b/d production in Libya, while ENI stopped at a string of sites, vastly reducing its flow of 550,000 b/d. A number of producers have declared "force majeure".

Barclays Capital said 1m b/d of Libyan output is "shut in", with the other 0.6m at risk. While Saudi Arabia can step in by raising output, this takes time and its oil is not a substitute for Libya's "sweet crude".

The escalating crisis set off further falls on global bourses. Wall Street was down 1pc in early trading and the FTSE 100 fell 1.2pc. The Dow has shed more than 300 points over the past three days to 12,075.

Nomura said a shut-down in both Libya and Algeria would cut global supply by 2.9m b/d and reduce OPEC spare capacity to 2.1m b/d, comparable with levels at the onset of the Gulf War and worse than during the 2008 spike, when prices hit $147.

Both price shocks preceeded – or triggered – a recession in Europe and the US. Fatih Birol, chief economist for the International Energy Agency, said the latest price rise had already become a "serious risk" for the fragile economies of the OECD bloc.

Some analysts fear the underlying picture is worse that officially recognised, doubting Saudi claims of ample spare capacity. A Wikileaks cable cited comments by a geologist for the Saudi oil giant Aramco that the kingdom's reserves had been overstated by 40pc. A second cable cited US diplomats asking whether the Saudis "any longer have the power to drive prices down for a prolonged period".

Nomura's report, which does not examine the catastrophic scenario of a full-blown Gulf crisis, said past oil shocks have shown a three-stage pattern, with a final blow-off in prices in the final phase. The current crisis is at stage one.

Surging oil prices create a nasty dilemma for central banks since they are inflationary if caused by robust global growth, but deflationary if caused by a supply crunch that acts as a tax on consuming nations. The big oil exporters tend to save extra revenues from price spikes at first, so the initial effect is to drain global demand.

The current picture contains elements of both, with an added twist of liquidity created by the US Federal Reserve that is leaking into the global system and playing havoc with commodity pricing.

US Treasury Secretary Tim Geithner said on Wednesday that the world economy is stong enough to "handle" the oil shock, insisting that central banks "have a lot of experience in managing these things".

The European Central Bank (ECB) responded to the oil spike in July 2008 by raising rates even though Germany and Italy were in recession by then. Nout Wellink, the ECB's Dutch governor, said this had been a policy error.

Circumstances are different this time yet also murky. ECB chief Jean-Claude Trichet signalled last month that the bank will "look through" the short-term price hump, but ECB rhetoric has since turned more hawkish. Fed doves will undoubtedly give more weight to the deflationary risks.

Jeremy Leggett, a leader of the UK industry task force on peak oil and energy security, said the Mid-East crisis "shows the extreme fragility of the global system. People don't realise how close we are to a potential precipice if this unrest reaches critical mass in enough OPEC countries. Governments need to draw up emergency plans and get cracking on proactive measures while we still have time," he said.

Charles Robertson at Renaissance Capital said the real concern nagging investors is what will happen in Saudi Arabia's oil-rich Eastern Province, the home of the kingdom's restless Shi'ite minority. The Saudis produce 11.6pc of world output, but a much higher share of exports.

"There is potential for serious tension, and not just among the Shia. High unemployment and the youth bulge means unrest could be country-wide. If Saudi Arabia or Iran are engulfed, we have a serious problem."

On Wednesday Saudi King Abdullah unveiled $11bn of welfare projects for his people.

Q4 2010 Growth of the US Economy Reduced Due to Decline in Government Spending

From the BBC:

The US Department of Commerce has unexpectedly cut its estimate of fourth-quarter growth to an annualised 2.8%, from 3.2% previously.

Analysts had instead expected the figure to be revised up slightly to 3.3%.

Lower government spending than previously estimated was the main reason for the downward revision.

Economic growth for the whole of 2010 was also revised down slightly, from 2.9% to 2.8%.

As well as lower state and local government spending during the final three months of last year, consumer spending grew at a slower rate than previously estimated.

The latest figure for final-quarter growth is the second estimate - the figure will be revised again next month.

Revised figures also released on Friday showed that the UK economy shrank by 0.6% in the fourth quarter compared with the original estimate of a 0.5% contraction.

By way of comparison, on a non-annualised basis, the US growth figures were revised from 0.8% to 0.7%.

Continue reading the main story

“Start Quote

Household spending accounts for about 70% of all spending in the US - even more than the UK - and international trade may not be able to fill the gap”

Robert GardnerChief economist, Nationwide

• UK v US: Which is set to do best?
• UK contraction worse than thought

Despite the downward revision, US economic growth still picked up in the final quarter, as growth in the previous quarter was 2.6%.

A rise in consumer spending contributed to the growth, as did falling imports, rising exports and a rise in commercial real estate.

There are widespread concerns in the US that economic growth is not strong enough to bring down the high unemployment rate, which currently stands at 9%.

Earlier this month, Federal Reserve Chairman Ben Bernanke estimated it would take about 10 years for the unemployment rate to fall to a more sustainable 5%-6% at current economic growth rates.

The latest GDP revision figures could raise questions about future growth, analysts said, given the government's plans to cut spending in order to bring down the country's large budget deficit.

President Obama has outlined plans to cut $1.1tn (£620bn) from the deficit over the next 10 years.

The deficit - the amount by which government expenditure exceeds its income in any given year, expressed as a percentage of GDP - currently stands at 9%.

26% of Home Sales in 2010 were Foreclosures

Just some interesting facts to keep in the back of your head. Just in case you were under the illusion that housing was turning around. From CNNMOney.com

Home prices are down but sales are up, somewhat contradictory trends.

Home prices fell nearly 6% during the six months ended Dec. 31, sending values to their lowest levels in the post-bubble period, S&P/Case-Shiller reported on Tuesday. On Wednesday, the National Association of Realtors reported that sales of existing homes rose for the third straight month.

"At least it's not a double whammy where both sales and prices are dropping," said Stuart Hoffman, chief economist for PNC Financial Services Group. "Deals are getting done."

That's because 26% of all homes sold last year were foreclosures and short sales, according to a RealtyTrac report released on Thursday. That's down slightly from 2009, but a jump compared to 2008.

Homes already foreclosed on and repossessed by banks, called REOs (real estate owned), sold for an average of 36% less than normal sales, RealtyTrac reported. Meanwhile, the discount for homes sold while they were still in the foreclosure process (short sales) was 15%.

"It's like the post-holiday sales at Macy's where they're trying to clear out unwanted inventory," said Anthony Sanders, a real estate professor at George Mason University.

Nevada had the highest percentage of distressed sales of any state at 57%. That was, however, less than 2009, when 67% of sales there were foreclosures. In Arizona, 49% of sales were distressed properties; in California, 44%; and in Florida, 36%.

Foreclosed properties sold for the biggest discount -- 50% off -- in New Jersey.

These homes have attracted bargain hunters, including individuals or groups looking to buy and hold properties, according to Hoffman. They hope to buy at such a good price that they can rent out the properties and make a profit.

"These folks are cash investors who are going in and offering very low bids," he said.

NAR reported that all-cash sales went up to 32% of the total, up from 26% a year earlier. It estimated the percentage of investor purchases hit 23%, up from 17% a year ago.

"Unprecedented levels of all-cash purchases -- primarily of distressed homes sold at deep discounts -- undoubtedly pulls the median price downward," said NAR president, Ron Phipps.

These investment opportunities are not going away. Nearly 30% of mortgage borrowers are underwater on their loans, owing more than their homes are worth, according to Stan Humphries, chief economist for Zillow, the real estate web site.

These owners are very vulnerable to foreclosure so the number of distressed properties that will go on sale only the next year or two will probably remained high.

Home Prices Expected to Take Another Hit

Home prices took another hit in Q4 2010 and they are expected to decline another 10% - 25% depending on the location. This should not come as a big surprise. Without the tax credits for new buyers, the slow unwinding of Fannie and Freddie, and continued high unemployment there is very little demand for homes. Most people I speak to expect this to remain the same for at least the remainder of the decade. This process simplifies the home buying decision. A house no longer has any investment value, it is now purely a cash flow issue. Is it cheaper to rent or buy? Forget about the tax consequences. Only about 30% of homeowners are able to take the interest and tax deductions on tax forms. Besides those deductions could be going away in the inevitable changes in the tax code. So what is the value of owning your own home? Given the risk of further declines, I don't know. From CNNMoney:

Home prices took a big hit at the end of 2010, even as the rest of the economy gained steam.

National home prices fell 4.1% during the last three months of 2010, compared with 12 months earlier, according to the latest report from the S&P/Case-Shiller home price index, a closely watched indicator of market trends. They were down 1.9% compared with three months earlier.

"Despite improvements in the overall economy, housing continues to drift lower and weaker," said David Blitzer, spokesman for S&P.

And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report's release.

"There's a substantial risk of home prices falling another 15%, 20% or 25% more," he said.

Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.

There's also talk of possibly ending the mortgage interest tax deduction for many homeowners. Meanwhile, the weak economic recovery may be threatened by higher oil prices as a result of turmoil in the Mideast.

At the web conference, Shiller's index partner Karl Case wasn't much more optimistic.

"I see [the market] bouncing along the bottom with a slight negative trend," said Case, an economics professor emeritus at Wellesley College.

A widespread drop

On a seasonally adjusted basis, the national index surpassed the low it hit in the first quarter of 2009.

The decline was widespread, with 18 of the 20 large cities covered by a separate S&P/Case-Shiller index recording losses for the year. The only gains were posted by Washington, which was up 4.1%, and San Diego, which saw prices climb 1.7%.

The biggest loser for the year was Detroit, where prices dropped 9.1%.

"We're really close to being at the bottom again," said S&P's Maureen Maitland. "Last year's gains came courtesy of the tax incentives and the market is not holding up on its own."

The impact of homebuyer tax credits ended back last spring, and the two quarters of data since then reflect that. Prices fell steeply during the third quarter, down 3.3%. When the credit was in effect, prices rose consistently, up four out of five quarters starting in the second quarter of 2009.

S&P reported that both the company's 10- and 20-city indexes also fell month over month. In three cities, Detroit, Cleveland and Las Vegas, home prices have dropped below their January 2000 levels -- yes, you'd have to go back to the past millennium to find lower prices there.

Eleven markets, including New York and Chicago, have reached their lowest levels since home prices peaked in 2006 and 2007.

The losses were not unexpected, according to Brad Hunter, chief economist for Metrostudy, a housing market research firm.

"It's clear now that, going back to last fall, the apparent strength was a false strength," he said. "Now that the tax credits are gone, we're back to where the training wheels are off, to normal consumer demand."

He expects home prices to decline gradually throughout 2011, with markets picking up only when hiring increases substantially.

The Average US Consumer Has Been Under Stress for 10 Quarters

I found the following at nakedcapitalism.com while reading an article a friend of mine sent me. The index is interesting because it shows some of the stresses in the US economy at the consumer level. The article indicates that in spite of all the rosy talk in the media about a recovery there are still parts of the economy that are really struggling. From CredAbility:

CredAbility, one of the leading nonprofit credit counseling and education agencies in the United States, today released the CredAbility Consumer Distress Index results for the 2010 fourth quarter. The Index, a quarterly measure that tracks the financial condition of the average US household, found that rising stock prices helped propel growth in consumers’ net worth. But lower scores in three of the index’s other four categories -- employment, housing and household budget – drove down the overall index. The health of household budgets declined each quarter in 2010 and is at the lowest level since the first quarter of 2009.

For the quarter ended December 31, 2010, American households scored a 64.3 on the Index’s 100-point scale, down slightly from 64.4 in the third quarter of 2010. For all of 2010, the index showed a small improvement, moving up from a score of 63.9 in 2009’s fourth quarter.

A score below 70 indicates a state of financial distress. The average US consumer has been in financial distress for 10 consecutive quarters, according to the Index. The last time the index was above 70 was in the second quarter of 2008.

According to the index, the 10 states ranked as the most financially distressed account for nearly 33 percent of the nation’s Gross Domestic Product. These states include California and Nevada in the West; Michigan and Indiana in the Midwest and Florida, Georgia, Alabama, North Carolina, South Carolina and Mississippi in the Southeast.

While US Gross Domestic Product (GDP) increased 3.2 percent in 2010’s fourth quarter, the CredAbility Consumer Distress Index indicates that the increased economic activity has not yet helped many Americans.

“The increase in the GDP in the fourth quarter and 2010 has not yet translated into improved financial health for many average American families,” said Mark Cole, CredAbility’s chief operating officer and the executive responsible for the CredAbility Consumer Distress Index.

“Improved stock prices have increased the value of 401(k) and other investment accounts in the average US household, but high unemployment continues to stifle income growth, causing many homeowners to miss mortgage payments,” Cole said. “While an increase in consumer spending helped the economy in the fourth quarter, the index showed that an increasing number of people failed to prudently manage their household budgets. This lack of savings could cause financial problems if they need to rely on their savings in the future.”

Based on the index’s data, Cole said that a tale of two different American families is developing in America. “The family with one or two stable jobs is seeing their investments grow again and is beginning to spend more of their household income,” he said. “But families that have lost a job or seen other income sources reduced, and who don’t have enough income to invest, have experienced increased financial distress.

“Unfortunately, millions of families are in the second category. In 2010, approximately 14.8 million people ended the year unemployed, more than 1 million families lost homes to foreclosure and 43.6 million Americans used food stamps to buy groceries.”

For the second straight quarter, Michigan posted the worst score on the Index with a 58.83. To see a detailed explanation of how the Index works and a national map, go to www.CredAbility.org/ConsumerDistressIndex. A link to the Index will also be posted on the CredAbility Twitter account, which can be found at http://twitter.com/CredAbility.

Other highlights from the fourth quarter index include:

• Seven states, led by North Dakota (79.35) and South Dakota (76.94), scored above the distress threshold of 70 points. Others were Nebraska (74.84), Wyoming (74.09), New Hampshire (72.3), Vermont (71.3) and Iowa (70.05).
• Seven more states and the District of Columbia are within two points of moving out of financial distress. These states are Massachusetts, Minnesota, Montana, Virginia, Utah, Connecticut and Colorado.
• Among the most distressed states, Nevada moved from No. 6 to No. 3 and Florida moved from No. 7 to No. 5. For the first time in 2010, North Carolina moved into the top 10 most distressed states at No. 9.
• Some states’ level of distress improved during the past quarter. Indiana, which had ranked as the No. 5 most distressed, is now No. 7. Ohio, which had ranked No. 8, is now No. 11.

Fourth quarter Index data by state:

	Q4 2010	Q3 2010	Q2 2010	Q1 2010	Q4 2009
National	64.32%	64.40%	65.23%	65.04%	63.96%
States
Michigan	58.83%	58.11%	61.01%	60.69%	60.47%
Mississippi	59.24%	58.76%	60.62%	60.57%	60.69%
Nevada	59.27%	60.71%	59.23%	59.16%	59.56%
Alabama	60.03%	60.23%	61.89%	61.60%	61.46%
Florida	60.21%	60.81%	61.01%	60.70%	60.48%
South Carolina	60.56%	60.10%	61.29%	60.63%	60.09%
Indiana	61.16%	60.68%	62.61%	62.27%	61.74%
Georgia	61.26%	61.24%	61.37%	61.24%	61.13%
North Carolina	61.38%	61.66%	62.28%	62.11%	61.53%
California	61.39%	61.31%	61.71%	61.36%	61.29%
Ohio	61.41%	60.83%	63.06%	62.60%	62.18%
Tennessee	61.53%	61.54%	62.26%	61.72%	60.97%
Kentucky	61.63%	61.72%	63.38%	62.83%	62.03%
Rhode Island	62.29%	62.57%	63.70%	63.33%	63.20%
Missouri	62.78%	62.43%	64.62%	64.37%	63.97%
West Virginia	63.76%	63.22%	64.50%	64.11%	63.39%
Arkansas	63.79%	63.94%	65.73%	65.24%	64.54%
Illinois	63.79%	63.01%	64.66%	64.45%	64.43%
Arizona	63.81%	63.98%	62.05%	61.75%	61.62%
Louisiana	64.00%	65.07%	67.64%	68.13%	68.59%
New Mexico	64.74%	65.35%	65.72%	65.64%	65.42%
Maine	64.80%	64.29%	66.04%	65.78%	65.46%
Washington	64.99%	64.88%	65.60%	65.59%	65.71%
Pennsylvania	65.07%	65.23%	66.99%	66.92%	66.61%
Delaware	65.23%	65.53%	66.96%	66.34%	66.00%
Hawaii	65.40%	65.51%	68.65%	67.96%	67.84%
Oregon	66.04%	65.88%	64.66%	64.29%	63.72%
Texas	66.07%	66.48%	65.89%	65.82%	65.36%
New York	66.25%	66.61%	67.79%	67.45%	67.35%
New Jersey	66.47%	66.44%	67.67%	67.42%	67.40%
Idaho	66.54%	67.28%	65.11%	64.51%	64.48%
Wisconsin	66.91%	66.27%	68.05%	67.48%	66.59%
Maryland	67.33%	67.58%	68.94%	68.94%	68.89%
Kansas	67.77%	68.41%	70.26%	69.79%	69.29%
Alaska	67.82%	67.31%	70.70%	70.68%	70.70%
Oklahoma	67.98%	66.88%	68.63%	69.02%	69.10%
Colorado	68.16%	68.23%	68.34%	68.31%	68.15%
Connecticut	68.29%	68.20%	69.23%	69.04%	68.96%
Utah	68.38%	68.58%	67.65%	67.79%	68.15%
Virginia	68.41%	68.50%	69.30%	69.16%	69.21%
Montana	69.20%	69.28%	69.51%	69.99%	69.75%
District of Columbia	69.31%	68.55%	64.64%	66.07%	65.72%
Minnesota	69.38%	69.30%	69.75%	69.01%	68.14%
Massachusetts	69.58%	68.96%	68.37%	68.18%	68.08%
Iowa	70.05%	69.91%	71.40%	70.97%	69.98%
Vermont	71.32%	70.88%	72.05%	71.63%	71.07%
New Hampshire	73.30%	72.77%	70.64%	69.26%	69.07%
Wyoming	74.09%	72.54%	72.80%	72.83%	72.76%
Nebraska	74.84%	74.87%	76.09%	75.47%	74.20%
South Dakota	76.94%	76.19%	77.43%	77.21%	75.62%
North Dakota	79.35%	79.45%	78.95%	78.89%	79.25%