by Calculated Risk on 2/21/2011 07:38:00 PM

• From Reuters: Brent Hits 2-1/2 Year High on Libya Export Concerns

Clashes in oil producer Libya sent benchmark Brent crude to 2-1/2-year highs on Monday above $105 a barrel on fears that supplies to Western countries could be disrupted, while U.S. prices rallied by more than $4.

• From the WSJ: The Stealth Return of $100 Oil

The days of $100 oil are back—and not just in Europe, where the Brent crude benchmark vaulted past $108 a barrel on Monday.

While U.S. prices haven't scaled such heights ... many U.S. oil refiners and consumers are finding their costs have already escalated.

• From Gail the Actuary at the Oil Drum: Why are WTI and Brent Oil Prices so Different?

We have all heard at least a partial explanation as to why West Texas Intermediate (WTI) and Brent prices are so far apart. We have been told that the Midwest is oversupplied because of all of the Canadian imports, and the crude oil cannot get down as far as the Gulf Coast, because while there is pipeline capacity to the Midwest, there isn’t adequate pipeline capacity to the Gulf Coast. I have done a little research and tried to add some more context and details. For example, the opening of two pipelines from Canada (one on April 1, 2010 and one on February 8, 2011) seems to be contributing to the problem, as is rising North Dakota oil production.

There are two pipelines (Seaway – 430,000 barrels a day capacity and Capline – 1.2 million barrels a day capacity) bringing oil up from the Gulf to the Midwest. It is really the conflict between the oil coming up from the Gulf and the oil from the North that is leading to excessive crude oil supply for Midwest refineries and the resulting lower price for WTI crude oil at Cushing. Demand for output from the refineries remains high though, so prices for refined products remains high, even as prices for crude oil are low.

• Some earlier analysis from Professor Hamilton at Econbrowser: Geopolitical unrest and world oil markets

Note: U.S. Markets were closed today in observance of Presidents' Day. Here are the weekly schedule and summary:
• Summary for Week ending February 19th
• Schedule for Week of February 20th

by Calculated Risk on 2/21/2011 05:08:00 PM

Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year. There are a series of steps the Fed will most likely take before raising rates¹:

• First the Fed needs to complete the $600 billion “QE2” large-scale asset purchase program. This is currently scheduled to be completed at the end of June, however, to “promote a smooth transition in markets”, it is possible the Fed will decide to "gradually slow the pace" of the purchases like they did with QE1 (quoted text from QE1 related FOMC statements). If the program is extended and purchases tapered off (but the size remains at $600 billion), this will probably be announced at the conclusion of the two day FOMC meeting in late April and the program will probably then be completed in August.

• Next the Fed will end the reinvestment of maturing MBS and Treasury Securities. This could be concurrent with the end of QE2, or the Fed might wait a few more months before halting reinvestment.

• Then the Fed will need to remove or change the extended period FOMC statement:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

If we look back to the “considerable period” language in 2003, the FOMC last used the “considerable period” phrase in the December 9, 2003 statement, and the first rate increase was on June 30th, 2004 – just over 6 months later.

This suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June (maybe tapered off into August).
• End of reinvestment 0 to 2 months later.
• Drop extended period language a couple months later
• Raise rates in early 2012.

That is probably the earliest the Fed will raise rates - and it could be later in 2012 or even later ...

¹ A research note on these steps by Jan Hatzius at Goldman Sachs on Friday lead me to revisit this.

by Calculated Risk on 2/21/2011 12:00:00 PM

Note: U.S. Markets are closed today in observance of Presidents' Day. Here are the weekly schedule and summary:
• Summary for Week ending February 19th
• Schedule for Week of February 20th

By requests, some links on Libya ...
• From the NY Times: Qaddafi’s Grip on Power Seems to Ebb as Forces Retreat

The 40-year-rule of Libyan strongman Col. Muammar el-Qaddafi appeared to teeter Monday as his security forces retreated to a few buildings in the Libyan capital of Tripoli, where fires burned unchecked and senior government officials and diplomats announced defections.

... several senior officials — including the justice minister and members of the Libyan mission to the United Nations — announced their resignations.

• The Telegraph has a site that is updated frequently: Libya protests: live

• From al Jazeera: Libya Live Blog

by Calculated Risk on 2/21/2011 08:56:00 AM

A few European notes and stories ...
• From the WSJ: Irish Banks Behind ECB Lending Surge

An unusual surge in overnight lending from the European Central Bank last week was connected to Ireland's effort to wind down nationalized lenders Anglo Irish Bank Corp. and Irish Nationwide Building Society ... The two banks moved collateral from the ECB's longer-term refinancing facilities to the more expensive overnight-lending program as part of a plan to auction off deposits and certain other assets on their balance sheets, the person said

The fear late last week was that some large European bank was in trouble, and now it appears this is just related to winding down the Irish banks.

• From AP: Ireland's Leading Party Wants New Bailout Terms. What a surprise (Not). The Irish election is this Friday, February 25th.

• From the NY Times: Greece’s Efforts to Limit Tax Evasion Have Little Success

Various studies have estimated that Greece may be losing as much as $30 billion a year to tax evasion — an amount that would have gone a long way to solving its debt problems. ... But payments have only trickled in.

Another surprise. Tax evasion is an art form in many countries.

• From Bloomberg: German Business Confidence Unexpectedly Rises to Record Unexpectedly?

• Note: There is a meeting of several EU leaders, apparently including Angela Merkel and Nicolas Sarkozy, in Helsinki on March 4th, and then a special eurozone debt crisis summit on March 11th.

• The Ten Year yields for certain European countries declined slightly today. Here are the Ten Year yields for Portugal, Spain, Ireland and Greece.

by Calculated Risk on 2/20/2011 08:34:00 PM

By requests, some links on Libya ...
• From the NY Times: Qaddafi’s Son Warns of Civil War as Libyan Protests Widen
• From the WSJ: Gadhafi's Son Warns of Civil War in Libya

Sunday, Moammar Gadhafi's son went on state television to proclaim that his father remained in charge with the army's backing and would "fight until the last man, the last woman, the last bullet."

Seif al-Islam Gadhafi ... warned the protesters that they risked igniting a civil war in which Libya's oil wealth "will be burned."

• From al Jazeera: Libya Live Blog
• From Reuters: Libya tribal chief threatens to block oil exports

by Calculated Risk on 2/20/2011 03:12:00 PM

We will be discussing the impact of negative equity for years. Toluse Olorunnipa at the Miami Herald has an anecdote: The curse of negative home equity

Wesley Ulloa bought her first condo for $230,000 in 2007, and watched helplessly as it lost two-thirds of its value [to about $80,000 today] ... She’s one of hundreds of thousands of South Floridians coping with the reality of being underwater on their mortgages—one of the most widespread side effects of the real estate market collapse.

“I get a little angry. I think ‘Man I bought this for $230,000 and for what I’m paying, I could be in a house’,” she said. “But I can’t dwell on it. I mean, what are you going to do?”

The choices are to tough it out, try for a modification or short sale, or just default. All bad choices - and this will limit her choices in the future too.

Olorunnipa also notes: "More than 300,000 South Florida mortgages—or 43 percent of them—are currently underwater ..."

That percentage comes from CoreLogic's Q3 2010 negative equity report (Q4 will be released in a few weeks).

Click on graph for larger image in graph gallery.

This graph shows the break down of equity by state (for home with a mortgage). Florida is bad, but Nevada and Arizona are in worse shape. And with house prices falling again, the number of homeowners with negative increase some more (depending on the number of modifications and foreclosures).

Earlier posts:
• Summary for Week ending February 19th
• Schedule for Week of February 20th