Rally fizzles ... so do Russia's oligarchs ... demand destruction a euphemism for income elasticity ... more oil in Brazil

Well England, and Theo Walcott in particular's slick performance in Croatia last night hasn't sparked the world wide euphoria you'd think is meritted by the excitement in the tabloids this morning (we're going to the "Wald Cup" says the Sun ...) The SPX gave back ten points of what had been shaping up as a decent rally led by energy and materials to end up six points at 1232 after Moodies downgraded LEH and WaMu (hello??). Decent figs from Fed Ex after hours don't seem to have done much and the futures right now are already pricing out most of those gains ... Asia is soft by a percent or two across the board while the dollar continues its staggering rise and is now trading comfortably through 1.40 against the euro (if you annualise the recent rate of appreciation it will cost only $0.12 to buy a euro this time next year) The precious metals are soft following the dollar, while the grains and energy are pretty much flat.

The Russian RTX index with a 4.4% decline yesterday, following on from a 7.5% decline the day before posted its biggest two day decline since 2000. Foreigners have realised that its actually quite risky to invest in Russia ... doubt yesterday's comments by the Resources Minister that BP would have to sell a stake in its Kovotka gas field to Gazprom or the govt would "be forced to intervene again" helped ... just as it looked as though BP and TNK were friends again ... 

But it now looks as though a classic emerging market panic is brewing. The Russian banking system has exploded in size in recent years, to the extent that deposits only account for around a quarter of its assets, it relying on capital markets for the rest of its funding. These numbers are similar to where Northern Rock was sitting before the music stopped ... has the music stopped in Russia? Well, I'm no Russian expert but I see interbank rates have spiked to last summer's levels ...

Russia is a worry indeed. For all its culture and rich history, it represents and is dominated by the darker side of Europe's contribution to philosophical thought - xenophobic nationalism - and has a tendency to authoritarian rule which is built into its societal DNA. Annecdotally, foreign exchange students who are non-white (e.g. African Americans) report of no-go areas in Moscow and St. Petersburgh (never mind out in the sticks). Sergei Rebrov's advice to his Russian friend Roman Pavliuchenko who has just signed for Spurs, whom Rebrov played for many years ago was:

"I wouldn't go for a walk on my own around White Hart Lane. A lot of dark-skinned people live there. So naturally the crime rate is higher than anywhere else. It's not nice to be a robbery victim. So I suggest that Roman doesn't walk but drives around that area."

Nice. Russia's strained relationship with the West has very deep roots indeed. Of course, none of this matters so much when everything is going up, what worries me is how nasty this nuclear power will get when things aren't ... the FT report today that margin pressure was behind the liquidiation with some of Russia's richest (now ex-richest?) industrialists mentioned ... and the first shall be last ... wonder if that means Chelsea will be relegated next season?

The Russian president believes its all a storm in a teacup. The FT quotes him as saying 

“If the right decisions are made, the situation will straighten out ... We will return to the levels that we saw at the start of the year. In any case, I believe this is in the power of the government.”

So there you have it. The Russian govt. intend to show the market who's boss. Interesting idea ... it would be the first time in history, certainly that I'm aware of, a policy maker (or even a private ring) will have been successful at sustainably rigging a market ... 

China's Minster of Commerce has pledge state aid for exporters suffering from falling demand. No specifics are given but one assumes he's talking about aid over and above the yuan's recent weakness. Although we don't really know what's really going on in China the government certainly appear concerned enough that the slowdown is real to want to do something about it. China has built up a very strong fiscal position in recent years and it looks as though they're about to start using it.

As the oil price continues to fall, partly on the basis of these Chinese fears, the latest forecasts from the IEA yesterday were noteworthy. Yes, they lowered their forecast for oil demand for 2008 and 2009. Yes they cited OECD demand as particularly weak. But all this "demand destruction" the market is so excited by, which seems like good old fashioned income elasticity to me, is only a small piece of the jigsaw. The expectation is for demand to continue rising by 700k barrels this year and 800k next. That's certainly a slowdown from the boom years, but a more modest rate of growth should not be confused with a decline. Echoing comments from what Petrobras were seeing a few months ago, non-OECD demand weakness is likely to offset that in the OECD, and rise by around 1.4mb this year and next. Let's just hope the Saudi's get following capacity additions planned by the Saudis come on stream, and are not overwhelmed by the delpetion of existing fields. Those capacity additions are as follows:

Field kbp year

AFK 500 2008

Nuayyim 100 2008

Shaybah II 250 2009

Khurais 1200 2009

Manifa 800 2012

The great hope long term is Brazil, and Petrobras last night announced that its Iara field (co-owned with GALP and BG) is likely to contain 3-4bn barrels of oil. Tupi was estimated last year to contain 8bn. The discovery probably doubles Brazil's reserves, but Iara is a smaller sized field than Tupi and proportionately, Iara looks higher than might otherwise have been expected. This find is encouraging indeed and bodes well for the reserves in the Santos pre-salt regions hitting the 30bn barrel preliminary estimates.