Iraq Oil Minister: Iraq, Iran Join in Oil Deal

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1. Lending Booms Despite Rate Hikes
2. Trade Deficit Hits $68B Record in July
3. Govt.: Oil Demand Growth to Slow
4. Iraq Oil Minister: Iraq, Iran Join in Oil Deal

1. Lending Booms Despite Rate Hikes

The Federal Reserve may have raised interest rates 17 times in the past two years, but the lending business isn't showing any signs of slowing, says The Wall Street Journal.

Though the demand for residential mortgages has dropped off, businesses have stepped up loan demand to finance mergers and acquisitions and other purchases. And banks are handing out loans like candy.

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Businesses borrowed over $1.7 trillion so far this year, according to Thomson Financial. Thomson reports that large bank loans to businesses jumped 16 percent in the year ending August 31 from the previous 12 months.

"Credit is about as ample as it's ever been. It's across the board. It's not one product class or asset class - it's everywhere," Mark Zandi, chief economist for Web site Moody's Economy.com.

Usually, when the Fed hikes interest rates, it drives up the cost for borrowing and tolls the death knell for easy credit. But with rates rising from a record low of 1 percent to 5.25 percent, the impact on businesses is relatively small.

And long-term rates have barely risen. Currently, the 10-year Treasury rate is lower than the Fed funds rate. That has created an inverted yield curve.

In addition, businesses measure their cost of borrowing as a percentage of their profits. As earnings have risen, corporations' ability to borrow has stretched.

"There's a cushion in terms of profit margins that has to dissipate before people become concerned about creditworthiness," says Jan Hatzius, chief U.S. economist at Goldman Sachs, to the Journal. "That provides a margin of error for the economy."

But the problem will come if banks tighten their lending standards as the economy slows or if default risks rise. The slowdown in the housing market has already brought talk of stricter lending standards for the construction and commercial real estate sectors, says the Journal.

Paul Kasriel, chief economist for Northern Trust in Chicago, says "It's always going to be a soft landing: ‘Everything's going to be OK, I didn't make any mistakes.' Then suddenly mistakes start to appear."

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2. Trade Deficit Hits $68B Record in July

The U.S. trade deficit hit a record $68 billion in July as surging global oil prices pushed America's foreign oil bill to the highest level in history.

The Commerce Department reported Tuesday that the July deficit jumped 5 percent from the June imbalance. Analysts had expected the deficit to worsen slightly, but the overall imbalance was worse than expected and surpassed the old monthly record of $66.6 billion set last October.

So far this year, the deficit is running at an annual rate of $776 billion, putting the country on course to rack up a record annual deficit for the fifth straight year. Democrats, campaigning for control of Congress in the November elections, hope voters will view the soaring trade deficits as evidence that President Bush's trade policies are not working.

For July, U.S. exports, after setting a string of records, edged down 1.1 percent to $120 billion -- still the second highest level in history. Sales of American jetliners, computers and food products all slipped.

Imports rose to a record high of $188 billion, an increase of 1 percent from the June level. America's foreign oil bill climbed 4.8 percent to an all-time high of $28.5 billion, reflecting record oil prices in July.

The politically sensitive deficit with China did decline slightly in July to $19.6 billion but is still on track to far exceed last year's $202 billion deficit, the highest ever recorded with a single country.

Treasury Secretary Henry Paulson will leave later this week for an Asian trip that will take him to China for his first meetings with Chinese economic officials since he joined the Bush's Cabinet in July.

The administration is pushing China to move more quickly to allow its currency to rise in value against the dollar as a way to narrow the yawning trade gap by making American exports cheaper in China and Chinese goods more expensive for U.S. consumers.

Congressional critics of China's trade policies have warned that if China does not act, they plan to push for a Senate vote before the end of this month on legislation that would impose 27.5 percent penalty tariffs on all Chinese imports.

That would drive up the price American consumers would have to pay for Chinese clothes, toys and consumer electronic products, but supporters of the legislation contend a strong U.S. response is needed to force China to stop manipulating its currency to gain unfair trade advantages.

The big jump in America's oil bill reflects the sharp rise in global oil prices. The average price for a barrel of imported crude oil rose to a record of $64.84 in July while the spot price in global oil markets surged even higher to $77 per barrel.

However, since setting a record in mid-July, crude oil prices have come down by about 13 percent, raising hopes that the trade deficit will start to improve in coming months.

American exporters have been helped by a decline in the value of the U.S. dollar against many major currencies and an improved economic outlook in Europe and Japan.

The drop in exports in July was led by a $1.2 billion decline in sales of U.S. capital goods, reflecting declines in shipments of civilian aircraft, computers and computer accessories and industrial machinery.

While the deficit with China narrowed slightly, America's trade deficit with Japan rose by 8.1 percent in July to $7.6 billion.

The deficit with Canada, America's biggest trading partner, edged up to $5.9 billion while the imbalance with Mexico narrowed to $5.1 billion. The deficit with the 25-nation European Union jumped to $13.4 billion, up from $9 billion in June.

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3. Govt.: Oil Demand Growth to Slow

The government's Energy Information Administration says that growth in oil demand will slow this year and next.

World oil demand is expected to grow by 1.2 million barrels per day in 2006 and 1.7 million barrels per day in 2007, according to the EIA. In 2005, the world used approximately 84 million barrels per day.

The EIA's monthly estimate has been revised downward for the past two months. The EIA cites "slower-than-expected demand growth in the Organization for Economic Cooperation and Development countries."

However, the EIA doesn't expect oil prices to fall much this year and next. The EIA predicts that oil prices will average around $70 a barrel for 2006 and 2007. It says gasoline prices will likely average $2.65 a gallon.

The EIA says that rising demand (though lower than previously forecast) and moderate supply will keep prices elevated. It also cited continuing geopolitical risks. The agency says that oil production capacity will increase a bit in 2007.

"Because only limited increases to surplus capacity are expected during the forecast period, existing and potential supply problems throughout the world will continue to raise concern," the report said. "Because of these factors, as well as the continued tight supply-demand balance, EIA expects little relief from current pricing patterns."

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4. Iraq Oil Minister: Iraq, Iran Join in Oil Deal

Iraq and Iran plan to develop oilfields that straddle their border and Iraq will pump crude to its neighbour's refineries, deepening commercial ties between the two oil producers, Iraq's oil minister said on Tuesday.

Iraqi Oil Minister Hussain al-Shahristani told Reuters in an interview that an agreement between Iraq and Iran will be signed in a few months after technicians mark out the common oilfields.

The deal, first explored by Iran and Iraq in the 1970s, entails both countries defining their reserves in the cross-border field and then pumping the crude jointly.

"We have already agreed to the unitisation principles. As soon as the technical people meet and mark the shared field (with Iran) then we will sign the agreement," he said.

Shahristani said Iraq would forge similar deals involving oilfields straddling borders with Syria and Kuwait.

The impending deal comes as Iraq's Prime Minister Nuri al-Maliki visits Tehran for the first time since he came to office five months ago.

After the Iran deal is struck, Shahristani said the two countries would build a pipeline to carry Iraqi crude to Iran's southern refineries.

"The Iranians said they are even ready to take all their needs for the Abadan refinery from us which is about half a million (barrels a day)," he said. "They want to buy it according to the market price."

Iranian companies were prepared to build the pipeline in as little as nine months, he said.

Shahristani said Iran also wanted to secure 100,000 bpd of Kirkuk crude from Iraq's north and more than 100,000 bpd of additional Basra Light crude in the future. Under a deal agreed in August, Iraq will receive refined products in return.

The two predominantly Shi'ite Muslim countries have been looking to strengthen ties, prompting concern among Iraq's once dominant Sunni minority and other Arab states, as well as in the United States, which has 145,000 troops in Iraq.

Washington, which considers Iran part of an "axis of evil", accuses Tehran of meddling in Iraq.

International Oil Firms

Shahristani, in Vienna for a meeting of the Organization of Petroleum Exports Countries, was also briefing international oil companies about the latest developments in his country.

He said Iraq would enter into serious talks with them when parliament passed a new hydrocarbon law to regulate investment. This is expected by year-end.

"Most of the international companies, all of them, are seriously interested in working in Iraq and we welcome them," the minister said. "As soon as the hydrocarbon law passes parliament we will begin serious discussions with them and I don't expect they will take a long time."

Iraq needs to attract investment to develop its oilfields and increase production. Big oil firms are waiting until the new investment code is in place before pumping cash into Iraq's giant and largely underdeveloped oilfields.

Shahristani said central government was encouraging the regions to attract investment but policymakers were still debating whether they would be able to sign deals.

"We have agreed that the contracts must be approved by a federal authority," he added.

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Editor's Notes:

Three steps to success! Discover how you can multiply your profits and cut risk down to size in three easy steps. Go here now.
Warren Buffett's billion-dollar bet on the dollar is raking in dough. Find out how you can profit from Buffett's strategy. Go here now.
In April 2004, Financial Intelligence Report predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Discover the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go Here Now.
Learn how you can triple your money with energy investments. Go here now.
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