Good News Breaking Out Everywhere

Jim Brown
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News of unexpected growth came from the U.S., China and India this week prompting crude prices to move to the upper end of their current range.

China reported that the pace of manufacturing had increased in October. China's Purchasing Manager Index rose to 54.7 in October from 53.8 in September. Anything over 50 is considered expansion of activity. This reduced fears that the recent tightening moves by the Chinese government had suppressed growth. The Chinese economy appears to be on track for continued 10% growth, which will raise crude demand.

This is the fourth consecutive month of gains in the PMI. New orders jumped to a new six-month high at 58.2 while export orders were basically flat. The headline number of 54.7 was well above the consensus estimate of 52.9 and higher than any individual forecast in a Reuters poll of 12 analysts.

Chinese inflation data is due out next week and analysts expect it to be at a two year high. The input prices component in the PMI rose +4.5 points to 69.9 and a six-month high. This could cause China's government to further pursue a tightening policy.

In the U.S. the ISM for October surged unexpectedly to 56.9 compared to September's 54.4. The +2.5 point gain far exceeded analyst's estimates for a 1.1 point loss. This is the highest level since May. The new orders component spiked +7.7 points to 58.9 and the production component rose +6.2 points to 62.7 and the highest level since May.

In India the October PMI rose to 57.2 from 55.1 and was driven by new orders and export demand. A surge in new orders also powered the employment component higher after a three-month decline.

Australia's PMI rose by +2.1 points to 49.4 but remained in contraction territory.

Investors should be encouraged by the broad based rise in manufacturing activity in the U.S., China and India. We already knew Latin America was growing quickly so this good news from multiple countries should mean the global recession is truly coming to an end. As activity increases the demand for oil products will increase.

Premier Manmohan Singh told India's energy firms on Monday to scour the globe for fuel supplies as he warned the country's demand for fossil fuels is set to soar +40% over the next decade.

India has onver 1.1 billion people and imports nearly 80% of its crude oil. India's growth rate is expected to grow by more than 8.5% this year and at least 9% in 2011.

India now realizes it is locked in a race with China to secure oil supplies for the coming decades. Once peak oil arrives those countries that import oil will be in serious trouble. With an 80% import rate India would quickly run dry.

Like China has been doing for the last five years the Indian premier urged energy companies to locate reserves around the world and build strong economic partnerships with other countries and their oil and gas industries. Unlike China, which only seeks to purchase reserves in order to guarantee future supplies, India's premier realizes that when the fecal matter hits the fan they want to be in "partnership" with other countries not simply an owner of crude supplies in that country. Owners can see their assets nationalized and I believe we will see a lot of that in the years ahead. It is harder to nationalize a partner that is helping to grow their mutual economies.

China has the lead on India in the oil race because China is ruthless and prepared to strike wherever it finds a deal. India is more bureaucratic and slow to act while the deals favor the swift.

India's premier must have seen the peak oil light. He recently said "there are supply-side uncertainties on the horizon." That would be an understatement since the only uncertainty is in the minds of those who are not good at math.

As I wrote last week I believe China is building up its military ($150 billion last year alone) for the time when they have to defend or "free" the reserves they are buying up around the world. For instance Venezuela sold China $20 billion in future oil production. Once supplies begin to dwindle and Chavez or his successor realizes they can sell the oil on the open market for twice as much that deal with China will turn ugly. Since he is not a fan of legal contracts China will have to face him down with a show of force to keep the oil flowing.

The resource wars are coming. You can count on it. Signs of increased economic activity around the world today mean that oil usage will grow even closer to the point where production fails to fill that demand.

Jim Brown

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