Following the peaceful implosion of the USSR in December 1991, numerous opportunities opened worldwide.

The Bush administration chose to devote its energies to achieving global military “full spectrum” dominance, to construct a worldwide martial presence that would cause any and all post-Soviet rising powers to think twice about even considering attempting to compete.

In that they were successful, but it can be argued that in winning the military peace, the Pentagon lost the economic war, as nations around the world poured monies into social programs while Washington focused on its military forces.

In 1991, Jim O’Neill, then Goldman Sachs head of global economic research and commodities and strategy research, coined an acronym that has increasingly come to dominate economic discussions since in his study, “Building Better Global Economic BRICs.” The study predicted the imminent rise of the four BRIC economies – Brazil, Russia, India and China.

Three of the four BRIC nations are in Asia – India, China and Russia who defines itself as an Asiatic power when circumstances are convenient, a technically correct assertion as the bulk of the vast Eurasian mass of the Russian Federation does in fact lie in Asia.

Which leaves Brazil as the Western Hemisphere’s sole rising potential economic powerhouse.

And rising they are – according to predictions by London’s authoritative Economist publication’s Intelligence Unit, its latest monthly forecasts postulate that Brazil’s GDP for 2011 is predicted to reach hit $2.44 trillion, compared with $2.43 trillion for Britain.

Can you say shell shocked?

For the first time since Columbus set sail in 1492, a Latin American country is set to surpass a nation whose empire in its prime covered one-sixth of the globe. Not that Britain ruled Brazil – that was sleepy Portugal, but Britain faces another milestone in its former colony India, with a similarly booming economy.

The Economist prediction notes dryly that Brazil, which in 2010 overtook Italy to become the world’s seventh biggest economy, will shortly dethrone Britain from sixth place, knocking the UK back to seventh place in global fiscal rankings. In 2010 the Brazilian economy grew by 7.5 percent after surmounting the 2008-2009 global financial recession.

Economist Intelligence Unit chief economist on Brazil Robert Wood attributed Brazil’s dynamism to a growing consumer class and rising trade with China, as Brazil satiates China’s raw material needs with commodities such as soy and iron ore. Wood then snarkily comments that while the combined indigenous rising consumer demand coupled with China exports have fuelled Brazil’s rise. We are in the middle of a commodity super-cycle that will last for some time but at some point the really good times Brazil is enjoying will cool off a bit.”

Much of Brazil’s current prosperity can be attributed to the progressive policies of former President Luiz Inacio Lula da Silva, in power from 2003 to 2010, known more popularly as Lula, who made it a keystone of his administration’s policies both to reject the economic prescripts of both the international Monetary Fund and the World Bank and boost progressive programs for the country’s less fortunate.

Top of the list, Lula’s administration tamed a fierce rage of hyperinflation during 1986-94 that averaged around 1,000 percent a year.

A charming diplomatic if occasionally blunt speaker, at the March 2009 G-20 summit in London, President Lula caused an uproar when he declared that the economic crisis was caused by “the irrational behavior of white people with blue eyes, who before seemed to know everything, and now have shown they don’t know anything.”

In July 2010 while visiting Zambia Lula noted, “We had a debt of $30 billion to the International Monetary Fund but when I took office, we repaid the IMF and we don’t owe anymore to the IMF. On the contrary, the IMF owes us $14 billion. We have $250 billion in our currency reserves.”

Lula left office last December with 80 percent approval ratings, an unprecedented accomplishment for a chief executive after seven years in office.

The Brazilian economy’s not so secret ace in the hole?

Oil – lots of it.

The government-managed Petrobras energy company is to build on Lula’s sound fiscal foundation and has announced that it intends to double its output by 2015. Echoing Lula’s reluctance to rely on foreign financial funding, Petrobras said that its plan to more than double oil output will boost the company’s cash flow and eliminate the need to tap debt markets in less than a decade, as profits from oil sales will be enough to cover both operating and debt costs, according to Petrobras Chief Financial Officer Almir Barbassa.

Petrobras has announced plans to invest $224.7 billion in increasing production through 2015, more than any other major oil producer in the world. Just one offshore Brazilian field, Lula/Cernambi, is estimated to contain an eye-watering 7 -11 billion barrels of recoverable crude, leading the deposit to be labeled the one of the Western Hemisphere’s biggest oil discovery in the last three decades.

And down the road? The Economist Intelligence Unit predict that Brazil’s economy will be larger than any in Europe within a scant nine years, when by 2020 it overtakes Germany to become the world’s fifth biggest global economy after China, predicted to be by then the world’s leading economy, followed by the U.S., India and Japan.

And Russia, the most sluggish of the BRICs?

That’s a story for another time.

By John C.K. Daly of http://oilprice.com

The problem with predictions is that for every one that forecasts price rises it is possible to find one that forecasts price declines. The arguments for each are usually sound, and based on the forecaster’s belief in how the world ought to work. Whichever side an investor comes down on, the decision is typically an act of faith.

So here we go. The CEO of Vitol, the world’s largest oil trader, expects crude prices to rise to $85/barrel in 2011 — a prediction counter to most forecasts which expect the market to top $100/barrel next year.

Vitol says its forecast is based on supply and demand fundamentals. First of all, a price between $70/barrel and $85/barrel is acceptable to both producers and consumers. At that price, pump prices are likely to remain below $3/gallon in the US.

Vitol also believes that prices are likely to stay below the $85/barrel level due to excess supply in the market and excess products coming out of the world’s refineries. The trading house sees demand growth slowing to 1.3 million b/d in 2011, compared with 1.6 million b/d in 2010.

Forecasts that crude prices will rise above $100/barrel are based primarily on factors that are not fundamental to the oil market. For example, if the global economy starts growing again at a faster pace, demand for energy will rise and so will prices. If the economy slows, so will demand for oil.

Likewise, if the dollar continues to fall, oil will be more in demand as a substitute “currency” and the price of a barrel of oil will rise. And if the US launches another round of quantitative easing, that will almost certainly lead to some level inflation, which would likely reduce near-month prices and flatten out the steep contango of the current market.

In the big run-up in oil prices during 2008, the fundamentals and the speculation were both lined up to push the price higher. That’s not the case today. The fundamentals say the price is not likely to change much. The speculation is that the global economy will drive the oil market higher, whether the economy improves or not.

Paul Ausick

Reuters:   Work on the BP plc (NYSE: B) oil spill will be delayed because of Hurricane Alex.

Reuters:   China’s economic growth slowed.

Reuters:   Oil prices fell for the fourth day.

Reuters:   The euro hit record lows against the Swiss franc.Reuters:   Microsoft Corporation killed its Kin phone.

Reuters:   Amazon.com (NASDAQ: AMZN) launched a less expensive Kindle.

Reuters:   Google Inc.’s (NASDAQ :GOOG) operating license in China is under review.

Reuters:   Amazon will buy online store Woot.

WSJ:   China’s banks are trying to find a source of earnings beyond lending in the People’s Republic.

WSJ:   GlaxoSmithKline (NYSE: GSK) has set up a number of small biotech units.

WSJ:   Democrats on a panel set up by Obama said spending cuts would have to outweigh taxes to drop the deficit.

WSJ:   Toyota (NYSE: TM) found engine problems in 270,000 cars

WSJ:   Wellpoint cut back rate increases.

WSJ:   Federal authorities began a crackdown on film piracy.

WSJ:   Robert Benmosche, CEO of American International Group, threatened to resign again.

WSJ:   Yahoo! Inc. (NASDAQ:YHOO) said it would buy back $3 billion in shares.

WSJ:   Moody’s may downgrade Spain’s Aaa rating.

WSJ:   The financial reform bill would cut FDIC charges for some small banks.

WSJ:   JAL will ask for more funds to operate in bankruptcy.

WSJ:   GM is expanding the launch of its Chevrolet Volt battery-powered car.

WSJ:   The WTO condemned subsidies offered to Airbus by European nations.

WSJ:   Warner Music (NYSE: WMG) and MTV will team up to market songs.

WSJ:   The SEC said that pension funds may not seek political contributions from politicians that oversee them

NYT:   Documents show Goldman Sachs Group put pressure on American International Group to make insurance payments.

NYT:   The TARP could be phased out early.

NYT:   During Q2 the DJIA was down 10% and the S&P 500 by 12%.

FT:   Manufacturing growth slowed in Asia.

FT:   The EU agreed to harsh guidelines for banker bonuses.

FT:   BP plc is trying to raise more money.

Bloomberg: Boeing (NSYE: BA) may get a lift for its Air Force tanker bid from the WTO censure of Airbus.

Bloomberg:   Apple Inc. (NASDAQ: AAPL) was sued by consumers over iPhone reception charges.

Bloomberg:   Google’s Chinese plans may push more advertisers to Baidu (NASDAQ: BIDU)

Douglas A. McIntyre

Declining demand is attributed to weak growth in Europe as consumers use less oil. The demand for oil is also a proxy for investment growth, which the bank is also targeting for a more “muted recovery.”  BofA sees the weakening of the euro versus the dollar as “a deflationary event” that will lead to a weaker dollar-based global economic recovery and lower prices for crude.

In the US, demand growth for crude oil is negative. The price spikes of 2008, when gasoline topped $4/gallon, has changed Americans’ habits. US drivers are driving fewer miles compared with the peak years of 2006-2007. As we noted yesterday, even previous recessions did not tamp down the number of miles driven in the US in the way the current slump has done.

A big part of that change in driving is due to unemployment levels approaching 10%, or 16%-17% if people who have given up looking for work are counted. There is little reason for these folks to drive anywhere, except to the infrequent job interview. Cash that was once spent on gasoline now goes to pay for shelter and food and other necessities. Driving is not a necessity.

Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) shares are down about 2% in early trading this morning. The shares of OIL, USO, and OIH are all down around 3% as well.

Paul Ausick

Kitco.com lists the gold market at around $1233.00, with a range of $1223.00 to $1243.10.  Kitco also lists gold being up over 32% over the past year and over the last 30 days as being up 8.4%.  The most recent quote in oil was seen at Crude Oil $69.91, down -$1.70 per barrel.  The chart over the last 30 days from BigCharts shows the extreme breakdown of the relationship.

Oil has many issues.  Maybe you can blame BP’s Gulf of Mexico oil spill, or maybe you can say that the E.U. is now just not going to use as much oil after its Greece, PIIGS, and debt crisis.  Maybe this is the charts or assets allocation rather than real demand.  Maybe you can blame all the airline traffic disruptions tied to Europe from the Iceland volcano.  Dow Jones noted earlier today that Qatar threw out $70 per barrel for oil as the floor for new significant investment in capacity.  It has been said many times that oil is in a trading range of $70 to $85, yet here we are again testing the downside of that range.

Gold is simply being used as a reserve currency for the world as the Euro continues to implode.  Its chart also showed explosive ramps up.  Gold is used less and less in industry outside of jewelry and electronics.  Gold has pulled up the price of silver on the lower-end and has somewhat pulled up platinum on the higher-end.

It will be very difficult to see this breakdown in correlations continue endlessly.  A rise in the price of gold is inflationary, at least if it pulls up all other metals.  A rise in the price of oil is inflationary because it is used by the world and is the benchmark for input costs in so many produced goods and services.

As far as using either asset as an investment or as a reserve, the obvious is that oil is far more useful for what can be done with it, but gold is far easier to store.  The price of oil to gold is now over 17.5 barrels, yet you could fit dozens of gold bars into a single barrel of oil.  Sure, that is simple and won’t give you any basis at all for an investment.  But that is worth noting.  Neither gold nor oil can be used directly as food or water.

We are witnessing a deflationary pressure here that is being tied to an inflationary pressure in the metals.  These markets can’t continue to drift apart endlessly.  Not in a rational world.  Maybe a solid pairs trade is forming.  Maybe.

JON C. OGG

Gasoline inventories rose by a whopping 3.737 million barrels to 219.7 million barrels.  Dow Jones was expecting a build of 300,000 and we were looking for anything above the flat line.

Distillates posted a loss at -233,000 barrels to 159.048 million barrels.

The disappointment here is in the refineries, although this may be mitigated now that our SPR is at the benchmark.  Refineries ran at 79.86% capacity, down from 80.27% a week ago.  Dow Jones had an estimate of 80.5% and we were just hoping for anything above 80% to hold.  This means the refining business is still running at very low levels.

NYMEX WTI Crude is trading down 0.69 at $81.08 as of 10:37 AM EST.  The key ETFs have pulled back slightly on this news: Oil Services HOLDRs (NYSE: OIH) is still up 0.1% at $126.30; the United States Oil (NYSE: USO) ETF is down 0.1% at $40.37; the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) is down 0.15% at $26.66; and the Ultra DJ-AIG Crude Oil ProShares (NYSE: UCO) is down 0.2% at $13.39.

JON C. OGG
January 6, 2010

As far as the SPR is concerned, the prior mandate was to get the reserves up to 1 billion barrels.  So the SPR is not full, but it is effectively at that 90-day threshold.  This is of course very subjective data and the real usage under emergencies versus the current usage have been issues up for debate for about a generation.

On the DOE oil inventory data, this was as follows:

• Crude inventory down 1.538 million barrels to 326 million barrels; Dow Jones estimate was -1.7 million barrels.  We were looking for a draw of only 1 million, but this is not enough to move the needle either way.
• Gasoline inventory was down 366,000 barrels to 215.964 million barrels; Dow Jones had an estimate at +400,000.  We were also looking for a build, so this notion was a disappointment.
• Distillates came in at -2.05 million barrels to 159.281 million barrels; Dow Jones was at -2.1 million barrels so no real impact.
• Refineries ran at 80.27% versus last week’s 80.04%.  Dow Jones expected 80.1% and we were going to be happy with anything above that 80% threshold.

At 11:22 AM EST we have NYMEX WTI Crude trading unchanged at $78.87.  The Oil Services HOLDRs (NYSE: OIH) is down 0.6% at $119.25, the United States Oil (NYSE: USO) ETF is flat at $38.84, the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) is up 1 cent at $25.61, and the Ultra DJ-AIG Crude Oil ProShares (NYSE: UCO) is down less than 1 penny at $12.42 as the key oil and oil service ETFs on the news.

Unfortunately, the news today probably leaves oil traders with more questions that it does actionable answers.

JON C. OGG

Crude oil futures rose to their highest point in seven weeks this morning, trading above $79/barrel. Cold, snowy weather in the Northeast and the Midwest are the likely suspects for the increase because traders have always taken weather into account in their transactions. The markets are watching the crude related ETFs: the Oil Services HOLDRs (NYSE: OIH), the United States Oil (NYSE: USO) ETF and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) as the key oil and oil service ETFs.

That whole line of thinking just seems so yesterday. Crude oil stocks in the US are still above the top of the five-year range. US consumers have reduced their consumption, the economy is still very weak, and crude oil imports are lower. None of these points to a solid reason for crude prices to do anything but fall.

Even if the US were to have the coldest winter in years, the overall effect on the crude market should still be no better than a wash, given the factors that ought to depress prices. The wild card in this calculation remains the strength of the dollar.

As the dollar weakens, traders buy contracts in foreign currencies to take advantage of their strength against the dollar. And crude oil also acts as a hedge against inflation, another factor that traders and other investors consider.

What does today’s move in crude prices portend for prices in the coming year? The answer to that depends mostly on how well one expects the global economy to perform in 2010. If you are an optimist, the past nine months’ rise in equity prices reflects just the beginning of a stronger recovery in the first half of next year.

If you’re a pessimist, the global economy, with the exception of China and a few other developing countries, promises to be no more than flat in the first half of next year than declining in the second half. That is not a rosy picture.

In the US, the nearly $800 billion economic stimulus package had its greatest effects on GDP in the third quarter of 2009, and those effects will diminish going forward until they turn negative in the second half of the year. Interest rates, particularly for home mortgages, are rising even though the Federal Reserve is keeping the funds rate near zero.

In the real world, where most of us live, things will continue to be tough. In the world of financial markets, a lot of (weak) dollars will be chasing higher returns. The fundamentals of the market for crude are unlikely to curb that enthusiasm, and a crude price near $90/barrel by July is not out of the question.

Paul Ausick

• Crude stockpiles fell by -3.689 million barrels to 332.387 million barrels.  Dow Jones was looking for a draw by -1.7 million barrels, and our discussions with traders yesterday had only a draw of 1.5 million barrels expected.
• Gasoline stockpiles rose by 879,000 barrels to 217.213 million barrels.  Dow Jones had estimates at a gain of 1.4 million, while we were only looking for 1 million.
• Distillate stockpiles fell by -2.954 million barrels to 164.363 million barrels.

Refineries ran at 79.95%, down from 81.05% last week.  Dow Jones had 81.4% estimates, but we were told yesterday to be happy with anything still close to 81%.  This was one of the larger disappointments.

The Oil Services HOLDRs (NYSE: OIH) is up 2% at $119.70, the United States Oil (NYSE: USO) ETF is up 2.6% at $36.87 and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) is up 2.8% at $24.36.  All key ETFs were already up since the 10:30 data, but shares are up even more now.

JON C. OGG

Canadian Rig Count is down 10 from last week at 354; down 36 year over year.

The US Offshore rig count is 38, up 1 from last week; down 27 year over year.

Oil Services HOLDRs (NYSE: OIH) is down 0.5% at $113.76, the United States Oil (NYSE: USO) ETF is down 0.4% at $35.59 and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) is down 0.35% at $23.42 on this.

At 1:17 PM EST NYMEX WTI Crude is down $0.45 at $70.09 per barrel.

JON C. OGG
DECEMBER 11, 2009