Top Links: Oil surges, China’s economic miracle swirls down the drain

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A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

Tuesday's financial headlines are dominated by a supply-driven surge in optimism in the oil patch, while China's economic growth strategy continues to swirl down the drain.

Finally, there are signs of a significant supply response in the North American oil sector that may eventually help end the crude glut,

"Output in December averaged 9.26mn b/d, a drop of 43,000 b/d or 0.5pc from November, according to new data from the US Energy Information Administration (EIA). Output in Texas, the top producing state, was down by 1.9pc at 3.34mn b/d. Production in New Mexico fell by 9.6pc to 373,000 b/d. Output in North Dakota, home of the Bakken shale, dropped by 2.3pc to 1.14mn b/d. "

A Reuters report, however, notes that the production declines are smaller than expected, and the trend will have to intensify to push the commodity price significantly higher,

"18 U.S. shale oil-oriented firms released over the past several weeks, from global independent Occidental Petroleum Corp to small Denbury Resources Inc, total oil and gas production would fall 5.6 per cent this year. The same firms saw output grow by around a tenth last year… Yet the overall declines may still appear unusually shallow given the scale of spending cuts … 'The resilience (of U.S. shale) has been extraordinary, a tribute to technical expertise,' Neil Atkinson, head of the International Energy Agency's benchmark Oil Market Report, said last week. .. 'Anyone who believes the U.S. revolution has stalled should think again.'"

"US crude output down in December: EIA" – Argus Media
"At last, U.S. shale firms see output falling, but is it enough?" – Reuters
"U.S. Shale Producers Face Reality, Cut Output" – Wall Street Journal

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There are so many signs of economic deterioration in China that it's hard to know where to start. Purchasing managers surveys released overnight suggest further weakening in business activity,

"China's official manufacturing purchasing managers index fell to 49.0, its lowest level in over four years and down from 49.4 in January, while the Caixin China manufacturing PMI slid to 48.0 from 48.4 in January. China's official nonmanufacturing purchasing managers' index, a gauge of activity outside factory floors, fell to 52.7 from 53.5 in January. A reading below 50 signals contraction and one above that suggests expansion."

The Financial Times detailed the massive scale of China's "zombie" state-owned enterprises (SOEs),

"Beijing has been seeking to steer its economy away from an overdependence on heavy industry and construction. State-owned enterprises are, however, clustered in smokestack industries like steel, coal, shipbuilding and heavy machinery, all tied to the old growth model. These lumbering giants are ill-suited to meet demand in the emerging services sectors such as healthcare, technology, education and entertainment — the fastest-growing areas of the Chinese economy.

"The greatest obstacle to shutting loss-making SOEs is the prospect of mass lay-offs, which Beijing fears could lead to social unrest. Merging weaker SOEs into stronger ones is seen as a less disruptive way to deal with excess capacity than forcing loss-making state firms into bankruptcy, leaving millions jobless."

Reuters reports that widespread layoffs have already begun, "China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution, two reliable sources said, Beijing's boldest retrenchment program in almost two decades."

"China's : The state-owned zombie economy" – Financial Times
"China to lay off five to six million workers, earmarks at least $23 billion" – Reuters
"Economists React: China's Manufacturing Weakened Sharply in February" – China RealTime (WSJ)
"China's shadow banking sleuth" – Report on Business
"The march of the zombies: China's excess industrial capacity harms its economy and riles its trading partners" – The Economist
"@bySamRo "We see no reason for optimism." Barclays on Feb Korean exports, aka global canary in the coal mine cc: @jj_under pic.twitter.com/2w2fX1Ec5L " – Twitter

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I don't write this very often, but there are encouraging signs of intelligent public investment in the Canadian manufacturing sector Tuesday,

"[Ontario's] budget supports an Advanced Manufacturing Consortium being formed between McMaster University in Hamilton, Western University in London and the University of Waterloo. It's a $35-million, five-year commitment … We're not talking about tweaking old factories. We're talking about creating the factories of the future – the very near future – where technology-enabled products communicate with technology-enabled machines, where machines anticipate their own preventative maintenance, where sensors in products communicate to machines, to other products, to customers."

"The future of manufacturing, revealed in an Ontario budget line item" – Report on Business

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Tweet of the Day: "@TheStalwart What's happening with Valeant is basically Bill Ackman's thesis of what was supposed to happen with Herbalife. " – Twitter

Diversion: Loved this – a 3D rendering of Rome circa 320 A.D. – YouTube