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Tomorrow is a “technical meeting” of OPEC members. There is little talk of curtailing production albeit all of its members are hemorrhaging money. Because of the 45% drop in price, the largest and perhaps OPEC’s most financially secure country, Saudi Arabia, is delaying payments to government contractors. Wire services report that some companies have not received payment in six months as the government seeks to preserve cash.
To write the obvious, it is easy to boost spending when oil is on the rise but very hard to cut when prices fall. However Saudi Arabia’s deficit today is too large to ignore, pretending that it is business as usual. The fiscal strain on the economy is immense.
Many times I have commented the drop in crude is not only threatening the existence of companies but also of countries. The Middle East is in anarchy where several nation states have already failed. Will the number of failed countries continue to rise because of the drop in crude?
If more countries do fail, will production be impacted as in the case in Libya and Nigeria? If history is of any precedence, yes.
But at this juncture, the oil narrative is still bearish with little geopolitical premium. As noted yesterday, many are extrapolating today’s no pricing environment into eternity in a number of different dimensions.
There is little to comment about yesterday’s trading. All markets were quiet but is this about to change given the parade of earnings to be released in the next 3 days. I am certain the interpretation will change many times.
Last night the foreign markets were mixed. London was down 0.29%, Paris down 0.74% and Frankfurt up 0.25%. China was up 0.13% Japan up 0.42% and Hang Sang down 0.37%.
The Dow should open nominally lower on some high profile earnings disappointments, the result of a strong dollar and weakened foreign markets. There are also questions regarding the trajectory of central bank stimulus in the US and euro area. The 10-year is off 8/32 to yield 2.06%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.