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%.
ANOTHER QUEIT DAY…BUT IS THIS ABOUT TO CHANGE
Ken Engelke
Chief Economic Strategist Managing Director
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