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Friday I Noted the Drop in Oil is Not Only Threatening the Existence of Companies, but Also of Countries.

Friday I noted the drop in oil is not only threatening the existence of companies but also of countries.  Perhaps the countries that are facing the gravest threat are Libya, Iran, Iraq, Nigeria, Venezuela, and Russia.  Will there be unrest that leads to anarchy that leads to regime change and curtailed production?  Will the Arab Spring be nothing as compared to a potential Arab Winter?

Wild thought?  The countries mentioned above debt and currencies are under attack given the multipolarity and interdependency of financial markets.  As most know a basic cause for domestic unrest is economic woes.

Regarding the interruption of supplies, Libya’s production dropped last month by 248,300 a day to 638,000 the result of its largest oil field being seized by purported ISIS gunmen.

According to OPEC, OPEC estimates 2015 global demand for its product is 28.9 million barrels per day.  Current reported production is about 30 million.  What will happen to the supply demand equation if two of the above countries go off line?

According to the International Energy Agency a drop in 1 million barrels in production can easily occur if unrest in any two of the above countries experience considerable civil unrest.

The drop in oil is also impacting the economies of the generally fiscally conservative countries such as Norway.  According to Bloomberg, Norway’s cost of production is $70/barrel and according to wire reports S & P may place its AAA rating under review/developing given the drop in crude.  Norway is one of the nine remaining AAA rated countries.


This week the Federal Reserve holds its final meeting of 2014.  What comments will the Committee make about crude and its impact upon the domestic and global economies?  As noted several times, a number of Fed officials have commented about the positive impact to growth that this drop may have upon the economies of the US, Europe and Japan.

Will the term “considerable period” be dropped in its post meeting statement?  If so how will the markets respond?

As noted many times, the averages typically decline about 10% to 12% when the FOMC alters monetary policy.  History then states in the seven tightening moves since 1970, the S & P is about 11% higher following its first interest rate hike.

To write the incredibly obvious, this week’s market action will be dictated by oil prices and the outcome of the Fed meeting.  Other data released are various housing statistics, several manufacturing data points and regional manufacturing surveys and weekly jobless claims.

Commenting briefly about Friday’s market action, equities sold off on oil and treasuries rallied.

Last night the foreign markets were mixed.  London was up 0.31%, Paris up 0.44% and Frankfurt up 0.34%.  Japan was down 1.57% and Hang Sang down 0.95%.

The Dow should open moderately lower following one of the worst weeks in about five years. The 10-year is off 13/32 to yield 2.12%.

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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.