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Has Oil Found a Bottom?

Oil climbed about $2 on Friday to about $56 barrel on perhaps short covering and perhaps from the closing out of option positions.  Has oil found a bottom?

Iran and Saudi Arabia are reportedly at odds as Iran commented that a “political conspiracy going to extremes” is to blame for the dramatic slump which could signal that Iran—who voted to keep production at current levels—will try to exert pressure on OPEC to cut production

Venezuela is already begging OPEC for a production cut.

As widely noted because 45% of Russia’s economy is oil related, Russia is facing extreme financial pressures.  Russia is also deemed persona non grata by Saudi Arabia and other Gulf states because of its relationship with Syria.  Moreover it is reported Russia is supplying Iran with nuclear materials and know how.

Saudi Arabia is adamantly against Iran obtaining “the bomb” and a closer relationship between Iran and Iraq.

It is reported that some influential figures on the fringe of OPEC have suggested some of its key members to meet with non OPEC producers such as Russia, Norway and Mexico, to discuss a cut to stabilize prices and economies.  Will this occur?

Many times I have opined “things are often not as they appear.”  The popular narrative is that Saudi Arabia is attempting to bankrupt American shale producers, a narrative that I rhetorically and conjecturally did not believe.  I always thought Saudi Arabia’s intent was similar to the “conspiracy theory” as proposed by Iran perhaps amplified by fear of ISIS.

According to the International Energy Agency (IEA), the difference between the world being over supplied and undersupplied with  oil is around 1.2 million barrels.  The IEA writes Nigeria’s production is about 1.8 million, a country whose oil production is threatened by Boko Haram.  Libya’s production is about 600,000 barrels down from approximately 900,000 barrels because of ISIS.    What happens to the supply demand equation if both countries ascend into chaos and anarchy that curtails production, a scenario I don’t think is outlandish?

Since 1990 there have been about five oil shocks, each of which the price of crude plummeted about 45% in six months.  Six months later crude had retraced about 50% of the drop and 12 months later, oil is up about 80%-85%.  Will history be again repeated?

Commenting on Friday’s market activity, all markets were quiet after seven consecutive volatile sessions.

What will happen this holiday shortened week?  The economic calendar is crowded with the final revision of third quarter GDP, several manufacturing statistics, a number of housing data points, a confidence survey and of course jobless claims.

Last night the foreign markets were up.  London was up 0.81%, Paris up 0.76% and Frankfurt up 1.03%.  Japan was up 0.08% and Hang Sang up 1.26%.

The Dow should open quietly higher.  The 10-year is off 3/32 to yield 2.18%.

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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.