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Yesterday I commented OPEC oil production declined by 79,000 barrels during February, the result of lower Iraqi output which declined by 125,000 barrels. Several times I remarked that according to the Iraqi oil minister its 2016 daily production may decline from 4.4 million to 3.9 million barrels/day because capital spending has collapsed from around $21 billion in 2014 to $9 billion in 2015, the result of low oil prices, fighting several wars and massive social spending.
I also quoted an OPEC oil minster stating that OPEC’s investment in oil infrastructure had declined by 23% in 2015 from 2014 for similar reasons.
Saudi Arabia just announced its foreign reserves fell $14 billion in January to $602 billion. Reserves are down about $150 billion in thirteen months. CNBC commented last week Saudi Arabia may be bankrupt by the end of 2018 if the status quo does not change. The IMF suggests 2019.
Oil advanced again yesterday, closing higher by almost 2% at $34.50/barrel, the result of decreased OPEC production, a production freeze which I think is symbolic in nature, and stronger than expected US economic growth.
I rhetorically ask is a proverbial perfect storm brewing in the oil market similar to one that occurred in 1999 but perhaps amplified by massive geopolitical unrest that supplies about 50% of the world’s crude and huge short interest?
To remind all, oil advanced 50% in 20 days in March 1999, the result of production cut backs and stronger than expected US growth.
Data is suggesting US production is also declining, perhaps as much as 600,000 barrels a day as US drilling activity is the lowest since 2009.
To write the obvious this is the inverse of the prevailing negative narrative.
For what it is worth department, spare global capacity today is about 1.2 million barrels/day, the lowest since at least 2008 when oil was around $150 barrel and forecasted to go to $200 barrel.
Commenting about US economic data, the top tier ISM Manufacturing Index rose to a level considerably higher than expected, construction spending was exponentially greater than forecasted, and the prices paid component of the ISM was also higher than thought. This data should not be a surprise given the unexpected strength in the manufacturing employment.
Because of the data and oil, equities rallied. As all know since July 2014 there has been a 90% correlation between oil and equities.
What will happen today as the ADP Private Sector Employment Survey and the Beige Book or statistical compilation utilized at the upcoming FOMC meeting is released. Will the releases confirm or deny the emerging narrative of stronger than expected growth?
Last night the foreign markets were up. London was down 0.32%, Paris up 0.02% and Frankfurt up 0.16%. China was up 4.07%, Japan was up 4.1%and Hang Sang up 3.07%.
The Dow should open quietly lower as oil is down nominally following yesterday’s strong advance. The 10-year is off 5/32 to yield 1.85%.

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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.