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How Long Will Oil Remain at Current Levels?

Stocks surged again on a dovish Fed as the US Central Bank and US data is making up for bad news in other parts of the world.  Oil resumed its sell off and energy was a market laggard.  As widely known, the energy issues have been crushed and according to Bloomberg the S & P 500 energy index is down 27% from its June high.  The valuation of this index is now trading at a 40% discount as compared to the entire index, the greatest discount since at least 2000 Bloomberg writes.

How long will oil remain at current levels?  Yesterday a British government official stated if oil remains at current prices, the British oil industry would collapse.  Similar comments were made concerning North Sea production.

Conversely, Bloomberg reports US energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets.  Goldman writes energy firms are trimming 2015 budgets to cope with lowest crude prices in five years and are shifting their focus to their most prolific, lowest cost fields, extracting more with enhanced technology at lower costs.

Bloomberg writes because of sunk costs and enhanced technology, operating costs for already drilled and fracked wells are $25 or less.  Wow!  In fact, Tom Petrie, Chairman of Petrie Partners who advises countries such as the US and Saudi Arabia about energy issues stated the average cost to operate a well in most of the US is about $20/barrel.  In fact Exxon reports that it spends $12.72/barrel to extract a barrel of oil in the US.

Could we argue if the above data is remotely accurate OPEC’s month old bet that American drillers would be crushed has been a bust and is backfiring on perhaps the producers who can least afford such a drop?

Many times I have written to always expect the unexpected where life is stranger than fiction.  Today’s oil bust and subsequently America’s purported cost of oil production and the possible normalization of relations with Cuba are two events I don’t think anyone suggested even as little as four months ago.

What will happen today?  The economic calendar is sparse thus suggesting trading will be dictated by headlines.

Last night the foreign markets were mixed.  London was up 0.44%, Paris down 0.24% and Frankfurt down 0.38%.  Japan was up 2.39% and Hang Sang up 1.25%.

The Dow should open nominally higher. The 10-year is unchanged at 2.21%.

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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.