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Oils surged to the highest level in a month amid speculation that falling crude production will ease the global supply glut. The International Energy Agency (IEA) stated cuts into new oil projects this year are the biggest in the history as investments in “upstream projects” are down at least 20% in 2015. Crude supplies outside of OPEC are set to fall by 500,000 barrels a day next year according to the IEA.
In my view, such a large drop was expected given the massive cuts in infrastructure.
I also believe questions about OPEC maintaining its current level of production will start to arise. Saudi Arabia et.al. must reduce spending as deficits are swelling with crude at current levels.
The oil rich kingdom stated it will reduce spending but not entitlement spending which is about 80% of its budget according to World Bank statistics. Based upon Saudi Arabia’s commitment to keep entitlement spending at current levels to maintain domestic harmony, spending must be cut then in other areas, more specifically oil infrastructure.
As widely known Saudi Arabia has little spare capacity. Will there be a cut in production for a reason few are suggesting—lack of spending on oil infrastructure?
Yesterday equity markets were bifurcated. The momentum driven biotech sector fell about 4% a decline that caused the NASDAQ to post a 0.70% decline. The Dow was unchanged as oil shares rallied on the IEA comments.
Is a transition occurring from the over owned momentum names into the beaten down value shares? One day does not make a trend but I think the narrative is changing dramatically relating to oil, the kingpin of value.
Last night the foreign markets were up. London was up 0.51%, Paris up 0.74% and Frankfurt up 1.04%. Japan was up 0.75% and Hang Sang up 3.13%.
The Dow should open moderately higher as oil is approaching $50 for the first time since July, spurring gains in emerging markets/currencies. It is becoming apparent that investors are selling health care stocks/momentum issues and buying energy shares. Yesterday energy shares capped the biggest rally since 2008 according to FBN Securities. The 10-year is off 10/32 to yield 2.07%.

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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.