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Oil has Dropped Over 25% or $16/Barrel Since June 30, One of the Sharpest Decimation in History.

Oil has dropped over 25% or $16/barrel since June 30, one of the sharpest decimation in history.  Everything in the energy sector has been utterly destroyed since June 30, a destruction that is greatly amplified in the bond market given liquidity issues brought upon by Dodd Frank and ETF selling and technology based trading.

The narrative is extraordinarily bearish.  However as opined several times there is no commentary about the implosion of oil is having upon the oil producing countries.  As I stated many times, the current decline is not only threatening the existence of some companies but also of some countries.

Contrary to public belief, most of OPEC struggles financially given their huge entitlement programs required to placate their restless and unemployed youth which is about 40% of many members’ population.  The Middle East is already in chaos.  What will happen if economic issues force a reduction in social spending?

Saudi Arabia is the region’s largest economy where approximately 90% of its $752 billion economy is oil.  Last month the country sold $4 billion of bonds to its banks but the terms remain unknown.  2007 was the last time the kingdom sold debt longer than 12 months.

Two unnamed Saudi officials stated the country needs to raise another $26.5 billion by year’s end according to Bloomberg.  If this were to happen Bank America writes that its government debt would increase to about 7% of GDP from less than 2% in 2014.

Furthermore the IMF states the nation’s budget gap may widen to as much as 20% of GDP during 2015.  Six months ago the budget gap was forecasted by Saudi officials’ at less than 5%.

Its foreign reserves fell for the fifth consecutive month in June and the nine out of the last ten months declining more than $68 billion to $664 billion since January.  Reserves are down $72.6 billion since August according to the Saudi Arabian Monetary agency.

Analysts thought before this report was released that its foreign reserves would fall to $655.5 billion by year end and drop another $22.1billion in 2016.

Saudi Arabia is hemorrhaging; its early year estimates were vastly under estimated.  The kingdom has the resources to withstand the decline in prices but what about other members?  Venezuela, Angola, Libya are teetering on bankruptcy if not anarchy.  And then there are the other members including Iran and Iraq that require crude over $120/barrel to meet budget assumptions.

Yesterday the markets traded declined about 1% as monies exited some of the momentum names.  Energy rallied perhaps the result that issues are vastly oversold.

What will happen today?  The BLS labor report is released and all will scrutinize the wage data and the labor participation rate (LPR).  Wednesday the ISM non-manufacturing index was released.  This index that measures 90% of the economy expanded at the fastest pace in a decade.  The strength was in housing, autos and employment.

I have opined a catalyst for stability in the oil market could be growth (and economic instability in the oil producers that causes a drop in production).  If the data suggests hiring is accelerating, perhaps yesterday’s nominal oil advance is an indicator of tomorrow’s economy.

Last night the foreign markets were mixed.  London was down 0.28%, Paris down 0.22% and Frankfurt down 0.30%.  Japan was up 0.29% and Hang Sang up 0.73%.

The Dow should open flat but this could change radically given the significance of thee 8:30 labor report.  The next two jobs report can be critical in determining the path of monetary policy.   The 10-year is unchanged at 2.22%.

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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.