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Oil Prices Could Decline Another 50%.

The Chairman of Shell stated with oil prices at current levels every oil firm will have to slash its budget, commenting further that most investments outside the Middle East does not make sense.  He further stated oil prices declining another 20% might be too optimistic, opining prices could decline another 50%.

Some of the gulf producers are suggesting oil prices can remain low for “some years” because of supply and demand.

The comments above are from a March 4, 1999 article from the Economist as oil staged a precipitous fall from $20 barrel in 1998 to around $12.    The remaining remarks in the article are very similar to comments echoed today for the exception the Economist was suggesting the Middle East and other oil producers could fall into an economic induced chaos given their large entitlement programs to placate their young and unemployed, restless population.

Oil bottomed about a month later, ending the year around $17.92 barrel and $28.50 a barrel in 2000 according to the 2014 BP Statistical Review of World Energy.

Perhaps the most overused disclaimer in the financial industry is History is not indicative of future performance.  The reason for the surge in oil prices from 1999-2001 was from stronger than expected economic growth, weather, environmental regulations and lack of investment.

Will 2015 be a repeat of 1999?  Analysts are projecting a 2.4% to 2.7% 2015 growth rate which suggests the second half of 2015 will be growing around a 3.5% pace.  Is this a realistic projection?

Traditionally housing and autos lead the economy out of a recession, catalysts that were generally absent.  Both today are indicating considerable strength.  While I do believe the unemployment rate is understated because of the anemic labor participation rate, but as evidenced by weekly jobless claims, there labor market strength.

As commented many times, the Middle East is in utter chaos, a chaos that three years ago would cause oil to trade 50% higher.  Will this chaos impact prices?  I will argue that if there is a supply disruption, the potential increase may be greater than normal given that crude today is so massively discounted.

Commenting upon yesterday’s market action, the sentiment on Apple—the world’s largest and most over owned company that represents 4% of the S & P 500 and 14% of the NASDAQ 100—came under considerable pressure.  Apple has massively violated its 200 day moving average line, down about 15% since its July 22 earnings report.

Will the decline continue?  To write the obvious, this question can only be answered by history.  Speaking of which, history is not kind to over owned companies.  All know more buyers than sellers are required for higher prices.  I rhetorically ask who is left to buy Apple when selling commencing.  In many regards the sentiment and activity (and probably research reports to follow) is and may continue to match that of GE 15 years year ago, the previous most over owned/recommended company that is still 50% below its 2000 apex.

Oil on the other hand advanced, an advance most are just calling an oversold bounce as no market ever mover linear.

Last night the foreign markets were up. London was up 0.56%, Paris up 1.27% and Frankfurt up 1.31%.  Japan was up 0.46% and Hang Sang up 0.44%

The Dow should open moderately higher ahead of the ADP jobs data that could suggest the economy is accelerating. The 10-year is off 5/32 to yield 2.24%.

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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.