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As most know equities are 90% correlated to oil. Oil advances so do equities and vice versa. Yesterday crude was down over 3%. Equities were down about 1.5%. Inventory data was released indicating gasoline inventories fell which is suggesting greater crude demand in the immediate future. Equities reversed about half of their losses.
At the close oil was up about 1.25% and equities ended moderately positive.
Contrary to the overwhelming bearish oil narrative, I think oil production has peaked. Why? As noted the other day, Exxon replaced 67% of spent reserves versus the 22 year average of 102% to 115%. BP and Shell did not replenish its 2015 production.
OPEC announced yesterday that oil infrastructure spending declined by 23% in 2015. For the first time in 30 years, producers outside of OPEC reduced capital spending for two consecutive years, totaling an incredible $375 billion.
What about demand? It is too early to suggest a first quarter growth rate given there is only one months’ of data, but if the data remains consistent first quarter growth could be around 2.5%-3.0%.
This is considerably higher than the overwhelming economic bearish narrative.
Will March 1999 repeat itself? The economic and oil narrative was similar to that of today. Because of stronger domestic growth and reduced production, oil advanced about 50% in 20 days. Equities also advanced.
If 2016 is to repeat 1999, I think value will outperform momentum growth given its discount, the greatest since at least 1980 according to JP Morgan.
What will happen today? Jobless claims and durable goods orders are released.
Last night the foreign markets were mixed. London was up 2.37%, Paris up 2.28% and Frankfurt up 1.67%. China was down 6.41% Japan up 1.41% and Hang Sang down 1.58%
The Dow should open quietly higher as oil is flat. China plunged about 6% as surgin money market rates are signaling tighter liquidity. The 10-year is up 3/32 to yield 1.74%.

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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.