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Oil surged over 9% as OPEC cut production for the first time in eight years, a production cut in some estimates that was greater than anticipated.  Oil gained further momentum as inventories declined for the second consecutive week versus rising.  East coast inventories are at the lowest levels since July 2015.  I rhetorically ask what happens if the northeast experiences a cold winter?

It was also announced that OPEC will meet next week with non OPEC members to discuss a production cut.  Some think there will be further reductions.

Is the perfect oil storm materializing?  Growth is accelerating, evidenced by the larger than expected increase in the ADP Private Sector Employment Survey.  Will tomorrow’s BLS report confirm the strength in the ADP report?

Will growth be greater than expected that will stimulate greater oil demand while supplies are contracting?  Contrary to popular opinion, production cannot be ramped up in a moment’s notice.  For large upstream projects, the time lag is 2 to 3 years.

Many times I have compared 2014-2016 to that of 1998-2002.  The similarities to date are uncanny.  Will oil now double from current levels just as they did in the previous era?

Treasuries are getting killed, experiencing their worst month since 2009.  The stated reason for the decimation is speculation of increased growth under a Trump administration.  The yield on the 10 year Treasury rose by 23 basis points in October and 55 basis points in November.


Yesterday I thought it was significant that Treasury Secretary nominee Mnuchin stated he was open to exploring issuing debt with maturities greater than 30 years as shorter dated debt matures.  Is government finally doing what most businesses do when interest rates are at historic lows?  Extend all short duration debt to the greatest possible maturity?  Wow!  That would be a first.

Treasuries were also hurt on oil’s rise.  Will such increase inflationary expectations?

Commenting about equities, the NASDAQ declined about 1% as technology valuation questions arose with rising interest rates.  Energy and the financials managed a breakeven day for the Dow.

Last night the foreign markets were mixed.  London was down 1.11%, Paris down 0.64% and Frankfurt down 0.92%.  China was up 0.72%, Japan up 1.12%and Hang Sang up 0.39%.

The Dow should open quietly lower.  Will the Italian referendum now begin weighing upon the markets?    Oil is up another 2% to over $50 barrel.   The 10-year is off 8/32 to yield 2.42%.

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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.