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Perhaps the Biggest Surprise of 2014 is the Collapse of Oil Prices.

Perhaps the biggest surprise of 2014 is the collapse of oil prices.  In June crude was around $110/barrel.  At one juncture yesterday, prices were around $65/barrel following a 2 day 10% plunge, the result of the OPEC meeting where production was not cut.

This massive 2 day decline in crude was perhaps exacerbated by thinned trading ranks because of the Thanksgiving holiday.

As recent as July the consensus view was for oil to trade between $90 and $110 barrel with an average price of $100, essentially the range following the collapse of the financial system in 2008-09.

Some are suggesting oil will continue to decline, referencing 1986 as the benchmark year where prices collapsed about 60%.  Oil is down about 40% in six months.  Will this occur?

The hype is intense but will again write the vast majority of oil’s decline occurred before October 15.  The drop from $75 to $65 was a two day affair.  Was there capitulation?  Oil did close $3 higher.

The geopolitical and geostrategic impact of the current decline could be infinite.  To write the incredibly obvious, the high cost producers, the producers in the lesser developed nations and the producers who require western technology could face great difficulty.

Will unrest accelerate in many producers’ societies for as all know a significant amount of production occurs in volatile regions?  Economic shortfalls are the major catalyst for civil unrest, anarchy and regime change.

There will be winners and losers and I will write the countries/companies that have adopted western style government will survive and prosper at the expense of others.  If history is of any guide, the potential geopolitical/geostrategic unraveling could potentially rapidly occur.

The over used phrase “the velocity of change is frightening” is echoing loudly.  I reiterate, other than a few outliers, who thought oil would fall to a five and half year low in four months?

Commenting about yesterday’s market activity, stocks fell weaker than expected Black Friday sales and disappointing Chinese manufacturing data.

However treasuries also declined in price for the opposite reason…domestic manufacturing data that exceeded expectations and a Federal Reserve official commenting the drop in oil should boost the economy.

Today’s trading may be driven by headline given the dearth of data scheduled to be released.

Last night the foreign markets were up.  London was up 1.19%,  Paris up 0.18% and Frankfurt down 0.11%.  Japan was up 0.42% and Hang Sang up 1.23%.

The Dow should open nominally higher on speculation China will lower interest rates further to stimulate its economy and the decline in oil prices is reflationary in the US that may permit a “three handle” in GDP.   The 10-year is up 1/32 to yield 2.23%.

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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.