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The Collapse of Oil Prices is Now Beginning to Weigh Heavily Upon the Oil Producing Countries.

The collapse of oil prices is now beginning to weigh heavily upon the oil producing countries.  Russia just posted the sharpest decline in GDP since 2009 and its third quarter outlook has further deteriorated.  Its foreign reserves according to the IMF are $357 billion down from $478.25 billion on June 30, 2014.  According to the IMF, $250 billion is the proverbial fail safe level relating to its debt owed by foreign creditors.

Saudi Arabia is also hemorrhaging.  As noted the other day, the kingdom is turning to the bond markets—albeit only its domestic bond market—for the first time since 2007 to fund its budget, a deficit that is expected to widen to 20% of GDP  in 2015 according to the IMF.  This is the greatest deficit since 1987. (Note:  Some are regarding the current collapse in crude is comparable to 1986 which decimated many regional economies)  Total 2015 borrowings are projected to reach $27 billion even as its foreign reserves have plunged about $73 billion to $664 billion since last August.

Because of the plunge in oil prices, it was reported early Monday morning that OPEC is planning an emergency meeting.  These reports were later disavowed stating the next meeting will be held at the already agreed upon date of December 4.

No one knows where oil is headed.  The narrative is incredibly negative as crude has dropped over 27% since June 30 before yesterday’s nominal oversold rebound.  Such a decline is partially the result of net long positons in oil fell to the lowest level since 2010 according to the US Commodity Futures Trading Commission.

As noted yesterday, American oil producers has slashed capital expenditures by over $180 billion or the greatest amount since 1986.  Housing and autos, the traditional engines of an economic recovery, are strong  Will stronger economic growth, the anticipated reduction in domestic output given the huge reduction in capital spending expenditures and economic pressure of the major oil producing countries reverse oil’s trend?

Oil advanced the most yesterday in two months as Chinese crude imports climbed to a record in July. As widely known, a reason for oil’s decline was an expected slowing of demand from China

Because of oil’s gains, equities closed handsomely higher.  Treasuries declined modestly fearing acceleration in commodity inflation.

Last night the foreign markets were down.  London was down 0.61%, Paris down 0.94% and Frankfurt down 1.61%.  Japan was down 0.42% down 0.09%. and Hang Snag

The Dow should open moderately lower as China devalued its currency by the most in two decades.  Several years ago I commented many times about the fictitious strength of its currency, stating China is an export driven economy, requiring the strength of its trading partners for economic wellbeing.  I also stated the country has little flexibility other than currency exchange mechanisms to stimulate growth.  Wow!  I did not realize how prophetic my remarks would become. The 10-year is up 14/32 to yield 2.18%.

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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.